Why Future Retirees Might Get Less Social Security Money

Social Security is the most important social safety net in America, providing critical benefits to millions of recipients. Since the program's inception in 1935, scheduled payments have been made on time, giving generations of Americans and their families basic monthly income once they pass their earning years, become disabled, or when they die. Unfortunately, you probably know Social Security's future is on shaky ground. Although it's no reason to throw a party, the Social Security trust fund — which was supposed to run dry by 2033 — has a slightly brighter outlook, according to a new government report. 

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Things are looking just a bit brighter for those on the cusp of receiving Social Security benefits. Last year, the Social Security Administration concluded that there was only enough money in Social Security's Old Age and Survivors trust fund to pay full benefits until 2033, but a new analysis has revealed that the fund — which many Americans depend on during retirement — should make it an additional year, through 2034. The better news: The report also projects that individuals receiving disability insurance benefits through the federal government will be able to continue receiving full payments for the next 75 years; previous projections had them lasting only through 2057.

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In 2020, Social Security entered into a new and fairly precarious era. Payroll taxes have long supported the program, but  according to the Brookings Institution, which studies public policy issues, this is the first time in 30 years that the program is being sustained not only by current payroll taxes, but also by dipping into the reserves that have been accumulated and earmarked for the program over the past three decades.

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Social Security is incredibly popular across the political spectrum, but raising taxes is equally unpopular. Since Social Security is funded by payroll taxes, the only two options are to reduce benefits or raise taxes, which puts lawmakers in an unenviable Catch-22. The Brookings op-ed summarized the dynamic neatly: "Aversion to tax increases causes skittish lawmakers to delay addressing the unavoidable challenges of Social Security, even though the required adjustments grow more wrenching every year that a feasible solution is delayed."

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There are competing theories on this one, but National Affairs makes a compelling argument against the basic foundation of the current system, which it calls "pay as you go." Virtually all Social Security dollars collected from workers through payroll taxes are used immediately to make payouts to current beneficiaries. Since almost all contributions support current retirees, taxpayer contributions can't be invested and grown to support the taxpayer's own future retirement.

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Even in times of surplus, about nine out of every 10 dollars goes to pay current retirees, but even that leftover 10% can't be invested. To make sure benefits could be paid out in the case of dark economic times, Congress mandated that surpluses be placed into emergency Social Security trust funds. Instead of investing and growing those trust fund dollars, however, the SSA loaned them to the federal government to plug gaps in other programs. In return came IOUs from the government. In times of deficit, like now, they get called in from the U.S. Treasury to pay retiree benefits. The problem, according to National Affairs, is that the Treasury couldn't possibly come up with the $2.8 trillion needed to cover all those IOUs without borrowing more somewhere else.

The fact that life expectancy has risen substantially is good for individuals but bad for Social Security, which must be stretched increasingly thin to provide people income for longer periods. In 1940, five years after Social Security was established with a retirement age of 65, women were expected to live for 65.7 years, and men for an average 61.4 years. Today, men are expected to live for 74.5 years and women should live to be 79.7 years old, according to the SSA. 

Not only are people living longer, but the nature of post-World War II demographics makes today's baby-boomer retirees the social-safety-net version of a big person on a seesaw with a little person on the other side. In 1957, the average woman had 3.7 children. The arrival of birth control and rapidly changing social and cultural norms brought that down to 2.8 in 1965. The birth rate needed to sustain a stable population is naturally 2.1 — one kid to replace you, one to replace the person you made them with. By 1976, less than 20 years after the peak of the baby boom, the birth rate had plummeted to an unsustainable 1.7, and today, it's even lower, at 1.6. In other words, there are far too many baby boomers on Social Security competing for far too little in payroll taxes paid by far too few children and grandchildren.

You can start getting Social Security as young as 62, but if you file before your  government-mandated retirement age, your benefits are reduced. For someone who was born in 1958 and is turning 62 now, for example, their full retirement age is 66 and 8 months. By filing for Social Security 56 months early at the age of 62, they'd get a $716 benefit instead of $1,000. That's a loss of 28.3%, which means that, in most cases, they'd be wise to wait. But the current economy might make that impossible for many older Americans who would prefer to hold out for full benefits but simply cannot if they want to put food on the table.

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Today, Social Security is still overwhelmingly supported by people who work for an employer. Both parties split the tab for payroll taxes, with the employee paying 6.2% and the employer matching it with another 6.2%. Those who are self-employed, however, have to kick in for both sides and pay a full 12.4% by themselves. Historically, this was an insignificant portion of the workforce, but that's changing rapidly with the rise of the gig economy. According to Forbes, 44 million American workers, or more than 28%, are now at least partially self-employed, and a full 14% are full-time independent contractors. That means the government has to double-dip from far more people to support a system that was designed for a W2-based employer/employee economy.

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