Editor's note: Americans may not see eye-to-eye on many things, but fully 96 percent of us agree on the importance of Social Security. And no wonder: The program, now 86 years old, has become the bedrock of our retirement finances. Which begs the question: Why are its finances not more secure? To answer that, AARP talked with dozens of experts about Social Security and its future viability. Here’s what we learned.
For decades, financial advisers have used the metaphor of a “three-legged stool” to describe America’s retirement system: that the equation for late-life security is having a healthy pension from work, ample personal savings and a monthly Social Security payment.
So much for that. Pensions that guarantee income for life are a dying breed in America, and too few Americans have accumulated a nest egg that can provide substantial monthly income across the full expanse of their retirement years. Less than 7 percent of retirees today have steady income from all three “legs of the stool,” reports the National Institute on Retirement Security.
Of those income streams, only Social Security has proven steadfast and strong. Not only is it the largest source of income for most retirees, but it also has never missed a monthly payment since it cut its first check to Ida May Fuller in 1940. Which is perhaps why so many Americans are anxious about its health. A 2020 AARP poll showed that 57 percent of Americans are not confident in the future of the program.
“Those who tend to distrust the government seem to have less faith that Social Security will be there for them in its current form,” said Michael Baughman, a financial planner in Tryon, North Carolina. “And as you work with younger clients, there is even less confidence in Social Security.”
While worry about the program is hardly new, with younger Americans typically more doubtful than older, the skeptics do have a point. Social Security’s finances are unquestionably on a downward slope, and fixing them is primarily in the hands of the U.S. Congress. If no action is taken, the moment of crisis — meaning when the program would no longer have enough money to fully pay its promised benefits — will happen in just over a decade.
Although there’s plenty of reason to suspect that Congress will drag its feet, it is likely that pressure will build to act before that moment. But it could be awfully close to the deadline. “Any reform that’s politically feasible requires things that both parties hate,” says Reid Ribble, a former Republican congressman from Wisconsin’s 8th District. “Republicans have never wanted to increase revenue, and just dealing with it on the benefit side is not politically feasible.”
Popular and troubled
Social Security is one of the most successful anti-poverty programs this country has ever created. Without Social Security benefits, 21.7 million more Americans would be below the poverty line, according to the Center on Budget and Policy Priorities.
Social Security does more than send eligible retirees a payment every month. It provides ongoing income to surviving spouses and their children as well. Social Security Disability Insurance (SSDI) helps pay the monthly bills for qualified disabled workers and their families. Although most of those whom Social Security keeps out of poverty are older adults, 6.9 million are under age 65, including 1.2 million children.
Not surprisingly, Social Security has widespread support. “It’s crystal clear that Americans of all generations value the economic stability Social Security has offered for the last 86 years — even more so as we face the health and economic challenges of a global pandemic,” says Nancy LeaMond, AARP executive vice president and chief advocacy and engagement officer.
But there’s trouble on the horizon. Absent any change in law, the Social Security trust funds — the financial accounts that the program draws from when annual payments to Americans are larger than annual tax collections — will be out of money in about 12 years. At that point, the program would have only ongoing tax revenue with which to fund payments; calculations show that would cover only 78 percent of promised benefits.
To Congress, 2034 is a long way off. But the sooner the legislature acts, the quicker and easier it will be to bolster the trust funds’ reserves, due to simple math: Smaller revenue or benefit changes made now would accrue over time, which is a far more efficient way to secure the funds than paying for a last-minute major repair job.
How we got here
One reason Americans get angry at talk of lower Social Security payments is that most of us have been paying into the system ever since our first jobs. And it’s not a trivial amount: Fully 12.4 percent of your gross income has gone to Social Security each paycheck by way of the Old-Age, Survivors, and Disability Insurance (OASDI) payroll tax. If you work for someone else, it’s split evenly: You pay 6.2 percent of your income, and your employer chips in the other 6.2 percent. The self-employed pay the full freight. The amount of wages subject to the payroll tax is capped and indexed annually; in 2022, a worker pays the tax on wages up to $147,000. For a self-employed worker clearing that amount or more, that means an annual OASDI tax bill of about $18,200.
After the Social Security Administration (SSA) pays beneficiaries, any tax dollars that are left over go into the trust funds, now totaling $2.91 trillion, to be tapped at a time when taxes coming into the system aren’t enough to cover ongoing benefit payments.
That time is now. To make up for its income shortfall, the SSA this year will start drawing on the trust funds. Based on recent calculations, absent any major changes, the funds will run dry in 2034. That’s 24 years earlier than the SSA estimated when the system was last overhauled in 1983.
How did we get here? As long predicted, demographics explain a good deal: In a decade, the entirety of the boomer generation — some 70 million Americans born between 1946 and 1964 — will have hit retirement age. As a result, the number of people receiving Social Security benefits come 2034 will be more than double the beneficiaries in 1985.
