Donald Trump
Win McNamee / Staff / Getty Images News / Getty Images North America / Getty Images CC

Why Future Retirees Might Get Less Social Security Money

View Slideshow
Donald Trump
Win McNamee / Staff / Getty Images News / Getty Images North America / Getty Images CC

Less Secure

Social Security is the most important social safety net in America, providing critical benefits to a current 50 million 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. That long-standing record of payments made on time and in full, however, might soon be part of history, in part because of changes to the payroll tax like the kind President Donald Trump ordered in August. 

Want more information on how to make the most of your retirement money? We’ve got dozens of stories featuring retirement tips and advice.

Related: 15 Countries Where You Can Live Comfortably on Social Security

There Simply Won't Be Enough to Go Around
Nikada/istockphoto

There Simply Won't Be Enough to Go Around

A Social Security Administration report called "The Future Financial Status of the Social Security Program" concludes that current Social Security reserves will be enough to cover the program in full only through 2037. When the reserves are exhausted, current-level tax revenue will be enough to cover only 76% of the program's costs.

We're Already Dipping Into the Till
DoxaDigital/istockphoto

We're Already Dipping Into the Till

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.

Related: Where Your Federal Income Tax Money Really Goes

Politics
wh1600/istockphoto

Politics

Social Security is an incredibly popular program across the political spectrum, but raising taxes is at least 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."

Related: The Best and Worst States for Middle-Class Taxpayers

The Framework Might Be Critically Flawed
tattywelshie / E+ / Getty Images CC

The Framework Might Be Critically Flawed

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.

Related: The 10 Biggest Investment Scammers of All Time

Social Security is Propped Up By a Doomed IOU System
SammiStock/istockphoto

Social Security Is Propped Up By a Doomed IOU System

Even in times of surplus, about nine out of every 10 dollars goes to pay current retirees, but even that small 10% leftover 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.

woman having breakfast on her 90th birthday
Kathrin Ziegler / Stone / Getty Images CC

People Are Living Longer

The fact that life expectancy continues to rise 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 76.5 years and women should live to be 81.3 years old.

Unsustainable Demographics
Dovapi/istockphoto

Unsustainable Demographics

Not only are people living longer, but the nature of post-World War II demographic patterns makes today's retirees of the baby boom generation 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. Though in 1989, the birth rate returned to an average two kid and that's about where it remains today, that's still far too many baby boomers on Social Security competing for far too little payroll taxes paid by far too few children and grandchildren.

Related: Countries Where the Population is Growing Fastest and Where It's Shrinking

Many Might Be Compelled to File Early
KenTannenbaum/istockphoto

Many Might Be Compelled to File Early

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 economic cataclysm — or any like it suffered by future generations — 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.

Related: 12 Ways to Get the Most Out of Social Security

elderly work from home
Eva-Katalin/istockphoto

Far More People are Self-Employed

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 — the IRS considers entrepreneurs and freelancers to be both the employee and the employer. 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.

Related: This is Why So Many People Feel Like They'll Never Get to Retire

Payroll Tax Cuts Are a Common Band-Aid
Pool / Pool / Getty Images News / Getty Images North America / Getty Images CC

Payroll Tax Cuts Are a Common Band-Aid

President Donald Trump had threatened not to sign any pandemic-related stimulus package that didn't include payroll cuts, and recently went ahead with an executive order trying one. (The president announced a cut, but introduced a deferral that might need repayment.) He's hardly the first to suggest that measure as an antidote to economic emergencies — lawmakers temporarily cut payroll taxes during the 2008 recession, although they protected those funds with general revenues. The idea is that reduced payroll taxes take pressure off of small businesses and puts more money into the pockets of consumers, but for a variety of reasons too complex to address here, the  Center on Budget and Policy Priorities makes a convincing argument that payroll tax cuts are ineffective as a real stimulus measure. That can be debated, but what isn't up for discussion: This politically convenient all-too-common economic Band-Aid puts an intolerable strain on the finances that feed Social Security.

Related: How COVID-19 Is Changing Retirement in America