Social Security is one of the most hotly debated social programs in America. While all seem to acknowledge that it's a vital necessity, how the program is funded and administered -- as well as its long-term viability -- are the source of endless arguments.
Beyond the philosophical and political discussions, however, there are structural and economic reasons why Social Security is facing problems in the years to come. Here's an overview of some of the prime obstacles that Social Security needs to overcome in order to meet its objectives.
Low Interest Rates
Like all savers, the Social Security program benefits from high interest rates. Money paid into the Social Security system is invested in bonds and other high-quality securities that pay interest. When rates rise, the Social Security program earns more money, meaning it becomes more solvent.
However, rates were persistently low for years now -- though they've risen, if they don't increase enough or for long enough, the Social Security program will simply have to recalibrate with lower income for its beneficiaries.
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Life expectancy in the United States is rising, which is generally a good thing. However, when it comes to the mathematics of Social Security, longevity is a killer. Longer lifespans result in higher total payouts, and as the Social Security fund isn't an endless reservoir of cash, more money flowing out results in less money in the overall pool. This makes it more likely that future beneficiaries will receive a cut in payments at some point.
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Too Many Beneficiaries
Social Security was created in the midst of the Great Depression. The architects of the program couldn't possibly have foreseen that there would be a baby boom following a Second World War. The results of that baby boom are currently taking their toll on Social Security, with an estimated 70 million boomers retiring between 2010 and 2030. This amounts to a huge increase in the amount of Social Security beneficiaries. To properly pay out these beneficiaries based on the original formulas, additional revenue is needed by the program.
Not Enough Workers
The flip side of the "too many beneficiaries" problem with Social Security is the "not enough workers" problem. As the baby boom has pushed a significant increase of beneficiaries into the system, the worker-to-beneficiary ratio is falling. The Social Security Trustees expect the ratio to drop from its current 2.8 to 2.1 by 2035. If this ratio continues to drop -- or even if it just remains at 2.1 -- Social Security will essentially be permanently underfunded.
Wealthier Individuals Live Longer
An additional problem that's related to the longevity issue is that wealthier individuals tend to live longer, thanks in part to greater access to healthcare and white-collar jobs. As Social Security benefits are calculated based on the 35 highest-earning years of a beneficiary, wealthy retirees are paid more benefits than lower-income participants. With a higher number of wealthy beneficiaries in the system, benefits are paid out more rapidly, acting as a further drain on Social Security reserves.
The Federal Reserve
Part of the reason that interest rates remained so low for so long is the Federal Reserve. Although the Fed doesn't directly control market interest rates, it does set the federal funds rate, off which many other rates are based. The federal funds rate was near zero from April 2020 until March 2022, when the Fed began increasing rates to curb inflation. Long periods of low rates spell bad news for the Social Security program, which needs higher interest rates to help it meet its payout requirements.
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Can't Grow Its Way Out
While higher economic growth translates to higher net revenues, the Treasury Department has stated that the U.S. can't grow its way out of its Social Security problem. While acknowledging that increased economic growth will certainly help the program, the Treasury Department states that taking action now to reform the program will result in a gradual transition to something more sustainable.
Otherwise, drastic actions will have to be taken when the Social Security fund reaches its anticipated exhaustion date in 2035, after which continuing tax income will cover just 80% of scheduled benefits, according to a December 2022 report from the Social Security Administration's chief actuaries.
Economic Contraction Hurts
The economic disaster that accompanied the coronavirus pandemic didn't just hurt workers and businesses. The Social Security program also suffered. Unemployment rates skyrocketed in 2020 and didn't return to pre-pandemic levels until July 2022, and in August 2022 the size of the labor force was still slightly diminished. As a result, there simply weren't enough workers kicking in to Social Security.
With fewer workers earning a wage and contributing payroll taxes, Social Security revenues have been dramatically lowered. This "black swan" event appears to be receding, and payroll taxes are anticipated to eventually normalize, but nothing can make up for the payroll taxes that were lost during the pandemic.
In the midst of all of these structural problems with Social Security, there's also a major political one. While congressional leaders love to talk about the need to "fix" Social Security, little has been done. Plenty of proposals have been bandied about, from increasing the Social Security retirement age to permanently cutting benefits or increasing the payroll tax. Yet, as of January 2023, no major adjustments to Social Security have been enacted.
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Daria Uhlig contributed to the reporting for this article.