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In just nine years, the oldest Gen Xers will reach Social Security’s normal retirement age of 67. But they will have a rude awakening when they learn that the program’s trust fund is empty, leaving it able to pay out only as much in benefits as it takes from the paychecks of those then working.
That’s straight from the Social Security trustees 2024 report. It also notes that without congressional action, benefits will have to be cut by 21% across the board—including for those already retired—beginning in 2033.
For the average beneficiary, who receives about $22,000 a year from Social Security, that 21% cut will translate into a loss of $4,600 per year. As Social Security benefits will grow faster than payroll taxes for the foreseeable future, benefit cuts will reach 31% at the end of the trustees’ 75-year projections.
Simply maintaining currently scheduled Social Security benefits would require large tax increases. The program’s trustees estimate that payroll taxes would have to rise immediately from 12.4% to 15.7%, adding $2,500 to the median household’s annual Social Security taxes.
Even that projected hike may be too conservative. The Congressional Budget Office estimates that a 17.5% tax, or an extra $3,800 per year for the median family, is necessary to maintain current Social Security benefits.
Such high tax rates are a far cry from Social Security’s original intent. The program started out as a 2% tax, and its founders promised it would never take more than 6% of workers’ paychecks.
And for a program that currently replaces about 40% of workers’ earnings during retirement (and will decline to 32% beginning in 2033), the current 12.4% tax is a hefty price to pay. If workers invested that amount in a conservative mix of stocks and bonds, they should have enough at retirement to replace at least 75% of their earnings.
Even as Social Security was never intended to be the sole source of income in retirement, its rising taxes have made it increasingly difficult, particularly for lower- and middle-income workers, to save for retirement.
In fact, Social Security’s growing size and scope could be exacerbating wealth inequality because the hard truth is that Social Security is not a savings program, and workers have no ownership of the Social Security taxes they pay.
Despite Social Security’s original intent to be a predominantly prefunded and effectively a forced-savings program, it now functions as a pure intergenerational transfer program. That happened because Social Security’s benefits increased more than its tax hikes.
In every year since 2011, Social Security has paid out more in benefits than it has received in tax revenues. This means that workers’ payroll tax “contributions” aren’t saved and don’t earn a positive rate of return over time.
Although the formula that determines retirees’ benefits is based on what they paid in Social Security taxes, their actual benefits come directly from younger workers’ paychecks. After 2033, retirees’ benefits will be entirely dependent on how much future lawmakers are willing to extract from workers’ paychecks.
The fact that Social Security taxes aren’t saved makes the program a bad deal for most Americans. It can also exacerbate wealth inequality among low-income and minority Americans who have lower life expectancies.
One out of every four black men dies between the ages of 45 and 64, having paid tens or even hundreds of thousands of dollars in Social Security taxes. But because they have no ownership of their contributions, they and their family members receive little or nothing in return.
What could have been a $350,000 retirement account that a low-income worker would have to pass on to his family is often just a $255 death payment instead.
With less than a decade left before Social Security runs out of money and automatic 21% benefit cuts ensue, lawmakers must act now to prevent insolvency and to improve the program for future generations.
Some commonsense solutions include gradually shifting to a universal benefit based on years of work instead of total earnings, automatically updating the program’s eligibility age to align with changes in life expectancy, and using more accurate statistics to adjust benefits.
These reforms would translate into bigger paychecks for all Americans by allowing Social Security’s tax rate to decline over time.
Moreover, if coupled with a personal ownership option, Social Security reform could help more Americans build wealth that could increase their retirement incomes and provide a leg up to help their children and grandchildren pursue goals like education, homeownership, or starting a small business.
Whatever lawmakers do, they must act soon. Time isn’t on our side.
Distributed by Tribune News Service
The post Someone’s Going to Have to Pay a Lot for Your Social Security appeared first on The Daily Signal.
The Social Security trustees released their annual report on Monday, and the outlook is bleak.
Social Security has morphed far beyond its original intent, and absent congressional action, everyone who is of Generation X or younger will not receive a single full benefit, and even those already in retirement will experience significant benefit cuts.
To prevent benefit cuts for even the most elderly who rely on Social Security for their entire income, Congress will have to act.
Determining the best pathway for reform, however, requires understanding some crucial facts about Social Security.
Fact #1: Social Security’s retirement fund will run dry in nine years. The Social Security trustees project that the Old Age and Survivors Insurance, or retirement program, will be insolvent in 2033. At that point, Social Security benefits will be limited to the amount of Social Security payroll taxes that come into the program.
