One of the most contentious social programmes in the United States is Social Security. While everyone seems to agree that it’s a necessity, there are ongoing debates over how the programme is funded and run, as well as its long-term survival.
Aside from philosophical and political debates, there are structural and economic reasons why Social Security may face challenges in the future. Here’s a rundown of some of the major roadblocks that Social Security must overcome in order to achieve its goals.
Interest rates are low
The Social Security programme, like other savers, benefits from high-interest rates. Money paid into the Social Security system is invested in high-quality, interest-paying bonds and other assets.
When interest rates rise, the Social Security programme generates more money, putting it in a better financial position. However, rates have remained consistently low for years, and it appears that they will do so for at least another few years, if not longer.
If interest rates continue low in the long run, the Social Security programme will simply have to restructure to accommodate lesser revenue for its recipients.
Retirement Age Increases
In the United States, life expectancy is increasing, which is typically a positive thing. However, longevity is a killer when it comes to the calculations of Social Security.
Longer lives mean larger total payouts, and because the Social Security system isn’t a bottomless pit, more money pouring out means less money in the overall pool. This increases the likelihood of future recipients receiving a payment reduction.
Too Many Recipients
During the Great Depression, Social Security was established. The program’s creators could not have predicted that a baby boom would occur following the Second World War.
With an expected 70 million baby boomers retiring between 2010 and 2030, the effects of the baby boom are already having an impact on Social Security.
This translates to a significant rise in the number of Social Security recipients. Additional income is required by the programme to appropriately pay these recipients according to the original formulae.
There Aren’t Enough Workers
The “not enough employees” problem is the polar opposite of the “too many recipients” problem with Social Security. The worker-to-beneficiary ratio is dropping since the baby boom has driven a considerable rise in beneficiaries into the system.
This ratio has dropped from 2.8 employees per recipient to just 2.1 in just a few years. If this ratio continues to fall — or even if it stays at 2.1 — Social Security will be perpetually underfunded.
Wealthier people live longer
Another issue connected to longevity is that wealthy people live longer, owing to better access to healthcare and white-collar occupations.
Because Social Security payments are computed based on a beneficiary’s 30 highest-earning years, affluent retirees receive higher benefits than those with lesser incomes.
Benefits are given out more quickly when there are more rich recipients in the system, thereby depleting Social Security reserves.
The Federal Reserve is the central bank of the United States
The Federal Reserve is one of the reasons interest rates have been so low for so long. Although the Fed has little direct power over market interest rates, it does set the federal funds rate, which is the foundation for many other rates.
The Fed declared in June 2021 that it plans to keep interest rates near zero for the foreseeable future, at least until 2023. This is terrible news for the Social Security system, which relies on higher interest rates to satisfy its payout obligations.
It Won’t Grow Itself Out
While increased economic development leads to increased net receipts, the Treasury Department has declared that the United States cannot grow its way out of its Social Security crisis.
While the Treasury Department acknowledges that increasing economic development will benefit the programme, it claims that taking action now to modify it will result in a gradual transition to something more sustainable.
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Otherwise, when the Social Security trust fund runs out of money in 2041, harsh measures will be required.
Economic contraction is detrimental
The coronavirus pandemic’s economic devastation affected more than just employees and companies. The Social Security programme took a hit as well. With unemployment rates soaring in 2020 — and persistent unemployment still a problem as of June 2021 — there simply haven’t been enough workers contributing to Social Security.
Social Security revenues have been drastically reduced as a result of fewer workers earning a wage and contributing payroll taxes. Although this “black swan” event appears to be subsiding, and payroll taxes are expected to return to normal, nothing can compensate for the payroll taxes lost during the pandemic.
Beneficiaries born in 1960 may face difficulties
You could be surprised if you were born in 1960 and plan to qualify for Social Security payments in 2022. Your payments may be permanently decreased due to oddities in the Social Security benefit computation, as a result of lower earnings earned in 2020 as a result of the pandemic.
“Assuming a 15% decline in the Social Security Administration’s measure of economy-wide average wages in 2020, a middle-income worker born in 1960 could have his annual Social Security benefits in retirement reduced by around 13%, with losses over the retirement period in excess of $70,000,” says Andrew G. Biggs, resident scholar at the American Enterprise Institute.
Stalemate in Congress
A big political issue exists in the middle of all of these fundamental difficulties with Social Security. While lawmakers frequently discuss the need to “repair” Social Security, little has been done.
There have been other suggestions floated, ranging from raising the Social Security retirement age to permanently lowering benefits or raising the payroll tax. Despite this, no substantial changes to Social Security have been approved as of June 2021.