For many retired workers, Social Security is viewed as a vital source of monthly income. A majority of today's retirees rely on Social Security to provide at least half of their monthly income, while a Gallup poll finds that greater than 8 in 10 baby boomers plan to rely on Social Security income to some degree when they eventually retire.
Congress has a problem on its hands
However, Social Security isn't in the best shape. According to the Social Security Board of Trustees' annual report, the program is on track to exhaust its more than $2.8 trillion in spare cash by the year 2034. The rapid decline in the Trust's spare cash balance is being caused by the ongoing retirement of baby boomers from the workforce, which is weighing down the worker-to-beneficiary ratio, and the relatively steady lengthening of life expectancies, which allows seniors to draw payments from the Trust for an extended period of time. If Congress doesn't find a way to resolve the current budgetary shortfall in Social Security, an across-the-board cut in benefits of up to 21% may be needed in less than two decades. That's a scary though for current retirees, as well as those who'll soon retire.
The interesting thing is that Social Security solutions are aplenty on Capitol Hill. More than a dozen Social Security fixes have been floated around in Congress, yet neither party can come to a resolution on how best to protect the benefits of current and future generations.
The American public, though, has been pretty clear about its intentions. An informal reader poll from The Washington Post in 2014 found that an overwhelming majority of readers supported the idea of raising the payroll tax earnings cap on wealthier Americans. All U.S. workers pay a 12.4% payroll tax (which is often split down the middle with your employer, with each paying 6.2%) on wages between $1 and $127,200, as of 2017. This means any wages earned above $127,200 are free and clear of the payroll tax. The American public would like to see this figure lifted higher so that richer Americans pay a greater portion of their wages into the program. Since raising the payroll tax earnings cap would only affect a relatively small percentage of the population, it's among the most popular solutions.
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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This shocking Social Security fix is gaining steam with the public
Surprisingly, though, a new study from the Public Consultation School of Public Policy at the University of Maryland finds another solution gaining steam.
Of the nearly 8,700 registered voters who took part in the "Voice of the People" survey, a shocking 79% supported the idea of raising the full retirement age from 67, which is set to be hit in 2022 for those born in 1960 and after, to age 68. The survey estimates that moving the full retirement age to 68 would eliminate about 15% of the program's budgetary shortfall. Surprisingly, 78% of Democrats, 74% of Independents, and 81% of Republicans supported the idea in the survey. Republicans have long favored the idea of raising the full retirement age, but it's an idea that's often strongly opposed by Democrats.
A person's full retirement age is determined by their birth year, and is the age at which they can claim 100% of their due benefits from Social Security. Retiring any earlier than your full retirement age means accepting a reduction in your monthly payout. Conversely, waiting until age 70, the last point at which benefits accrue (your benefits grow by approximately 8% for each year that you don't file for benefits between ages 62 and 70), can net you a payout that's higher than what you'd receive at your full retirement age.
The Social Security retirement benefit schedule for people born between 1943 and 1954. Chart by author. Data source: Social Security Administration.
For persons born between 1943 and 1954, the full retirement age was a tidy 66 years, right in between the traditional Social Security claiming ages of 62 and 70. Claiming at age 62 netted a monthly payment that was just 75% the total of your full retirement age benefit, while claiming at age 70 produced a monthly payout of 132% of your full retirement benefit.
Adjusting the scale to a full retirement age of 68 means everyone born after 1960 could potentially be facing a cut in benefits (everything would depend on the birth year Congress chooses to implement a full retirement age of 68). Waiting until age 70 would reduce your monthly take-home maximum from 132% to 116%, while claiming at age 62 would mean a greater than 30% reduction from your full retirement age benefit at age 68. From top to bottom, all future retirees would face benefits cuts.
Would it work?
Increasing the full retirement age certainly has its pluses and minuses.
The obvious benefit is that it would probably encourage healthy seniors to remain in the workforce for a longer period of time. Staying in the workforce means fewer years that retirees are receiving payments from Social Security, and it would also mean additional years of payroll tax revenue collection for the program.
You could also argue that the prospect of lower future payouts would encourage American workers to get more serious about saving for their future rather than relying on Social Security income to fill the gap when they retire (which is really how it should be in the first place).
Image source: Getty Images.
Raising the full retirement age also relieves some of the stress of finding new revenue sources. According to the Trustees Report, a 2.66% payroll tax increase could eliminate the entirety of the shortfall through 2090, but it could prove tough to pass along an immediate tax hike of this magnitude, even if it would be just 1.33% for most workers since their employers would be responsible for half of the increase.
However, raising the full retirement age would be crippling for lower-income Americans, as well as those who aren't in the best of health. Some people have little choice when it comes to filing for benefits at age 62, and moving the full retirement age higher means dooming these lower-income folks to accepting a considerably reduced payout that could leave them below the poverty level. Adjusting Social Security's minimum benefit level higher could fix that problem, but it would also work against curbing the budgetary shortfall that lawmakers are trying to fix.
In theory, raising the full retirement age helps, but it's not a solution by itself. I've long personally believed that a solution to maintain Social Security for generations to come is going to involve both tax increases and benefit cuts. It remains to be seen where Congress navigates next in its efforts to fix Social Security, but there's certainly no shortage of ideas.
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.