But what wasn’t known as accurately was how much longer those boomers would live. “From 1940 to 2019, life expectancies at age 65 have increased by about 6.5 years,” says Amy Kemp, chair of the Social Security Committee of the American Academy of Actuaries.
The impact: Many workers will be receiving benefits for a longer period of time. And those with higher incomes, which are generally those who receive higher benefit amounts, tend to live longer on average.
At the same time, there has been a continued decline in the nation’s birth rate; that means there are fewer younger workers to support the benefits promised to older workers. In 1955, there were more than eight workers supporting each Social Security beneficiary. Now there are 2.7 workers per beneficiary.
Additionally, the country’s growing income inequality has had a negative effect on the amount of payroll taxes going into the trust funds, as wages above the payroll tax cap have grown much faster than wages under the cap.
All this doesn’t mean that the Social Security program will end in 2034. “People could be erroneously thinking that all benefits will be cut off at that point,” Kemp says. “But once the reserve is depleted, benefits will still be payable — though only about 78 percent will be covered from the payroll taxes that still will be coming into the system.” And even if nothing is done, Social Security is projected to still be able to pay roughly three-quarters of promised benefits for the remainder of the century.
Every year, the trustees who oversee the Social Security trust funds issue a public report that updates projections for the program’s finances. It typically causes a flurry of foreboding news coverage, and 2021’s report, citing factors including the pandemic and the topsy-turvy economy, was no different.
It’s no surprise that Americans are doubtful about the program’s future, particularly among millennials: Only 3 percent of Americans ages 30 to 49 are very confident in the future of the program, according to AARP’s 2020 survey. Adults born after 1981 “are more likely to assume future benefits will be nonexistent, while families who are five to 10 years from claiming Social Security assume benefits will be reduced or means-tested,” notes Cody Garrett, a financial planner in Pearland, Texas.
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So what needs to happen to secure Social Security for the long term? There are variables that are out of the direct control of the SSA or Congress, such as the economy, wages, life expectancy and birth rates. But if projections hold more or less true, on paper the options are fairly simple: Congress will have to raise taxes, modify benefits or do some of both. Those options come down to any variation of a handful of leading approaches discussed by policymakers. Here are several, starting with ways to bring more money into the system.
- Adjust the cap. This year, someone with $1 million in work income would pay the same amount of OASDI tax as someone with $147,000 in wages. Eliminating the taxable wage cap would keep the trust funds solvent until 2060, according to Social Security. Other less-drastic approaches: Simply raise the cap to a higher level, or keep the cap but resume taxing after wages reach a new threshold.
- Increase payroll tax rates. As noted, the current rate is 12.4 percent. Some propose raising that incrementally — say, by 2 percentage points, to 14.4 percent — as a way to bring additional dollars into the trust funds. But some experts note that such tax increases would be hardest felt by those who earn lower wages or are self-employed.
- Broaden the base. Not all state and local employees are covered by Social Security. Some have only public pension coverage. Bringing all newly hired state and local workers into the Social Security system would create a large new influx of cash, although it would mean more beneficiaries to pay later. But this isn’t a simple solution either, as the move could pose challenges to pension plans operated on behalf of local governments.
- Broaden the definition of income. Certain forms of income are not subject to SSA payroll taxes, such as the value ofemployer-sponsored group health insurance. Gradually eliminating such exclusions — and collecting payroll taxes on the additional income — would keep the trust funds healthy for roughly four additional years. A significantly larger target, and so more politically challenging, would be to levy a Social Security tax on annual investment income, as opposed to just payroll taxes. The other side of the coin is implementing changes that reduce benefits to certain Social Security beneficiaries. Here are several approaches that have been floated.
- Introduce more progressivity. Typically referred to as “means testing,” this approach calls for adjusting the size of your Social Security payments based on your wages, wealth or income. The concept is to protect people below a certain annual income or wage level so they get full benefits; those who are financially healthier would sacrifice some or all of their Social Security payments.
- Cut benefits for new recipients. Another approach would be to pay newly eligible retirees a little less per month than promised. By cutting payments to new retirees by 3 percent, you extend the life of the trust funds by 10 years, according to a 2005 study by the SSA. If your monthly payment was to be $2,000, that size cut would bring it to $1,940.
- Reduce the cost-of-living adjustment (COLA). Each year, the SSA usually adjusts beneficiary payments to help protect their purchasing power from inflation. The yardstick used is the government’s Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, which takes into account the price increases for everything from apples to gasoline to rent. Proposals have been floated to switch to different inflation measures, or simply to outright reduce the COLA. But doing so is highly unpopular. Social Security annual increases have long been below the general inflation rate, and reducing the annual COLA likely would have little impact on the long-term financial health of the program. But its impact on beneficiaries would compound over time, reducing benefits by a greater amount each year.
