Some time next year, as the ranks of retirees swell, the Social Security system in the United States will pass an ominous tipping point and start the slide into insolvency.
For the first time in nearly four decades, the government program that provides retirement checks to older Americans will pay out more in benefits in 2020 than it takes in. That will force the program to dip into a rainy day fund that will be depleted in about 15 years.
And if the political dysfunction in Washington continues and lawmakers don’t fix the system, benefit cuts are in store for current and future retirees, most of whom haven’t socked away enough money in their personal retirement accounts.
“If you look around and see how much middle-class people approaching retirement have in their 401(k)s, they don’t have enough,” said Alicia Munnell, director of Boston College’s Center for Retirement Research. “And most lower-income people don’t have 401(k)s. So Social Security is going to become more important to most people.”
Indeed, most Americans are seriously unprepared for retirement, particularly the boomer generation. Fidelity Investments, which has been monitoring retirement readiness among its customers for years, reports that the average balance in 401(k) plans among boomers is just $198, 000, and significantly less for those in their early 50s.
And those are ones taking steps to save for retirement. A significant number of workers have little to no money set aside, and as recently as a few years ago, about 30 percent of boomers had no money in retirement plans, the Stanford Center on Longevity found.
More than 54 million retirees and survivors receive Social Security benefits today — the largest contingent in history — and tens of millions expect to collect them in the future.
Yet despite years of warnings from policy wonks and financial professionals, the looming crisis in Social Security has lacked urgency and barely enters the public debate. The funding shortfall, which policy makers have seen coming for years, didn’t merit a mention in the Democratic presidential debates in June.
One reason may be because once the nearly $3 trillion in the Social Security trust fund starts shrinking, no one will lose benefits right away. But if the funding isn’t replenished by 2035, all recipients will face benefit cuts of more than 20 percent, under current projections by Social Security trustees.
So, for example, if the average benefit this year is $1,461 a month, a 20 percent cut would reduce that payout by $292. Moreover, the cost-of-living adjustments built into the program over the coming years would not be enough to offset the cuts.
A cut of that size would likely put a serious crimp in a retiree’s standard of living: Social Security accounts for at least 90 percent of total retirement income for about a quarter of Americans over 65 and at least 50 percent of retirement income for roughly half, according to the Social Security Administration.
Benefits vary widely depending on how much individuals earn during their working years and when they begin collecting. One common income-boosting strategy for those who can afford to do it is to wait to take Social Security beyond their full retirement age, when monthly payments are higher. But the prospect of a benefit cut could make people planning to retire in the next 15 years reassess that strategy and opt to begin collecting sooner.
The impact of a cutback on beneficiaries and the nation’s economy would be huge, considering how heavily so many Americans rely on the program, and how quickly other sources of retirement income have dried up. And the problem will only intensify as millions more employees retire each year in the coming decade.
“The key problem with Social Security is the baby boom generation is too big,” said former New Hampshire senator Judd Gregg, a Republican who struggled with colleagues from both parties to find ways to keep the program solvent during his two decades in Washington. “The system wasn’t structured for the present demographic.”
Still, it’s become the bedrock of retirement for more people over the past generation, as most private employers have stopped paying pensions and some — but not all — have replaced them with plans, like 401(k)s, that make employees responsible for their own savings.
Some longtime congressional watchers take solace in history. Lawmakers often wait until the eleventh hour to address difficult problems. In fact, the 1983 legislation to preserve Social Security payments, a compromise negotiated by President Ronald Reagan and House Speaker Tip O’Neill, was reached only when payments were at dire risk.
But this time, a fix could prove even tougher. Government is — at least right now — deeply divided, and the parties averse to compromise on virtually anything. So it would be a daunting challenge for them to craft a mix of revenue increases, benefit reductions, or other measures acceptable to both sides.
Some experts think the best way to save Social Security is to establish a more traditional fund that could grow over time and bolster payments to beneficiaries. That was the funding mechanism envisioned when the program was launched in the 1930s. But to support the retirement of Depression-era workers who hadn’t paid into the system, it morphed into a “pay-as-you-go” approach that relies heavily on payroll deductions.
Replacing that with a sustainable fund now, however, would mean raising payroll or income taxes. Not an easy sell.
While the issue has drawn little attention in the presidential campaign, most of the Democratic candidates have called for not only stabilizing the Social Security program but increasing benefits, offering varying degrees of detail on how to pay for it. Massachusetts Senator Elizabeth Warren and Vermont Senator Bernie Sanders are part of an “Expand Social Security Caucus,” and both would finance the cost of additional benefits, in part, by increasing taxes on higher earners.
The so-called Social Security 2100 Act, introduced in the House in January by Representative John Larson, a Democrat from Connecticut, would keep the program solvent for 75 years, boost payments modestly for all recipients, and raise the minimum for low earners through a number of revenue-generating steps, including hiking the payroll tax on high-earning employees. The bill is cosponsored by more than 200 Democrats — but for Republicans, it’s a nonstarter.
Senate majority leader Mitch McConnell has called for cutting funds for Social Security and other “entitlement” programs such as Medicare and Medicaid, arguing it’s the only way to reduce the federal deficit. But there’s currently no bill to address the Social Security funding shortfall in the Republican-controlled Senate, and no appetite in the Senate to take up the House bill.
President Trump’s appointee as the new Social Security commissioner, New York businessman Andrew Saul, who was sworn in June 17 for a six-year term, hasn’t commented publicly on how he would approach the coming shortfall. Saul, through an administration spokesman, declined a request to discuss his plans for the Social Security Administration.
Trump himself has largely steered clear of the issue, perhaps sensing it’s a political loser, though he’s said he believes in “honoring the deal” the government made with retirees. That’s effectively dampened GOP enthusiasm for an idea embraced by George W. Bush when he was in the White House: to partly “privatize” Social Security by allowing recipients to invest a portion of their benefits in place of federal payment increases.
Democrats have long opposed that approach, and continue to argue against it.
“Privatizing Social Security means taking the risk of market downturns and putting it on the beneficiaries,” said retired Tufts Health Plan president Jim Roosevelt, a former associate commissioner for retirement policy for the Social Security Administration. (His grandfather, President Franklin Delano Roosevelt, signed the Social Security Act into law in 1935.)
Larson, who is confident his bill will pass in the Democratic-controlled House this fall, said he views the current Senate as “Death Valley.” But he said Trump could emerge as an unlikely ally for Democrats on the issue of fixing Social Security, since Larson’s bill seemingly comports with Trump’s stated preference to maintain the program.
“We’re building grass-roots support on this,” Larson said. “If Trump gets behind something, he can put a lot of pressure on the Senate.”
Gregg, however, is skeptical that Congress will adopt any solution that doesn’t include at least some benefit cuts as well as increased revenue for Social Security. That was the recommendation during the Obama administration of a bipartisan group of lawmakers that crafted the Simpson-Bowles plan, which would have stabilized Social Security funding as part of a broader deficit reduction strategy.
Although the plan failed then, Gregg believes the ultimate fix will involve ideas generated by the Simpson-Bowles group, such as boosting the age of Social Security eligibility over a long period of time, changing the cost-of-living increase index to better reflect modern spending habits, and employing some form of “means testing” to lower benefits for affluent seniors.
“It’s fixable, but it has to be done in a bipartisan way,” Gregg said. “And there’s no interest in doing anything bipartisan now. Unless you have presidential leadership and congressional leadership, nothing’s going to happen.”Robert Weisman can be reached at email@example.com. Follow him on Twitter @GlobeRobW.