The importance of Social Security for our nation's retired workers simply can't be overstated. Though the average payout, as of November 2016, of $1,355 to the nearly 41.2 million retired workers may not seem like a lot, an analysis conducted by the Center on Budget and Policy Priorities estimated a 32-percentage-point decline in elderly poverty rates as a result of Social Security income being available to seniors during their golden years.
Despite being such a critical program for seniors, Social Security is itself not in the best shape, at least over the long run. Two major demographic shifts -- the ongoing retirement of baby boomers and lengthening life expectancies over the past five decades -- are expected to turn Social Security's net cash inflow into an annual outflow by 2020. By the year 2034, the Social Security Board of Trustees projects the Trust's more than $2.8 trillion in spare cash will be exhausted. Should this happen, across-the-board benefits cuts of up to 21% could be needed to sustain Social Security through 2090.
It's this expected budgetary shortfall that's left many lawmakers in Washington scrambling for an answer as to how best to reform Social Security.
Trump, Republicans weigh in on Social Security
President-elect Trump, who's set to take office in just a few weeks, offered a very minimalistic approach to Social Security reforms during his campaign. Rather than addressing specific policies that would alter the program, Trump suggested leaving Social Security untouched in its current form.
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Instead, Trump wants to have an impact on the greatest revenue generator for Social Security: its payroll tax. In 2015, payroll taxes made up more than 86% of the revenue collected by the program, with interest earned on its spare cash and the taxation of Social Security benefits comprising the remainder. Trump plans to boost payroll tax revenue by cutting individual and corporate income tax rates, increasing infrastructure and defense spending, and renegotiating trade deals. If wage growth increases and consumers are earning more, they'll be paying more in payroll taxes and possibly helping to close Social Security's budgetary shortfall.
RELATED: Important Social Security facts and figures you should know:
25 Social Security facts & figures you need to see
25 Social Security facts & figures you need to see
1. 60.66 million
As of the September 2016 snapshot from the Social Security Administration (SSA), 60.66 million people were receiving monthly benefits, two-thirds of whom are retired workers. A little more than 6 million survivors of deceased workers and 10.6 million disabled persons were also receiving monthly benefits.
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2. 5.44 million
Social Security's beneficiary base is increasing rapidly due to the ongoing retirement of baby boomers, which is expected to last until about 2030. As such, 5.44 million people were newly awarded Social Security benefits in 2015.
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It's important to understand that Social Security isn't an entitlement, though the requirements for a guaranteed benefit are not too high. You need 40 lifetime work credits to qualify for Social Security benefits, and a maximum of four credits can be earned annually. In 2017, one work credit is equal to $1,300 in wages. Simply earn $5,200 in 2017 and you'll have maxed out your work credits for the year. Do that 10 times and you'll be guaranteed benefits when you retire.
Based on statistics from the SSA, nearly all working Americans (96%) are covered by survivors insurance protection. Though Social Security is primarily designed to provide financial protection for retired workers, it does provide benefits for the spouses, children, and in rarer cases parents of deceased workers.
To add to the above statistic, the SSA also points out that 90% of the American workforce is covered in case of long-term disability. Since nearly 70% of all private sector workers have no long-term disability insurance, it's good knowing that Social Security has their back.
An interesting figure from the SSA is that 55% of beneficiaries are women. Social Security income is of particular importance to women since 1) they tend to live about five years longer than men, on average, and 2) they're often the caregivers that take care of the kids or sick family members, thus their lifetime earnings are often lower than their male counterparts'. Social Security income can be critical to ensuring a healthy financial foundation for women come retirement.
According to an analysis conducted by the Center on Budget and Policy Priorities (CBPP), Social Security income has reduced what would be a 40.5% poverty rate for seniors without this added income to just 8.5%. While the CBPP's analysis can't factor in external variables such as how much extra seniors would have saved prior to retiring if Social Security wasn't available, it's clear as day that Social Security is critical to keeping seniors on solid financial footing.
