Social Security in danger in 2033? America’s aging population a significant factor

It’s not an emergency, yet, but demographics are powerful. More taxes? Fewer benefits? Both futures are possible.

America is rapidly aging, and that simple but powerful fact is forcing us to reconsider everything from retirement housing and consumer technology to our collective ideas about who is and isn’t sexy.

However, the most significant age-related change, which is expected to affect the majority of Americans’ finances, is expected to occur in exactly 10 years.

According to a recent report from the trustees who oversee Social Security, by 2033, the number of Americans old enough to collect benefits from the program will be so large, and the pool of working-age people paying for it will be so small, that the program’s largest trust fund will be depleted.

Social Security will not go bankrupt (it will continue to receive revenue from active workers), but the pay-as-you-go program will be unable to make full payments to retirees who have earned checks unless major changes are enacted, either as benefit cuts or higher payroll taxes, or some combination of the two.

The trustees of Social Security wrote in an open letter to the United States Senate on March 31:

“Additionally, we project that the reserves of the (Old-Age and Survivors Insurance and Federal Disability Insurance) Trust Fund will be depleted… by 2033, with only about 77 percent of benefits scheduled under current law payable at that time if no legislative action is taken.”

Even for those who have other sources of income in addition to their government check, the prospect of receiving less in the future, even if it is a decade away, already strikes a nerve.

“If that happens, I’ll be, well, I don’t want to say it in mixed company, but I’ll be upset,” said 91-year-old Ivan Anderson, an Arizona resident who was visiting Tustin earlier this month.

“It’d be a classic bait and switch.”

Despite how dire the warning was, it was not unexpected. Social Security has been the subject of debate almost since President Franklin D. Roosevelt signed it into law in 1935. Detractors of Social Security have argued at various times that the program was draining America’s collective wallet. Others argued that the program should be expanded to help more vulnerable Americans while also boosting the nation’s economy.

And, at times, it’s been a political hammer, especially as Social Security has grown to become what AARP public opinion polling shows is easily the most popular federal program, loved or at least liked by people of all political stripes. Generations of legislators (most recently Democrats, but previously Republicans as well) have campaigned on the promise of strengthening or protecting Social Security from their ostensibly anti-Social Security political opponents.

However, Social Security has survived and even thrived in all previous political eras, despite numerous threats and promises.

Approximately 67 million Americans currently receive Social Security benefits, which typically match 25% to 50% of their earnings while working.Approximately four out of every five of those beneficiaries are retirees who paid into the system during their careers, while the remainder are either too disabled to work or the survivors of deceased workers.

Furthermore, experts predict that Social Security-related spending will account for 5% to 6% of the US economy in the 2030s and beyond, and will become an even bigger economic driver in the 2030s and beyond. Any significant reduction in Social Security benefits could deprive many people who aren’t on the program of money.

Social Security is such a large and important part of American life that it is the rare federal program about which many non-politicians have strong feelings.

“I don’t know about all the economic stuff, but I think it would be pretty stupid to let Social Security go,” said Elaine Roth, 79, a retired accountant who lives in Culver City and considers Social Security to be “an important part” of her overall income.

“I don’t care which party is doing it – and I voted Republican until Trump – if the thinking is that allowing Social Security checks to shrink is somehow a good idea… I’m not sure what kind of thinking that would be.”

Numerals

The March warning letter from Social Security trustees (which included Treasury Secretary Janet Yellen, among others) was taken seriously.

Within hours, everyone from President Joe Biden to House Speaker Kevin McCarthy had commented, mostly claiming that their political opponents would allow Social Security to deteriorate. Hundreds of op-eds were written within days, with conservative writers generally arguing that benefits should be challenged and liberals generally urging that taxes on higher earners be raised. In addition, at least two books about the politics of fixing Social Security have been published or found a new audience this year.

So, if the program is popular, successful, and necessary, why is this year’s hand-wringing receiving so much more attention than similar hand-wringing in the previous four decades?

Math.

Because so many older people are living longer lives and so many younger people are choosing to have few or no children, two important population bubbles – working-age Americans who pay into Social Security and older Americans who draw from Social Security – are growing at diametrically opposed rates. The labor force in the United States (the pool of active adult workers who pay 12.4% of their first $147,000 earned in any given year into the two trust funds that support Social Security) is expected to grow by 6% over the next decade, from approximately 180 million today to approximately 202 million in 2033. During the same time period, the number of people receiving Social Security checks is expected to rise by 31%, to approximately 88 million.

None of this will come as a surprise. For decades, the United States Census Bureau and many public and private demographers have predicted that America’s population would age. It’s one of the reasons why “the future of Social Security” has been a political talking point since the 1970s.

However, the demographic surge has gained such momentum that it has moved from speculative projection to fiscal threat. For the first time, the Social Security Administration was forced to begin drawing on its financial reserve to meet ongoing obligations in 2021. That reserve, a pair of trust funds valued at around $2.9 trillion two years ago, is expected to be depleted by 2033.

“Because the Baby Boomers are a big generation, followed by smaller generations, it means that for any given payroll tax, there’s not enough revenue to pay the benefits,” Louise Sheiner, an economist with the Brookings Institute, told the Harvard Gazette earlier this year.

