April 14, 2024
It's not an emergency, yet, but demographics are powerful. More taxes? Fewer benefits? Both futures are possible.

America is getting older, rapidly, and that simple but powerful fact is prompting us to rethink everything from retirement housing and consumer technology to our collective ideas about who is or isn’t sexy.

But the biggest age-related change – one that figures to touch most Americans’ pocketbooks – is currently projected to reach an inflection point in exactly 10 years.

By 2033, according to a recent report from trustees who oversee Social Security, the number of Americans who are old enough to collect from the program will be so big, and the pool of working-age people paying for it will be so stagnant, that the program’s biggest trust fund will run dry.

Social Security won’t be flat broke (it’ll still be getting revenue from active workers) but unless big changes are enacted – either as benefit cuts or higher payroll taxes or some combination of the two – the pay-as-you-go program won’t be able to make full payments to retirees who have earned checks.

In their open letter to the U.S. Senate, dated March 31, Social Security’s trustees wrote:

“Moreover, we project that the reserves of the (Old-Age and Survivors Insurance and Federal Disability Insurance) Trust Fund will be depleted … during 2033, and only about 77 percent of benefits scheduled in current law will be payable at that time if no legislative action is taken.”

For people who collect Social Security – even the outliers who have other sources of money to live on beyond their government check – the idea of possibly getting less, even a decade in the future, already strikes a nerve.

“If that happens, I’ll be, well, I don’t want to say it in mixed company, but I’ll be upset,” said 91-year-old Ivan Anderson, an Arizona resident who was visiting Tustin earlier this month.

“It’d be bait and switch.”

Actually, as dire as the warning was, it’s not unexpected. Questions have been raised about Social Security almost since the day President Franklin Roosevelt signed it into law in 1935. At various times, Social Security’s detractors have argued that the program was draining America’s collective pocketbook. At others, supporters said the program should be expanded, to help more vulnerable Americans and, as a side benefit, boost the nation’s economy.

And, often – particularly as Social Security has grown to become what AARP public opinion polling shows is easily the most popular federal program, loved or at least liked by people of every political stripe – it’s been a political hammer. Generations of lawmakers (recently Democrats but previously Republicans as well) have campaigned on the idea that they would beef up or protect Social Security from their supposedly anti-Social Security political opponents.

But during all previous political eras, under all manner of threats and promises, Social Security has survived and even thrived.

About 67 million Americans currently get some kind of Social Security check, typically matching 25% to 50% of what they made while working.  About 4 in 5 of those beneficiaries are retirees who paid into the system during their careers, and the rest are either too disabled to work or are survivors of deceased workers.

What’s more, experts project that Social Security-related spending accounts for about 5% to 6% of the U.S. economy, and will become an even bigger economic driver in the 2030s and beyond. Any massive cut to Social Security benefits could take money from a lot of people who aren’t on the program.

Social Security is so big, and such a part of American life, that it’s the rare federal program a lot of non-politicians have a strong opinion about.

“I don’t know about all the economic stuff, but it would be pretty stupid to let Social Security go,” said Elaine Roth, 79, a retired accountant who lives in Culver City and says Social Security counts as “an important part” of her overall income.

“I don’t care what party is doing it – and I voted Republican until Trump – if the thinking is it’s somehow a smart idea to let Social Security checks get smaller… Well, I don’t know what kind of thinking that would be.”

Numbers

The March warning letter from Social Security trustees (a group that includes Treasury Secretary Janet Yellen, among others) didn’t go unnoted.

Within hours, everybody from President Joe Biden to House Speaker Kevin McCarthy had commented, mostly saying their political opponents would let Social Security wither. Within days, dozens of op-eds were written, with conservative writers generally arguing that benefits should be challenged and liberals generally urging that taxes should be raised on higher earners. Also, at least two books about the politics of fixing Social Security have been published this year or found a new audience.

So, if the program is popular, and successful, and essential, why is this year’s Social Security hand-wringing getting so much more attention than similar hand-wringing over the past four decades?

Math.

So many older people are living longer, and so many younger people are choosing to have few or no children, that two important population bubbles – working-age Americans who pay into Social Security, and older Americans who draw from Social Security – are growing at vastly different rates. The U.S. labor force (the pool of active adult workers who pay 12.4% of the first $147,000 they make in any given year into the two trust funds that support Social Security) is expected to grow by about 6% over the next decade, from roughly 180 million today to about 202 million in 2033. During that same period, the number of people collecting Social Security checks is expected to grow by about 31%, to about 88 million.

None of this will be surprising. The U.S. Census Bureau and many public and private demographers have projected for decades that America’s population would get older. It’s part of why “the future of Social Security” has been a political talking point since at least the 1970s.

But now the demographic surge has picked up so much velocity that it’s made the leap from airy projection to fiscal threat. In 2021, the Social Security Administration was forced for the first time to start tapping into its financial reserve to meet ongoing obligations. That reserve, a pair of trust funds valued at about $2.9 trillion two years ago, is what’s projected to fall to zero in 2033.

“Because the Baby Boomers are a big generation, followed by smaller generations, it means that for any given payroll tax, there’s not enough revenue to pay the benefits,” Louise Sheiner, an economist with the Brooking’s Institute, told the Harvard Gazette earlier this year.

“It’s not coming from the fact that Social Security benefits have gotten really generous,” she added.

