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The importance of social security for retirees can not be overstated. According to the Social Security Administration, about 62% of existing retirees rely on the program to account for at least half of their monthly income, with one-third dependent on social security for almost all of their income. In other words, social security is more than a simple monthly check that most workers will receive during their retirement. It's actually a way to create a financial base for tens of millions of elderly beneficiaries.
Here again, social security is also facing what could be described as its greatest challenge of all time.
Source of the image: Getty Images.
The latest annual report of the Social Security Administration highlights three recurring issues
According to the latest Board Report, released in June, the program is expected to spend more than it generates in 2018 for the first time in 36 years. A number of ongoing demographic changes are expected to exacerbate this net cash outflow, ultimately leading to the depletion of its reserves by nearly $ 2,900 billion by 2034. When this occurs and assuming that the federal government does not find a new way to generate revenue for the program, a reduction in benefits of up to 21% to maintain payments until 2092. This is not exactly an encouraging forecast given the number of older people who depend on social security as their main source of income.
But it is the publication of the report "Fast Facts & Figures 2018" of the Social Security Administration (SSA) last week that really puts into perspective the problems of the program. In particular, the report highlights three trends that are at the heart of social security problems.
1. A declining ratio of workers to beneficiaries
Baby boomers are certainly not responsible for the problem. Social security relies on relatively predictable fertility trends to ensure that enough new workers enter the labor market as older workers retire and leave the labor force. These new workers are encouraged to generate tax revenue on wages that can be paid to eligible beneficiaries.
Image Source: Social Security Administration, Facts and Figures, 2018.
After the end of the Second World War, fertility rates in the United States soared, leading to an increase in births between 1946 and 1964, known as the "baby boomer generation." Unfortunately, the US fertility rate in September 2017 (1.77 births per woman) is the lowest since 1976. This suggests that there are fewer workers to enter the labor force compared to the number of baby boomers who will retire.
As you will note in the table above, provided in the Fast Facts and Figures report, the ratio of workers per beneficiary has been declining steadily for a decade and will continue to decline until around 2035. The decline in fertility, combined with the retirement of baby boomers, creates many long-term problems for social security.
2. The average age of retirees
Although this next point is considerably more subtle than the change we see in the relationship between workers and beneficiaries, it nevertheless plays a role in the pressure on social security. Namely, we are talking about increased longevity for social security beneficiaries.
Image Source: Social Security Administration, Facts and Figures, 2018.
According to the report "Fast Facts & Figures", the average age of retired worker beneficiaries has increased from 72.4 years in 1960 to 73.8 in 2017. Although this may seem relatively insignificant, additional data from the SSA show that the percentage of the population reaching the age of 65 has exploded in recent decades. And, as a reminder, the benefits of retired workers can start at the age of 62 or at any time thereafter.
An examination of the data on the life expectancy of social security, now dated, shows that just over 65% of the population had to survive between 21 and 65 in 1960. In 1990, it reached around 78% of the population. In nominal terms, the number of Americans aged 65 and over increased from 9 million in 1940, when Social Security began paying pensioners to almost 35 million in 2000. The number of people reaching retirement age increases. and life expectancy increases modestly, pressure continues to rely on social security.
3. A decreasing percentage of taxable profit
One of the biggest problems highlighted by the latest SSA report is undoubtedly the percentage of payroll employment gains covered by the payroll tax of 12.4%. In 1937, when Social Security began collecting the tax on earned income, 92% of covered earnings were subject to payroll tax. In 2017, only 83% of the income covered was taxable.
Image Source: Social Security Administration, Facts and Figures, 2018.
The main reason for this decline is rising income inequality. Wage growth has been mainly limited to the better-off, allowing their earned income (wage income, interest and dividends) to rise much faster than the national average wage index, which imposes the maximum cap on taxable profits. Last year, only 6% of the 174 million insured workers had incomes above the salary income ceiling of $ 127,200 ($ 128,400 in 2018). Yet, 17% of the total compensation of this small percentage of workers completely escaped payroll taxes by 12.4%. This represents an estimated $ 1.2 trillion profit to escape the tax, and that is a big problem!
This graph (and these data) largely explains why Capitol Hill Democrats pushed to increase or eliminate the maximum cap of taxable profits. Eliminating the cap and requiring all earned income to be subject to payroll tax is seen as a panacea for the Social Security cash flow forecast in 2092. Of course, getting Congress to raise payroll taxes for the rich is easier said than done.
In summary, social security faces many challenges, and the latest SSA report highlights them on a daily basis.
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