“It’s not because Social Security benefits have gotten really generous,” she added.

“It’s really a structural change in the economy that makes (Social Security) difficult to sustain.”

The rising tide

If the basic reason for Social Security’s current lack of vigor (more retirees; fewer workers) is straightforward, so is the reason why lawmakers are unlikely to let Social Security die.

The same retiree population that is growing large enough to threaten Social Security also votes. And as those voters become a larger proportion of the total population (by coincidence, the United States Census Bureau projects that in 2033, America will have more people 65 and older than children 18 and younger), the political will to protect or even expand Social Security could be overwhelming.

It’s not as if Social Security hasn’t been tinkered with before.

Congress voted in 1939, just four years after the law was passed, to extend Social Security benefits to workers’ dependents and survivors. Congress approved a one-time cost-of-living adjustment in 1950, increasing monthly checks by 77%. Laws allowing disabled Americans to collect Social Security were passed in 1956 and again in 1960. In 1961, workers were given a new option: they could retire as early as 62 and receive lower benefits than if they waited until 65.

However, a true crisis for Social Security occurred in 1977. That was when the economy was plagued by double-digit inflation, just as the program began, for the first time, to incorporate automatic cost-of-living increases each year. That combination had the potential to be lethal. The initial COLA increases were significant enough to jeopardize the program’s viability. To address the issue, Congress voted that year to protect beneficiaries while raising revenue through a smattering of new or increased payroll taxes.

But the fix didn’t work. By 1983, Social Security was once again on the verge of insolvency. This time, Congress largely fixed the problem on the backs of current and future Social Security recipients. The new rules allowed for the taxation of Social Security benefits (depending on the recipient’s income), the postponement of some cost-of-living increases, and the declaration of 67, not 65, as the new “full retirement” age for people born after 1960 – most of whom were still in their twenties at the time.

These changes, along with others enacted in the early 1990s, contributed to the creation of the trust fund reserve that Social Security now uses to bridge the gap between what it owes and what it collects.

According to experts, the specifics of those changes mitigated the political fallout.

“The majority of the 1983 cuts were imposed on temporally distant cohorts, not current retirees.” Legislators increased the full retirement age from 65 to 67, but did so gradually. “The only cost that legislators imposed on current beneficiaries was a six-month delay in cost-of-living adjustments, a small price to pay for avoiding automatic benefit cuts that would have been larger,” wrote R. Douglas Arnold, a former Princeton political science professor, in his new book “Fixing Social Security: The Politics of Reform in a Polarized Age.”

However, any changes made to avoid the potential cliff of 2033, according to Arnold, may be more difficult, especially as the deadline approaches and the money gap widens.

“(Congress) cannot raise such a massive sum by implementing long-term solutions such as raising the retirement age, because long-term solutions generate very little immediate revenue.” Furthermore, short-term solutions such as deferring cost-of-living increases or reducing benefits for wealthy retirees would generate only a fraction of the revenue needed to keep benefits flowing. To put it another way, benefit cuts can be part of a solvency plan, but they cannot prevent automatic benefit cuts.”

Distinct world

The fight isn’t about large sums of money, at least not for those receiving a check, and certainly not for those living in higher-cost areas like Southern California. A retired married couple’s monthly Social Security payment is around $2,700, or $32,400 per year.

According to a report from the Center on Budget and Policy Priorities, Social Security ranks 29th out of 38 countries surveyed in terms of how much a worker can collect as a percentage of their previous salary.

According to Arnold and others, the most-discussed proposals to change Social Security aren’t particularly complicated.

The payroll tax threshold could be raised for all workers or just those with higher incomes. Retirement age could be pushed back to account for longer lifespans. Cost-of-living increases could be limited. The entire system could be privatized, or Congress could change the rules so that Social Security is funded through general revenues. Every idea has supporters and detractors, and few are implemented without someone in the system – a worker or a beneficiary – losing money.

But, whatever changes occur or do not occur, the stakes of resolving the 2033 crisis are enormous.

The prevalence of defined-benefit pensions peaked in 1983, when Congress forced beneficiaries to foot the majority of the bill for Social Security reform. In retirement, more than half of American workers in the private sector can expect a pension check to supplement their Social Security check.

Today, such pensions are uncommon, with fewer than 10% of private-sector workers eligible for one. Instead, 401K retirement plans, which are mostly funded by employees with some matching funds from employers, are the norm. However, they have not bridged the gap. According to federal data, less than half of all American workers have any retirement savings, and only about 42% of workers closest to retirement – ages 55 to 64 – have 401 (k) savings, with an average pot of about $200,000, according to federal data.

As a result, Social Security becomes more about survival than comfort. Among retirees who receive a federal check, slightly more than one in every five married couples and nearly half of individuals report that Social Security accounts for more than 90% of their income. Because the majority of those people were lower-income workers during their careers, their average monthly pay is around $1,500 – less than the rent for an average studio apartment in Los Angeles or Orange counties.

Even if it is not a lifeline, some argue that Social Security has meaning beyond money.

“It’s a promise that we’ll all take care of each other,” said Roth, a retired accountant.

“It would say something negative about the country if it went away,” she added. “That’s why I think it’ll get fixed.”