Federal social security system reaches the milestone of 90 years, showing signs of aging
The financial stability of Social Security, a critical safety net for millions of Americans, has become a pressing concern due to political divisions and demographic shifts. This pension program, signed into law by President Franklin Delano Roosevelt in 1935 during the Great Depression, is facing a challenging future as the ratio of workers to beneficiaries continues to shrink.
According to recent data, there were more than five workers per beneficiary in 1960, a figure that has dropped to around 2.7 workers per beneficiary today. This trend is expected to continue, further straining the Social Security trust fund.
However, the importance of Social Security to retirees has not waned. An AARP survey shows that 67% of Americans view Social Security as more important to retirees today than five years ago. In fact, Social Security is the primary source of income for over 40% of older Americans. It is also the only inflation-protected income for many people in retirement, as stated by AARP.
To address the funding challenge, various solutions have been proposed. These include raising the payroll tax rate, increasing or eliminating the wage cap subject to Social Security taxes, and raising the retirement age. These steps aim to increase revenues and/or reduce long-term benefit obligations, thereby shrinking the projected $25 trillion shortfall over 75 years and delaying trust fund depletion, currently expected by 2032 or 2033.
Raising the payroll tax rate, currently at 12.4%, could boost revenues into the Social Security trust fund. Similarly, raising or removing the income cap, which currently exempts earnings above $176,100 from Social Security taxes in 2025, would subject higher incomes to payroll taxes, generating more revenue. Increasing the retirement age, currently 67 for those born after 1960, would reduce the number of years benefits are paid and thereby lower program costs.
Other proposals involve indexing tax thresholds or benefits differently and addressing how Social Security benefits are taxed. However, eliminating taxes on benefits without offsetting revenue could worsen solvency.
Some Republican proposals focus on limiting the growth of future benefits and encouraging private retirement savings. Meanwhile, Democratic lawmakers have backed proposals to expand benefits by taxing higher incomes.
The longer Congress delays action, the more severe benefit cuts (currently projected at about 23%) or tax increases may be required. Without a compromise, retirees could face automatic benefit cuts within a decade.
Over 90% of Americans, across party lines, support Social Security and want lawmakers to strengthen it, not cut benefits. Myechia Minter-Jordan, CEO of AARP, stated that Social Security helps tens of millions of Americans avoid poverty in retirement. However, current recipients of Social Security say that payments are falling behind the cost of living.
As Social Security turns 100, the number of people receiving benefits is expected to increase to 82 million. To address this, policy analysts have proposed potential fixes, including diversifying trust fund investment strategies and adjusting benefit formulas for higher earners.
In a recent development, Edward Cates, chairman of the Senior Citizens League, is calling on Congress to authorise a one-time make-up payment to all Social Security recipients.
Social Security is mainly funded through payroll taxes under the Federal Insurance Contributions Act (FICA). It remains a crucial part of the American social safety net, providing benefits to 70 million retired workers, disabled workers, and their families.
[1] https://www.ssa.gov/OACT/TR/2022/index.html [2] https://www.brookings.edu/research/social-security-reform-a-balanced-approach/ [3] https://www.cbpp.org/research/social-security/chart-book-2022 [4] https://www.aarp.org/politics-society/issues/social-security/info-2021/social-security-trust-fund-depletion-date.html [5] https://www.ssa.gov/OACT/COLA/AverageWage.html
- The ongoing debate in politics surrounding the future of Social Security has come to the forefront, with lawmakers proposing various solutions such as raising the payroll tax rate, increasing or eliminating the wage cap, and raising the retirement age to boost revenue and reduce long-term benefit obligations.
- As a significant source of income for over 40% of older Americans and crucial in helping millions avoid poverty in retirement, Social Security is not only a matter of concern for business and finance, but also a central component of general news and public discourse.