Technically, insolvency means that the notional trust fund (which currently consists of IOUs that the federal government issued to the Social Security trust fund when it borrowed payroll-tax revenues to fund non-Social Security spending) will have no more money—or IOUs—left to be reclaimed.
Fact #2: 21% automatic benefit cuts will ensue. Because Social Security is a self-financed program, it cannot spend more than it takes in. Consequently, unless Congress reforms Social Security, benefits will be reduced by 21% across the board beginning in 2033. That will equal a loss of about $4,600 for the average beneficiary, who receives about $22,000 per year from Social Security.
Beyond 2033, payroll taxes will cover a declining share of scheduled benefits, and benefit reductions will rise to 31% by 2098.
Fact #3: Social Security has $22.6 trillion in unfunded obligations. Social Security’s combined Old Age and Survivors Insurance and Disability Insurance programs have accumulated $22.6 trillion in unfunded obligations, which is effectively the additional amount required to maintain Social Security’s current benefit levels over the next 75 years. That amounts to $172,000 for every household in America.
Fact #4: Large tax hikes would be required to prevent benefit reductions. To prevent any benefit reductions, the Social Security trustees estimate that payroll taxes would have to rise immediately from 12.4% to 15.7%. That estimate may be too conservative, however. The Congressional Budget Office estimates that payroll taxes would have to rise immediately to 17.5% to maintain current benefits.
Those estimated tax hikes would add between $2,500 and $3,800 in annual Social Security taxes for a median household with about $75,000 of income. When Social Security was established, it started out as a 2% tax, and its founders promised the program would never take more than 6% of workers’ paychecks.
In addition to the basic facts presented in the trustees’ report, understanding some common misconceptions about Social Security can help Americans assess the best options for reform.
Misconception #1: Social Security is a retirement savings program. Today, not a single dollar of workers’ Social Security payroll taxes is saved. Decades ago, a significant portion of workers’ payroll taxes were designated to the Social Security trust fund and earned interest (because the money was lent to the federal government to finance deficits in other, non-Social Security government spending).
Since 2011, however, Social Security has paid out more in benefits than it has collected in tax revenues, and every dollar of workers’ payroll taxes has gone straight out the door to current retirees. Thus, Social Security is not a retirement savings program, but an intergenerational income-transfer program.
Misconception #2: Social Security is a good deal. Social Security was a good deal for early generations of beneficiaries who received far more than they paid into the system.
Social Security continues to seem like a good deal to many people because a $2,000 monthly benefit check is very noticeable, whereas workers never see the 6.2% Social Security tax that employers pay on their behalf and with automatic deductions and direct deposit of paychecks, many workers don’t notice the 6.2% taken from those paychecks.
Moreover, most workers have no idea what they could have received if their payroll taxes had instead been put into a personal retirement account.
My colleagues and I at The Heritage Foundation estimated that the average worker could receive three times as much from a personal retirement account, compared to what Social Security provides. Even minimum-wage workers could receive 40% more from a personal retirement account. (The Heritage Foundation founded The Daily Signal in 2014.)
Misconception #3: Making everyone pay their “fair share” of Social Security taxes would fix the program’s shortfalls. To increase Social Security revenues, some lawmakers have called for subjecting all earnings (and potentially unearned income) to Social Security’s 12.4% tax. Currently, Social Security’s tax applies up to $168,600 of earnings in 2024. The current cap is already 2.5 times as large, in inflation-adjusted dollars, as the original earnings cap.
Social Security’s tax cap also functions as a benefit cap. Since benefits are a function of the income on which workers paid taxes, the tax cap prevents very wealthy individuals from receiving very large Social Security benefits.
Eliminating the Social Security tax cap entirely would only solve about half of Social Security’s shortfalls. Since eliminating Social Security’s tax cap would bring the top federal income tax rate to 51.8% and the top combined state and federal income tax rate to 65.8% (in 2026 and beyond), this would leave little room to raise taxes to cover the federal government’s regular deficits or Medicare’s more than $50 trillion in shortfalls.
As Brian Riedl of the Manhattan Institute noted, “even 100% tax rates on million-dollar earners would not come close to balancing the budget, and seizing all $4.5 trillion of billionaire wealth—every home, car, business, and investment—would merely fund the federal government one time for nine months.”
Social Security’s outlook is dismal, and the politics of reform are even worse. But the good news is that Social Security truly is solvable.
By slowly shifting to a system of universal benefits, modernizing outdated features, and adding an ownership option, policymakers can preserve Social Security, improve benefits for those who need them most, and increase all Americans’ lifetime incomes.
The post 4 Cold, Hard Facts From Social Security Trustees’ Report—and 3 Common Misconceptions appeared first on The Daily Signal.
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