Based on data from the SSA, 81% of all benefits paid out by the Old-Age, Survivors, and Disability Insurance Trust (OASDI) are heading to seniors ages 62 and up. Just 5% go to children under the age of 18, and another 14% to adults between the ages of 18 and 61.
Statistics from the SSA in 2016 show that 61% of seniors rely on Social Security to provide at least half of their monthly income. For elderly couples this figure was 48%, while 71% of unmarried elderly persons lean heavily on the program for at least half of their monthly income.
10. $920.2 billion
The SSA's data showed that $920.2 billion was collected from three revenue channels in 2015. A majority of this revenue came from payroll taxes (86.4%), while interest earned on the OASDI's spare cash (10.1%) and the taxation of benefits (3.4%) comprised the remainder.
Payroll taxes comprise the lion's share of revenue collection for Social Security. This tax totals 12.4% of wages (up to a certain point, which is discussed below) and it's typically split down the middle between you and your employer, with each paying 6.2%. If you happen to be self-employed, you're on the line for the entire 12.4% tax.
There is, however, a cap on how much a person can be taxed by the SSA via the payroll tax. All earned income in 2017 between $1 and $127,200 is subject to the 12.4% payroll tax. Any wages beyond that point are free and clear of being taxed by the SSA.
The September 2016 snapshot shows that the average retired worker is bringing home $1,351.70 per month, or $16,220 over the course of a year. Annual benefit increases are tied to the inflation rate as measured by the Consumer Price Index for Urban Wage Earners and Clericals Workers, or the CPI-W.
Speaking of inflation, Social Security beneficiaries are getting a 0.3% cost-of-living adjustment (COLA) in 2017, the smallest increase on record. Social Security's COLA has been dragged down in recent years by weaker energy and food costs, which are sizable components of the CPI-W.
15. 33 out of 35 years
One of the more saddening facts and figures about Social Security is that its COLA has been lower than medical cost inflation in 33 of the past 35 years. The CPI-W factors in a number of varied expenses, but medical costs are a much smaller portion of workers' average expenditures. Seniors spend double what urban wage earners and clerical workers do on medical costs as a percentage of their annual expenditures.
Social Security benefits are capped at $2,687 per month, which makes sense given that payroll taxes have an annual cap as well. The monthly benefit cap is usually adjusted year-to-year based on inflation. Only a small fraction of Americans have a shot at reaching this maximum payout, as you'll see in the next figure.
Based on data from 2013, as assembled by the Centers for Retirement Research at Boston College, 60% of retirees sign up for benefits before reaching their full retirement age (FRA). A person's FRA is when they become eligible to receive 100% of their FRA benefit. By signing up early, retirees are taking a cut in benefits from their FRA benefit of up to 25% to 30%.
As of 2015, the worker-to-beneficiary ratio stood at 2.8 workers for every one beneficiary. In about two decades, this ratio is forecast to drop to 2.1-to-1. In simpler terms, baby boomers are retiring in increasing numbers, and there simply aren't enough new workers to take their place and maintain the worker-to-beneficiary ratio at its current level. This leads to the next point...
20. The year 2020
Based on the latest report from the Social Security Board of Trustees, by 2020 the cash inflow into the OASDI is slated to turn into a cash outflow. In other words, what's expected to be close to $2.9 trillion in spare cash will begin dwindling in 2020.
21. The year 2034
Perhaps the scariest finding of the Trustees' report is that Social Security's spare cash is expected to be exhausted by the year 2034. Assuming Congress passes no new laws affecting Social Security, the Trustees predict that an across-the-board benefits cut of up to 21% may be needed to sustain payouts through the year 2090.
Findings from the Board of Trustees report also showed that the actuarial deficit in 2016 was 2.66% for the program. In easier-to-understand terms, a 2.66% increase to the payroll tax would be expected to alleviate all funding concerns through the year 2090. This would mean an increase to 7.53% if you're employed by someone else, or 15.06% if you're self-employed.
