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Social Security's Catch-22 Is Bad News for Retirees

As you may have heard, our nation's most successful social program is in a bit of a bind.

Every year since 1982, the Social Security program has generated a net cash surplus. By bringing in more revenue than is paid out in benefits each year, the program has been able to build up a $2.9 trillion reserve. However, according to the 2019 report from the Social Security Board of Trustees, the program is about to hit an unwanted inflection point.

Social Security's Catch-22 Is Bad News for Retirees
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You see, more than a half-dozen ongoing demographic changes are expected to result in Social Security expending more than it collects in 2020. While this initial net cash outflow will be relatively small, the amount flowing out of the program will increase exponentially in subsequent years. By 2035, Social Security's asset reserves of $2.9 trillion are forecast to be completely exhausted.

If there is one positive to highlight in this mess, it's that Social Security, which has stood the test of time by making guaranteed monthly payouts for 80 years and counting, won't be going anywhere. Social Security can't go bankrupt, thanks in part to its two recurring sources of income.

However, this doesn't mean things won't be painful for its recipients. If lawmakers in Congress don't figure out a way to resolve an estimated $13.9 trillion cash shortfall between 2035 and 2093, current and future retired workers could be looking at a benefit cut of up to 23% within 15 years.

Social Security finds itself in a Catch-22

The problem is that Social Security finds itself in a Catch-22. The "Catch-22" phrase describes a dilemma that offers no escape because of mutually conflicting or dependent conditions. In Social Security's case, no matter what unilateral proposal is made to resolve the program's cash shortfall over the long term (defined as the next 75 years), benefit cuts for retired workers seem to be a given. Allow me to explain.

On Capitol Hill, there are two core methods to fix Social Security. There are the Republicans, who prefer to gradually reduce long-term expenditures paid out by Social Security, and there are the Democrats, who prefer to raise additional revenue for the program. As you'll see, no matter which route is chosen, benefit cuts become a necessary evil down the line.

Social Security's Catch-22 Is Bad News for Retirees
Image source: Getty Images.

If the GOP got its way and the full retirement age -- i.e., the age at which a beneficiary becomes eligible to receive 100% of their monthly payout, as determined by their birth year -- were gradually increased from its current expected peak of 67 in 2022 to, say, age 70, such a move would reduce program outlays over the long run. Unfortunately, increasing the full retirement age would take decades to have a meaningful impact on Social Security's expenditures. Thus, it would do nothing to stop the program's asset reserves from being depleted by 2035 and therefore lead to benefit cuts.

What you might be shocked to learn is that Democrats' proposal of raising or even eliminating the payroll tax earnings cap to bring in additional revenue would also result in eventual benefit cuts. Although raising or eliminating the payroll tax cap ($137,700 in 2020) would generate an immediate influx of new revenue and push the expected asset reserve depletion date further down the line, no amount of newly added revenue can account for certain ongoing demographic changes. For example, record-low birth rates for women of childbearing age, lower net immigration rates, and increased longevity are all likely to substantially widen how much additional revenue will be needed to sustain the existing payout schedule, inclusive of cost-of-living adjustments.

No matter which unilateral path is taken, benefit cuts eventually become a necessity to support the solvency of Social Security.

Political hubris is preventing Republicans and Democrats from working together on a solution

Now, there is a third solution to fix Social Security, and it would, in theory, work considerably better than either unilateral solution -- and that is to combine the core proposals from the Democrats and Republicans into one solution. In other words, raise or eliminate the maximum taxable earnings cap to deal with the short-term revenue needs of Social Security, while also addressing long-term expenditures by gradually raising the full retirement age for younger generations of workers.

Social Security's Catch-22 Is Bad News for Retirees
Image source: Getty Images.

While a bipartisan solution would resolve many of the weaknesses described above, it has almost no chance of getting off the ground. The issue is that each party offers a proposal that works, albeit on differing timelines. Because their solutions work, there's no incentive for lawmakers of one party to find common ground with their opposition.

It should also be noted that it'll require 60 votes in the Senate to amend the Social Security Act. Considering that no party has held a true supermajority (not counting independents) in the Senate in more than 40 years, bipartisan cooperation is a must to pass any changes to America's storied social program.

So, to summarize, both one-party solutions would eventually lead to benefit cuts, while a bipartisan approach that would make Social Security stronger in the short and long terms is being held up by political hubris. Suffice it to say that current and future retired workers simply can't win.