Social Security Insolvency: Why is it Happening and What Can We Do?

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To be insolvent is to be unable to pay one’s debts. It’s an elegant way of saying that there isn’t enough money. For years now, we’ve been hearing about the funding issues the Social Security Trust is facing. Now, due to the havoc caused from the pandemic, Social Security insolvency is projected to take place in 2033, one year earlier than originally predicted.

That sounds scary, and it’s not an acceptable position to be in — but everything is not all doom and gloom. Social Security works differently than other financial institutions or projects. Yet we still must ask, why is Social Security insolvency happening and what can we do about it?

Traditional Insolvency vs. Social Security Insolvency

Insolvency is both the right and wrong word to accurately describe the situation Social Security is in. It’s a very important distinction, but it is the Social Security Trust that is facing insolvency, not the overall program. Traditional insolvency or bankruptcy is when there is absolutely no money to pay debts. The Social Security program is publicly funded, meaning that it will still be able to pay out benefits from tax revenue. Unfortunately, those benefits will only cover about 70 to 78 percent of what a person is entitled too.

It’s important that seniors understand the full scope of the situation, as it directly affects them. Luckily, seniors that rely on Social Security for much-needed income will still be able to receive some sort of benefit. The dangerous side of this situation is that money will be less than they deserve, leaving them potentially facing an inflated cost of living with a smaller safety net.

What is Causing the Insolvency  

The main reason behind insolvency goes back to simple finance. If a household is spending more than it saves, then it will run out of money. Large expenses require more savings. Social Security is publicly funded, earning revenue from payroll taxes and treasure bond investments. So that’s where the savings come from but why are the expenses so high?

There are several leading factors behind the insolvency, but the biggest one is the size of the retiring generation. Currently there is an estimated 76 million Baby Boomers in the U.S., and according to the Pew research Center, an estimated 66.9 percent of Baby Boomers were retired or retiring in 2021. The retired population has grown at a rate of around 1 million per year from 2008. Resulting in the largest retired population in American history. This normally would not be a problem; however, due to the pandemic, the U.S. is in the middle of a labor shortage. A smaller workforce means less revenue from payroll taxes, and a larger retiring population means more expenses.

Other factors adding to the insolvency crisis are the pandemic and inflation. The pandemic has put considerable strain on the government’s spending ability, forcing attention on aid and critical government programs. Inflation has also added constraints to the economy, making investing in treasury bonds a near impossibility.

What Can Be Done?

Ultimately, any solution to the problem will have to come from Congress. Social Security reform is often politicized and as a result, politicians are wary of passing any long-term legislation. It doesn’t necessarily stop them from trying to get their own legislation passed, but coming to a consensus is an uphill battle.

Despite all this there are some suggested solutions that are worth looking into. The easiest solution, and the most unfavorable, would be to raise payroll taxes. To get the Trust back on track, a 3.54 percent tax increase would suffice. Employees pay 6.2 percent in payroll taxes and their employers match their contribution, while self-employed people pay the full 12.4 percent. No one wants more taxes, but there is an argument that a higher minimum wage would help offset the cost from higher payroll taxes.

Another option would be to raise or eliminate the Social Security tax cap. As it stands, high earning workers making equal to or greater than $142,800, don’t have to pay payroll taxes past that amount. Legislation was suggested that anyone making more over $400k would have to pay taxes at a rate equivalent to their tax bracket.

Make Congress Protect the Benefits You’ve Earned

Regardless of whether we look at the situation calmly or if we panic, certain facts remain unchanged.

First, and most importantly, Social Security will not go away. This fact helps us keep our cool in the situation and lets us focus on how to solve specific issues rather than worry about overhauling the whole program.

Secondly, if nothing is done, our benefits will be reduced by 22 to 30 percent. That’s still an unacceptable outcome. Seniors deserve all the benefits they have earned.

Despite the growing anxiety, there doesn’t seem to be a sense of urgency from Congress. There is still time to correct this course, but we need to act now! With the impact of the pandemic and inflation, Congress doesn’t have the luxury to assume that Social Security insolvency will wait until they’re ready to deal with it in the future.

The Council for Retirement Security is demanding Congress make Social Security insolvency a priority, so that seniors won’t have to compromise their own benefits or live in fear of their own retirement.  Join us in our work to protect and preserve Social Security for all retired Americans, today and tomorrow.

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