Social Security will do this for the first time in 39 years in 2020

For many retired Americans, Social Security is a critical source of income. Data from the Social Security Administration finds that more than three in five retired workers rely on Social Security for at least half of their monthly income.

A big change is coming by 2020 that hasn't happened in almost four decades

Who's to thank for Social Security's stability over the past eight decades? Look no further than the original architects of Social Security in the mid-1930s, as well as the Reagan administration in the 1980s, which passed major amendments to the program in 1983. The 1983 amendments included an acceleration of payroll tax increases, which generated more money for the program, the introduction of taxation on Social Security benefits if individuals and couples filing jointly earn more than $25,000 and $32,000, respectively, and a gradual increase in the full retirement age.

In the 34 years since the Reagan administration passed the 1983 amendments, Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) Trust has seen its asset reserves at the end of the year grow from a meager $24.9 billion to $2.85 trillion as of the end of 2016. In fact, between 1998 and 2009, Social Security's payroll tax revenue, taxation of benefits, and interest earned on its excess cash generated between $107 billion and $190 billion in added asset reserves per year for the OASDI. The last time Social Security paid out more in benefits than it generated in revenue was 39 years ago, in 1981.

But according to the 2016 Social Security Trustees annual report, the program will begin paying out more in benefits than it's generating in revenue by 2020. Over the past four years, the net increase in asset reserves at the end of the year has shrunk to a range of $23 billion to $35 billion following more than a decade of more than at least $107 billion net increases in the annual reserve.

25 Social Security facts & figures you need to see
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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.

(Caroline Purser via Getty Images)

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. 

(ImagesBazaar via Getty Images)

3. $1,300

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.

4. 96%

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.

5. 90%

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.

6. 55%

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.

7. 32%

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. 

8. 81%

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.

9. 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.

11. 12.4%

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.

12. $127,200

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.

13. $1,351.70

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. 

14. 0.3%

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.

16. $2,687

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.

17. 60%

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%.

19. 2.8-to-1

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.

22. 2.66%

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.

23. 56%

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.

24. 51%

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.

25. 28%

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.


Who's to blame?

Why the sudden switch from budget positive to negative, you ask? It's actually a confluence of factors.

The most obvious reason why we're seeing a reduction in the program's annual net OASDI increase is the ongoing retirement of baby boomers from the workforce. Social Security's architects in the 1930s could never have predicted the surge in baby births following World War 2. As boomers leave the workforce, the worker-to-beneficiary ratio suffers, meaning there aren't enough new workers to cover the benefits being paid out to newly retired boomers.

Second, we've witnessed a steady increase in life expectancies over the past five decades. According to data from the Centers for Disease Control and Prevention, life expectancies have risen by roughly nine years over the past 50 years. This, along with a slower increase in the full retirement age, has allowed seniors to draw a payment from Social Security for a longer period of time.

The finger of blame can also be pointed at the wealthy. The well-to-do tend to live substantially longer than lower-income Americans, which is a function of their higher income giving them access to medical care, including preventative care. This means the rich are able to draw a payment from Social Security (a higher payment than the average American) for an extended period of time.

According to the Trustees' report, should Congress fail to present a "fix" for Social Security, an across-the-board cut in benefits of up to 21% may be necessary to sustain payouts through 2090.

The longer Congress waits, the deeper the hole

The Trustees were also very clear in their report that the longer Congress waits to act, the tougher it could be to fix Social Security for future generations. In 2016, the actuarial deficit came out to 2.66%. In plainer terms, it means the payroll tax, which is currently 12.4% and often split down the middle between employers and employees, would need to increase by 2.66% to 15.06% to cover the budgetary gap through 2090. If it waits until well after the asset reserves are exhausted, the actuarial deficit could jump to nearly 4%.

You might be thinking that Congress doesn't have the slightest idea on how to fix Social Security for the long run, but it does. There have been well over a dozen proposals to strengthen this critical program for the long term. The issue is that Republicans and Democrats both have workable solutions, so neither party is willing to back down.

A person holding a Social Security card.

Image source: Getty Images.

The Republican solution primarily involves increasing the full retirement age, or the age at which you become eligible to receive 100% of your Social Security benefit. By 2022, the full retirement age will have risen to 67 years, albeit it will have moved higher by just two years over the previous four decades. Republicans would like to see a gradual increase in the full retirement age to 68, 69, or 70, which would coerce seniors to either wait longer to receive their full benefit or to retire earlier and accept a steeper permanent deduction in benefits (benefits increase by an average of 8% per year, beginning at age 62 and ending at age 70).

The Democrats' solution revolves around the idea of increasing the maximum taxable earnings cap. Right now, earned income between $0.01 and $127,200 is taxed at the aforementioned 12.4% rate, while earned income above and beyond this point isn't subject to Social Security's payroll tax. Democrats would like to see the maximum taxable earnings cap removed entirely, or reinstituted at a higher level, such as $250,000, as an example. Since eliminating the cap entirely would only impact about 10% of all workers, and a majority of workers are already paying tax on every cent they earn, it's among the most popular solutions with the public.

A long-term fix that strengthens the program for future generations should contain ideas from both parties, but finding bipartisan support for a Social Security bill is easier said than done.

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