It's a fact that gets overlooked by many seniors, but Social Security income may be taxable. Individuals earning more than $25,000 annually and joint filers with income over $32,000 could have a percentage of their Social Security benefits taxed. Not to mention 13 states also tax Social Security benefits.
According to Gallup, 51% of polled Americans in 2015 believed Social Security won't be there for them when they retire. Luckily, this is blatantly false. Social Security is essentially incapable of going bankrupt because it'll always be collecting payroll tax revenue from the workforce. Benefits may indeed need to be cut, but the program will be there for many generations to come.
Finally, a survey conducted by MassMutual Financial Group in 2015 found that just 28% of the more than 1,500 respondents who took its quiz received a passing grade and correctly answered at least 7 out of 10 multiple choice or true/false questions. Only 1 respondent out of more than 1,500 got all 10 questions correct. It's a stark reminder of just how little Americans know about Social Security.
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However, not all of Congress sees eye-to-eye with Trump on Social Security.
For example, earlier this month the chairman of the Ways and Means Social Security subcommittee, Sam Johnson (R-TX), offered up the Social Security Reform Act of 2016. Johnson's legislation is designed to make sweeping reforms to seniors' most prized social program, including raising the retirement age, boosting benefits for lower-income retirees, ending the taxation of Social Security benefits, and readjusting how inflation is factored in annually by switching to the chained Consumer Price Index from the Consumer Price Index for Urban Wage Earners and Clerical Workers. Johnson's plan to save Social Security is a stark contrast to Trump's hands-off approach, and it begs the question whether or not Trump will be able to honor his campaign commitment to leave Social Security alone while in office with so many Republicans in Capitol Hill fighting for reform.
This new Trump appointee could push for Social Security reform
The challenge for Trump to leave Social Security alone may have been made even harder by his selection of Rep. Mick Mulvaney (R-SC) as the director of the White House Office of Budget and Management one week ago.
Sen. Mick Mulvaney (R-S.C.). Image source: Mark Taylor, Flickr.
According to a statement from Trump, Mulvaney will help with "reining in out-of-control spending, fighting government waste and enacting tax policies that will allow working Americans to thrive." What it'll also do is put a staunch fiscal conservative who strongly opposes more national debt and believes in a balanced budget in charge of overseeing the incoming president's budget and ensuring that all of the numbers add up.
On one hand, the selection of Mulvaney suggests that Trump is going to take a hardline stance against the United States' growing national debt, even as he's advocated spending $1 trillion on infrastructure over the next decade. Mulvaney is not shy about going against members of his own party when it comes to reducing debt and balancing the budget.
However, part of Mulvaney's solution could involve finding ways to reform so-called entitlement programs such as Social Security, Medicare, and Medicaid, which, when combined, currently suck up around half of all federal spending in a given year.
Back in 2011, Mulvaney introduced the Balancing Our Obligations for the Long Term Act, also known as the BOLT Act, which sought to enact a number of measures to reduce Congressional spending and balance the budget. It would have capped long-term spending, required Congress to review long-term budget trends every five years, and authorized the reconciliation of long-term savings in Social Security, Medicare, and Medicaid. In other words, Mulvaney's bill would have tightened America's belt, Social Security included.
Image source: Getty Images.
In addition, InsideGov, a nonpartisan website that aims to better explain how the U.S. government works, notes that Mulvaney favors at least some degree of Social Security privatization (which is ironically the same position Trump favored 16 years ago in his book, The America We Deserve). A partial privatization of Social Security would allow Americans to invest a percentage of their benefits however they'd like, putting them in greater control of their financial future. While that might be great for some people, those with little to no financial knowledge, or those taking big risks, could find themselves in even worse shape once they retire.
To be crystal clear, Mulvaney's affinity for running a tight ship doesn't mean he'll necessarily push Trump for Social Security reform. However, it's tough to ignore previously introduced legislation when we're discussing an appointee who will play a critical role in helping Trump orchestrate a workable budget.
For you working Americans, this is just one more reminder that you need to have alternative sources of income during retirement than just Social Security.