A lot of Americans — even older ones — are worried about whether Social Security will still be around when they need to collect it. At least polling says so.
According to Transamerica’s Retirement Survey roughly 75 percent of Americans worry that Social Security will not be there by the time they want to retire. The concern is especially strong in younger workers: 83% of Generation X and 80% of Millennials share this fear, but even 65% of Baby Boomers share this apprehension. Most interesting, the fear seems to be largely constant across educational boundaries, earnings power, and ethnicity.
These results can’t be particularly shocking. The Social Security Administration believes that nearly half of those people turning 71 today will be alive in 2034 when benefits face automatic reduction. So you can’t be surprised by the number of Americans worried that Social Security will be reduced or that it might even cease to exist. Long story short, Congress has kicked the can as long as it can be kicked.
Typically, pundits dismiss these concerns as little more than the musings of Chicken Little. They tend to believe that the past is a good indicator of the future. In generally, these writers suggest in a worst case scenario you will get about 75 percent of your planned benefit. While they are correct that the program has survived decades of rumors about its demise, the past is almost irrelevant to the system’s future.
|Uncharted Waters for Social Security|
Over the past 8 years Social Security has moved into uncharted waters. In the past, Congress could deal with Social Security’s imbalances with levies that primarily targeted people too young to vote.
In 1983 for example, insolvency could be addressed by gradual change to retirement age and increasing the payroll tax that fell hardest on those 17 and younger at the time. More importantly, Social Security was a good deal in 1983. An average couple retiring in 1985 expected to collect $3 in benefits for every $1 contributed on an investment adjusted basis. So a typical worker continued expected to continue to make money, albeit less, when taxes increased.
That entire economic backdrop is now completely gone. For the first time in history, legislated benefit reductions or tax increases will largely fall on existing voters. Worse, typical workers now lose money because of the high cost of payroll taxes, and the ever widening scope of the taxation of benefits. As a result, there isn’t a lot of room for benefit reductions.
To illustrate, the bulk of the adjustments made to fix Social Security back in the 1980s fell on those now approaching retirement. If we exempt these retirees because they already paid a large price to fix Social Security in 1983, the changes will have near zero impact on the current solvency picture. If we don’t, any adjustment today will layer on those people who lost nearly 25 percent of their benefits to fix Social Security the last time.
Specifically, we could increase the retirement age by a year for those born in 1960 and later. If so, that retiree will have lost a total of 3 years of benefits to help fix Social Security.
As we extend retirement age, fewer people reach retirement age, and those that do collect fewer checks. These people will lose on average more than $75,000 of benefits over their lifetime. While that sum sounds significant to the individual, the total savings to the system amounts to roughly slight less than 1/6th of the total change necessary to keep the program functioning. (more on life expectancy)
The program faces an equally tough structural problem on the other side of the ledger. Between 1950 and 1990, payroll taxes increased nearly 5% annually. They haven’t budged in 35 years. Chances are that higher payroll taxes are running into resistance from the electorate because now a typical worker loses money on the program. As a consequence, it really can’t surprise anyone that tax increases struggle with Millennials, who aren’t all that sure that they will ever get paid.
Saving Social Security comes down to two choices. We can cut the benefits of those who have already paid an enormous price to fix Social Security once, or we can ask workers who don’t believe that they will ever get paid to contribute more.
Author’s note: Readers are going to ask about increasing the cap on taxable wages. I suspect that some change in the tax base is unavoidable, but (1) Eliminating the cap doesn’t fix the problem. It does not even officially kick the can anymore. (2) The policy introduces structural changes to the program which will over time crash the program. This solution appeals to the people who wish to throw other people’s money at the problem. I am happy to take questions in the comments.