“It’s really a structural change in the economy that makes (Social Security) difficult to sustain.”

Rising tides

If the basic reason for Social Security’s current lack of mojo is pretty simple (more retirees; fewer workers), so is the reason why lawmakers aren’t likely to let Social Security croak.

The same pool of retirees that’s growing big enough to potentially damage Social Security also votes. And as those voters become a bigger chunk of the total population (by coincidence 2033 also is the year the U.S. Census Bureau projects America will have more people 65 and older than it has kids 18 and younger) the political muscle to protect or even expand Social Security could be overwhelming.

It’s not like Social Security hasn’t been tweaked before.

In 1939, just four years after the law was passed, Congress voted to extend Social Security benefits to worker’s dependents and survivors. In 1950, Congress approved a one-time cost-of-living adjustment, boosting monthly checks by 77%. In 1956, and again in 1960, laws were passed to let disabled Americans collect Social Security. And in 1961, workers were given a new option – retire as early as 62 and collect lower benefits than if you wait until age 65.

But a true crisis for Social Security came in 1977. That’s when double-digit inflation was dogging the economy just as the program was starting, for the first time, to incorporate automatic cost-of-living increases each year. That combo nearly proved to be lethal. The initial COLA raises were big enough to threaten the program’s solvency. That year, to fix the problem, Congress voted to protect beneficiaries by raising revenue through a smattering of new or higher payroll taxes.

But that fix didn’t take. By 1983, Social Security again was facing potential insolvency. This time, Congress fixed the problem largely on the backs of current and future Social Security beneficiaries. The new rules made it possible to tax Social Security benefits (depending on the recipient’s income), delayed some cost-of-living increases, and declared 67, not 65, to be the new “full retirement” age for people born after 1960 – most of whom were then only in their 20s.

Those changes, and others enacted in the early 1990s, helped create the trust fund reserve that Social Security currently is using to bridge the gap between what it owes and what it collects.

Experts say the details of those changes softened the political fallout.

“Congress imposed most of the 1983 cuts on temporally distant cohorts, not current retirees. … Legislators raised the full retirement age from 65 to 67, but implemented the change very gradually. … The only cost that legislators imposed on current beneficiaries was a six-month delay in cost-of-living adjustments, a small price to pay for avoiding automatic benefit cuts that would have been larger,” wrote former Princeton political science professor R. Douglas Arnold in his new book “Fixing Social Security: The Politics of Reform in a Polarized Age.”

But any changes made to stave off the potential cliff of 2033, Arnold adds, could be harder, particularly if they come closer to the deadline when the money gap will be wider.

“(Congress) cannot raise such a colossal sum by adopting long-term solutions like raising the retirement age, because long-term solutions produce very little immediate revenue. Moreover, short-term solutions, like delaying cost-of-living increases or reducing benefits for affluent retirees, would produce only a fraction of the revenue required to keep benefits flowing. Put differently, benefit reductions can be part of a solvency plan, but alone they cannot prevent automatic benefit cuts.”

Different world

The fight isn’t over huge money, at least not for any individuals collecting a check, and certainly not for people living in higher-cost regions like Southern California. The average monthly Social Security payout for a retired married couple is about $2,700, or $32,400 a year.

Compared with public retirement around the world, Social Security ranks 29th out of 38 countries surveyed in terms of how much a worker can collect as a percentage of their previous salary, according to a report from the Center on Budget and Policy Priorities.

And the most-discussed proposals to tweak Social Security aren’t viewed as particularly complicated, according to Arnold and others.

The threshold for payroll taxes could be raised, on all workers or only on people making higher incomes. The age for retirement could be postponed to reflect longer lifespans. Cost-of-living raises could be capped. The whole system could be privatized, or Congress could change the rules so Social Security could be paid for out of general revenues. Every idea has supporters and critics, and few come without somebody in the system – a worker or a beneficiary – losing some money.

But whatever changes are or aren’t coming, the stakes of solving the 2033 crisis are huge.

In 1983, when Congress stuck beneficiaries with most of the bill for fixing Social Security, the prevalence of defined-benefit pensions peaked. More than 50% of private-sector American workers could expect a pension check, in retirement, to supplement their Social Security check.

Today, such pensions are rare and fewer than 10% of private-sector workers can expect a pension. Instead, 401K retirement plans — mostly financed by workers with some matching money from employers — are the norm. But they haven’t bridged the gap. Fewer than half of all American workers have any retirement savings and only about 42% of workers nearest to retirement – ages 55 to 64 – have 401 (k) savings, with an average pot of about $200,000, according to federal data.

Related links

Could the aging boom change our prejudice against ‘old?’
Next chapter in America’s aging boom? Homeless retirees
How an age shift in Southern California’s population could change everything
In pricy Southern California, some seniors can’t be retiring types

That makes Social Security more about survival than comfort. Among retirees who collect a federal check, slightly more than 1 in 5 married couples and and nearly half of individuals say Social Security represents more than 90% of their income. Most of those people were lower-income workers during their careers, so their average check is about $1,500 a month – less than rent for an average studio apartment in Los Angeles or Orange counties.

Still, even beyond the lifeline, some argue Social Security has meaning that goes beyond money.

“It’s a promise that we all take care of each other,” said retired accountant Roth.

“It would say something about the country if it goes away, something bad,” she added. “That’s why I think it’ll get fixed.”

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