- Change benefit calculations. Adjusting the complex formulas used to determine your Social Security payments could result in modestly lower benefits that could help increase the life of the trust funds. Here’s an example: The SSA uses your highest 35 years of salary history to determine your retirement benefit. Using a higher number of years, such as 38 or 40, would reduce a beneficiary’s average annual earnings and, as a result, the size of his or her monthly benefit.
- Up the retirement age. You can start taking Social Security, with reduced benefits, at age 62. Wait until you’re 67 (if you turn 62 in 2022) and you qualify for your full benefit. Gradually increasing both (or just the higher) age thresholds would ease some of the strain on the trust funds. But it would also hurt those retirees who can’t wait longer to get Social Security. “There are a lot of jobs where people’s bodies just wear out,” says former Wisconsin congressman Ribble.
Then there are the more radical ideas
Some have suggested scrapping the entire program and converting it to individual account plans similar to a 401(k) retirement program, in which you contribute some or all of your current payroll taxes to a self-managed retirement account invested in stocks, bonds and other securities; you would bear the risks and rewards of your choices.
President George W. Bush proposed such a plan in 2005, but it was widely rejected by the American public. Experts also note that such a program would mean the trust funds would be depleted sooner, putting current benefits at even greater risk.
Getting it right
Legislators in Congress routinely propose bills to alter Social Security, ranging from small adjustments to substantive overhauls. In fact, so far in the 2021–2022 legislative session, dozens of members of Congress have introduced bills related to Social Security. To date, none has moved to a full vote.
This lack of action isn’t surprising, given Congress’ big disagreements on Social Security reform. The 1983 legislation negotiated between House Speaker Tip O’Neill and President Ronald Reagan that has kept the program solvent over the past four decades was a squeaker (though it ultimately won large bipartisan support). “The OASI trust fund actually reached the point where technically, it would have become depleted in 1982,” says Social Security chief actuary Stephen Goss. Fortunately, some technical maneuvers allowed full payments to be made until the Social Security Amendments of 1983 were signed into law.
That bill gradually raised full retirement age for beneficiaries to 67, levied taxes on Social Security payments for some beneficiaries, and increased taxes, all of which would be difficult to reach consensus on in Congress today.
Standing on one leg?
Americans rely on it. It’s long been cited that Social Security was meant to provide just 40 percent of your retirement income. But today, 12 percent of men and 15 percent of women on Social Security rely on it for 90 percent or more of their income. Even a modest reduction in benefits would hit them hard. And 37 percent of men and 42 percent of women on Social Security get 50 percent or more of their income from the program.
With around 65 million people today receiving benefits, that means tens of millions of Americans depend heavily on the program. And already, their payments aren’t high. The average retirement benefit from Social Security was $1,555 a month in 2021, or $18,660 a year. The average rent for a one-bedroom apartment in the U.S.? About $1,680 a month, according to Apartmentguide.com.
“When I did my research on it, probably the hardest-hit recipient of Social Security was a widow who has outlived her family savings and is now living in old age, strictly on Social Security,” Ribble says. “She’s trying to live off a $700- or $800-a-month payment.” Even though those who rely on Social Security alone are struggling, and the trust funds face depletion, neither are high enough on Congress’ radar to warrant action — yet. Still, if history is any guide, there’s reason to hope that Congress will find a solution. Says Social Security’s Goss: “We’ve never reached the point where we depleted the reserves and had to reduce benefits.”
AARP and Social Security
For more than 60 years, AARP has fought to protect Americans’ hard-earned Social Security benefits, answer your questions about the program and make sure it continues to be financially strong for future generations. Here’s what those efforts look like today.
Advocacy in Washington and beyond
In 2022, AARP will continue to urge members of Congress to shore up Social Security’s long-term finances and keep the promises made to all current and future beneficiaries. We have fought hard against arbitrary cuts to the cost of living adjustment (COLA) and against bills like the Trust Act that target Social Security as a way to deal with budget deficits. And we fought hard to ensure that those on Social Security would be able to get economic stimulus payments without having to file separately.
Delivering better service: AARP plans to continue highlighting customer service challenges and solutions at the Social Security Administration (SSA), and advocating for Congress to approve adequate funding for the SSA to deliver benefits and services properly and promptly to its growing number of customers.
State taxation: Twelve U.S. states now tax Social Security benefits. In 2022, AARP will work at the state level to eliminate this tax burden for more retirees and their families.
Helping to answer your questions
The AARP Social Security Resource Center can assist you in finding answers to both basic and complicated questions about Social Security. And the AARP Social Security Calculator can help you find out how you can maximize your Social Security benefits.
AARP offers free interactive webinars to help Americans 50 and older make informed decisions about Social Security. Consumers also can watch past webinars related to financial planning and Social Security, as well as get help from retirement experts.
A valuable resource
AARP’s updated edition of Social Security for Dummies is the one guide you need to navigate the complex world of Social Security benefits. Find out more at aarp.org/dummies.
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner's USA Today investing column ran in dozens of newspapers for 25 years.