2020 is here, and many people are excited about starting a new decade. Yet for those who watch Social Security’s financial condition, New Year’s Day just means we’re a year closer to the challenges facing the key government program.
This year is likely to be the last one that Social Security manages to keep its spending under a key psychological level. Starting in 2021, the amount of money that the Social Security Administration spends on benefits for retirees and survivors of retired workers will exceed $1 trillion for the first time — and that’s just the beginning of an upward surge that will pose problems for the program’s finances sometime during the 2030s.
Breaking down the numbers
This might not be the first time you’ve heard about Social Security flirting with the $1 trillion mark. In 2019, the total expenditures from the entire Social Security program — which include not only retirement and survivor benefits but also the payments it makes to disabled workers and their families — went over $1 trillion for the first time in the program’s 83 years.
Yet even though millions of people rely on disability benefits, the retirement side of Social Security makes up by far the majority of total spending from the program, and so it’s in position to follow suit over the $1 trillion mark in quick succession. In 2019, about 90% of scheduled benefits were tied to retirement, compared with just 10% in disability benefits. Few see that proportion changing markedly anytime in the near future.
Moreover, the amount that the government spends on retiree benefits will only rise over time. By 2028, Social Security retirement and survivor benefits will likely cost more than $1.5 trillion, and with payroll tax revenue failing to keep up with that surge, the program will be drawing down nearly $200 billion per year from its reserves to pay scheduled benefits at that point.
A tug of war is coming
There’s no agreement in Washington about how to solve the problems that Social Security faces. Some believe that reining in the rate of growth of future benefits is the best way to control spending. And measures like tying future increases in benefits related to costs of living to indexes that grow more slowly than the current inflation metrics could help preserve the program’s financial condition longer.
In the past, Social Security has gradually raised the full retirement age, at which participants are entitled to receive full benefits under the program. And some lawmakers have proposed further increasing the full retirement age in an effort to save even more over the long run. Yet for the most part, these measures are aimed merely at slowing the rate of growth in Social Security spending rather than actually reducing it.
Other lawmakers believe that the better solution is to look at program revenue. In particular, one popular provision would lift the current cap on the Social Security wage base, potentially making more income subject to Social Security taxation and thereby boosting revenue. Some of those advocating for a higher Social Security payroll tax would actually seek to increase benefits, with the corresponding rise in the rate of spending from the program.
The demographic surge of baby boomers who are collecting Social Security benefits has boosted the cost of the program immensely over the past several years, and it’ll be a long time before death rates among that cohort rise enough to let up the pressure on Social Security expenditures.
Until that happens, you can expect to see total spending on retirement benefits continue to rise. And without action from Washington to bring revenue and expenditures into balance, that will inevitably lead to a massive disruption for those receiving Social Security benefits in the future.
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