Ten Biggest Problems with Social Security

Social Security is one the most controversial social programs in America. It’s something that everyone recognizes as a necessity. But how is it funded? as well as its long-term viability — can be the source of endless arguments.

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Social Security will face problems over the next few years, despite philosophical and political debates. 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

High interest rates are a benefit to the Social Security program as with all savers. Social Security money is invested in bonds, and other high-quality securities that earn interest. The Social Security program becomes more solvent when interest rates rise.

Although rates have been low for many years, they are beginning to rise recently. Social security will have to adjust if rates continue to be low over the long-term, with lower incomes for its beneficiaries.

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Longer Retirements

The United States has a rising life expectancy, which is generally a positive thing. Unfortunately, longevity can be fatal when it comes down to the mathematics of Social Security. As the Social Security Fund isn’t an infinite cash reserve, longer lives mean higher total payouts. Additionally, less money flows into the overall pool, so a longer life expectancy means that there are fewer people who will be able to receive them. It is more likely that future beneficiaries will be paid less.

Too Many Beneficiaries

Social security was created during the Great Depression. The program’s creators could not have predicted the emergence of a boom in baby-boom after the Second World War. Social Security is suffering as a result of the baby boom. Between 2010 and 2030, an estimated 70,000,000 boomers will be retiring. This results in a significant increase in Social Security beneficiaries. Programs require additional revenue to pay beneficiaries in accordance with the original formulas.

There are not enough workers

Social security’s “too many beneficiaries” problem is also reflected in 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. In just a few decades, this ratio has decreased from 2.8 workers per beneficiary down to just 2.1. Social security will be essentially permanently underfunded if the ratio continues to fall, or if it remains at 2.1.

Wealthier Individuals Live Longer

Another problem is related to longevity. Wealthier people tend to live longer due to having more access to healthcare and white-collar work. Social Security benefits are calculated according to the beneficiary’s 30 highest income years. Therefore, wealthy retirees get more benefits than low-income beneficiaries. Benefits are paid faster if there is a greater number of wealthy beneficiaries. This further drains Social Security reserves.

Federal Reserve

The Federal Reserve is a key reason why interest rates have remained low for so many years. While the Fed doesn’t directly control the market rate of interest, it does establish the federal funds rate upon which all other rates are calculated. In June 2021, it announced that the Fed intends to keep rates near zero in the future. It will do so until at least 2023. This is bad news for Social Security, which requires higher interest rates in order to meet its payout requirements.

Can’t grow it’s way out

Higher economic growth means higher net revenues. However, the Treasury Department stated that the U.S. cannot grow its Social Security problems. The Treasury Department acknowledges that the program will benefit from increased economic growth, but it states that the Treasury Department will take steps now to reform it. This will allow for a more sustainable transition. If the Social Security fund is due to exhaustion in 2041, then drastic measures will be required.

Economic contraction is a problem

Not only did the coronavirus pandemic cause economic destruction, but it also affected workers and businesses. Social Security also suffered. Social Security has been suffering from a shortage of workers. With the unemployment rates soaring in 2020 and continuing to rise as of June 20,21, there are no enough workers contributing to Social Security. Social security revenues have seen a dramatic drop in the number of workers who earn a wage and contribute payroll taxes. The “black swan” event seems to be receding. While payroll taxes will eventually normalize, nothing can replace the lost payroll taxes during the pandemic.

Potential trouble for beneficiaries born in 1960

You might be surprised if you were born in 1960, and plan to apply for Social Security benefits by 2022. Your benefits may be permanently cut due to changes in the Social Security benefit calculations. This is because of the decreased wages paid in 2020 by the pandemic. Andrew G. Biggs (resident scholar at American Enterprise Institute), “Assuming a 15% decrease in the Social Security Administration’s measure of economywide average wages in 2020,” a middle-income worker who was born in 1960 might see his annual Social Security retirement benefits reduced by approximately 13% and losses over the retirement periods exceeding $70,000.

Congressional Stalemate

There is a significant political problem in the midst all the structural problems that Social Security faces. Although Congress leaders love to talk of the need to “fix Social Security,” little has been accomplished. Many proposals have been made, ranging from increasing Social Security’s retirement age to increasing benefits and increasing the payroll tax. As of June 20, 2021, however, no major adjustments have been made to Social Security.

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This article was originally published on GOBankingRates.com: 10 Biggest Problems Facing Social Security