These days, politicians from both parties are vowing that they won’t touch Social Security. Just one problem: Not touching Social Security means benefit cuts for everyone just a few years from now.
How is this possible? For starters, Social Security doesn’t work the way many people think. The money it collects from taxes isn’t saved but is spent on today’s retirees. In the past – when there were fewer retirees compared to workers – that system worked. In some years, it took in more than it needed.
But ever since 2010, Social Security has had to pay out more in benefits than it’s taken in. And by 2033, it will no longer have enough money to pay Americans what they’ve been promised.
At that point, Social Security will be legally required to balance its books by cutting everyone’s benefits by an estimated 21%. For a typical two-income retired couple, that translates to losing over $17,000 a year.
The upshot: We’re in for some painful decisions that will likely involve both tax hikes and benefit cuts. But the sooner we start, the less painful it will be.
America is living through an era of danger.
Hostile nations growing in power.
Anger and division running through the country.
But there’s one threat that’s even more terrifying than those.
Because this one … involves math.
…and a really flimsy piece of paper.
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Here’s some good news for an otherwise polarized nation: In recent years, politicians from both major parties have promised that they won’t do anything to change Social Security — and they’ve pledged that Americans will get exactly the benefits they’ve been promised from the program.
Here’s some bad news: We can’t actually do both of those things. Because if we leave the program untouched … a lot of those benefits are guaranteed to disappear.
To understand why, it helps to understand how Social Security actually works.
It’s often assumed that Social Security is a kind of mandatory retirement savings: The government takes money out of your paycheck throughout your career and then, when you retire, it’s waiting for you on the other end.
And while that might be a reasonable way to run a retirement system … it is not the way that we decided to run a retirement system.
In reality, Social Security is what’s called a pay-as-you-go programi — which is a fancy way of saying that money is constantly getting shoveled into one door and right out another. The money Social Security collects from workers in taxes doesn’t get saved — it goes straight to today’s beneficiaries.
In other words, the money that came out of your paycheck in 2002 isn’t sitting in an account somewhere waiting to fund your retirement. It was already spent on … well, whatever retirees in 2002 were into.
So … probably a Walker, Texas Ranger VHS set.
Now, if you’re wondering how a system like this could ever have worked, there’s actually a pretty simple explanation. For most of Social Security’s history we had way more workers paying into the system than people drawing out from it, so there was always enough money to take care of everyone. In fact, during many years Social Security was collecting more money than it needed.ii
But today … not so much. Back in 1955, there were about eight and a half workers paying in to Social Security for every one person drawing benefits.iii By 2022, that number had fallen to 2.8.iv And, based on current trends, in just a few decades every single retiree in America will be reliant on the taxes of one guy in Nebraska named Jeff.
OK, we made that last part up — but you see the problem. In every year since 2010, Social Security has been paying out more in benefits than it’s been taking in taxes.v And, under current policies, that is never going to change.
Now, you might think “The federal government brings in a lot of tax revenue, surely it can just make up the difference. How bad could it be?” And the answer to that question is that over the course of the next decade, Social Security is going to be short … about $3 trillion.vi
But we must have safeguards, right? After all, there were all those years when Social Security took in extra money, so at least we’ve got a rainy-day fund to make up for these shortfalls. Right?
Well … about that. The Social Security Trust Fund is what economists refer to as “total bull$#!+.”
Here’s what we mean: In those years when Social Security took in extra funds, none of it actually got saved. It just got “lent” to the federal government to spend elsewhere, with the promise that they’d pay it back someday.vii
To repeat: The government lent the money … to itself. Which is a very Washington way of saying … yeah, the cash is gone.
But here’s the thing: Even had we actually been setting all that money aside, it still wouldn’t have been nearly enough to solve today’s problems. The money that would have gone into Social Security’s trust fund was about $3 trillion. The program’s projected shortfall over the next 30 years or so is nearly $40 trillion. viii
So, what does this mean for the future? Social Security is required by law to be self-supporting — it can only spend what it’s brought in through payroll taxes, even if that’s less than what people have been promised. The only reason that hasn’t already caused serious problems is that the federal government is currently making up Social Security’s shortfall by paying back all that money it “borrowed.”ix (Though, let’s be clear, that actually means that taxpayers are paying it back — with interest).
But here’s where things start to get really messy: It’s projected that in less than a decade — by the year 2033 — that debt will be paid off, Social Security won’t be able to meet its obligations, and at that point benefits will have to be cut for everyone — by an estimated 21 percent.x
In other words, when politicians tell you they’re not going to touch Social Security, they’re basically guaranteeing a world in which a typical two-income couple would lose over $17,000 a year.xi
And even the few politicians who are willing to admit this is actually a problem will often try to tell you that it can be solved by … all the things their party wanted to do anyway. But the math usually suggests otherwise.
Want to solve the problem by raising Social Security taxes for the wealthiest taxpayers? That’d get you enough money to keep Social Security out of the red … for about five years.xii
Want to move the retirement age up to 70? That’d only get you about 25 percent of the money you need to make up the gap.xiii
The hole is just too deep. Which means that when we’re eventually forced to solve this it’ll probably be the worst of both worlds — both tax hikes and benefit cuts. Not because that’s the best option, but because it may be the only one left.
So, the downside: We’re in for some painful decisions. But the upside? The sooner Washington does something about it, the more of that pain we can avoid.
And while we’re in the “taking bold steps” business … maybe get a better version of this card?
It’s like our most important legal document. Why is it made out of the same stuff as raffle tickets?
