For more than eight decades, Social Security has been a financial anchor for our nation's retired workforce. The monthly payouts the program provides were responsible for lifting 22.5 million people out of poverty in 2020, including 16.1 million seniors aged 65 and above, according to an analysis from the Center on Budget and Policy Priorities.
But this foundational program isn't on the best financial footing, and it's resulted in a lot of finger-pointing -- especially at elected officials.
Image source: Getty Images.
Social Security has a $20 trillion problem
Ever since the first payouts to retired workers began in 1940, the Social Security Board of Trustees has released a lengthy annual report that examines the past, present, and future solvency of the program. The Trustees Report provides an in-depth look at how Social Security generates revenue and where those dollars eventually end up, as well as forecasts how fiscal policy and a multitude of changing demographic trends might impact the program.
Every single annual Trustees Report since 1985 has cautioned that long-term revenue -- the Trustees define the "long term" as the 75 years following the release of a report -- wouldn't be sufficient to cover outlays, inclusive of annual cost-of-living adjustments. In plainer English, Social Security is projected to have a funding shortfall over the next 75 years.
The 2022 Social Security Board of Trustees Report estimates the program's long-term funding shortfall at $20.4 trillion.
Worse yet, the Old-Age and Survivors Insurance Trust Fund (OASI), which is responsible for doling out checks to 48.8 million retired workers and 5.8 million survivor beneficiaries each month, is forecast to exhaust its asset reserves by 2034. If this excess capital built up since inception were to be exhausted, sweeping benefit cuts of up to 23% may be necessary to sustain payouts through 2096 without any further reductions.
Although a long list of demographic factors is responsible for Social Security's shaky financial situation, it's Congress that often takes the blame.
Has Congress pilfered from Social Security's piggy bank?
If you were to peruse the comment section of Social Security articles posted online, it's pretty much a guarantee you'll find a response (or 20) that suggests Congress' greed put the program in its current dilemma. Specifically, some readers believe the best solution to Social Security's woes is for Congress to "return the money it stole and pay it back, with interest."
I've gone through 82 years of historic data from the Trustees and added up just how much lawmakers have pilfered from Social Security's piggy bank. That shocking figure is (drum roll)... $0.00. Not one penny !
US Old-Age, Survivors, and Disability Insurance Trust Fund Assets at End of Year data by YCharts .
Since Social Security was signed into law in 1935, the program has required that its asset reserves -- the excess revenue collected that wasn't disbursed to beneficiaries -- be invested in special-issue bonds and, to a far lesser extent, certificates of indebtedness backed by the federal government. Every single dollar in excess revenue collected by Social Security is accounted for by these bonds and certificates of indebtedness. Nothing has been stolen, and not a cent is missing.
What's more, Social Security's investment holdings (link opens new window) update each month. This allows you to follow along as new Treasury bonds are purchased and older bonds mature. You can watch as Social Security's OASI and Disability Insurance Trust Fund (DI) asset reserves rise and fall over time.
Not only is Social Security's $2.84 trillion in asset reserves (as of January 2023) backed by the federal government, but it's generating a 2.338% average interest rate. In 2021, $70.1 billion of Social Security's $1.088 trillion in total revenue came from the interest income the program earned on its asset reserves. Between 2022 and 2031, an estimated $575.8 billion in aggregate revenue is expected to derive from interest income.
Hypothetically speaking, if Congress were to pay back this debt, it would lose out on $2.8 trillion in borrowing power, and Social Security would lose nearly $576 billion in estimated revenue over a decade. In other words, it would put Social Security on far worse financial footing than it's on now and likely move the program's expected asset reserve depletion date forward by a couple of years.
Image source: Getty Images.
Here's something you can definitely blame Congress for
On one hand, suggesting Congress stole from Social Security is blatantly wrong. On the other hand, Congress does deserve at least partial blame for the struggles America's top retirement program is contending with. If you want to blame our elected officials for something, let it be their lack of cooperation with so many proposals to strengthen Social Security on the table.
Regardless of party affiliation, lawmakers on Capitol Hill have been aware of Social Security's precarious financial footing for 38 years , and they widely recognize that something needs to be done to shore it up. The problem is that Democrats and Republicans are approaching their solutions from opposite ends of the spectrum, and neither side has been willing to find common ground with the other.
Though this is an incredibly simplistic explanation, Democrats seek to increase payroll taxation on high-earning individuals to raise additional revenue. They also broadly agree that Social Security's measure of inflation should be changed to the Consumer Price Index for the Elderly (CPI-E) from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W has been failing our nation's seniors for decades .
Meanwhile, Republicans in Congress favor long-term outlay reductions, which would be accomplished by gradually raising the full retirement age -- the age where a worker becomes eligible to receive 100% of their monthly benefit -- and switching Social Security's inflationary tether from the CPI-W to the Chained CPI. The Chained CPI takes substitution bias into account , which would lower annual cost-of-living adjustments.
Both plans would be effective at strengthening Social Security, albeit on very different timelines. These plans also have plenty of flaws. But since they're both effective, Democrats and Republicans haven't been willing to work with their opposition to find a compromise. Without bipartisan cooperation and 60 votes in the Senate, Social Security can't be amended.
This lack of legislative progress is where Americans can rightly focus their finger-pointing.
The Motley Fool has a disclosure policy .
