How Big Is The Social Security Unfunded Liability?

When the stock market crashed in 1929, no one imagined how deeply the nation’s workers would suffer – and how long that suffering would last. At the height of the Great Depression, nearly one in four workers were unemployed. Those who remained employed saw their wages drop by more than 40 percent.

In 1932, Franklin D. Roosevelt was elected President, and he immediately began making plans to boost the economy and provide financial security for the unemployed and elderly. FDR’s programs were collectively called the “New Deal,” and within a few years, a variety of agencies, regulations, and relief measures were launched.

These included the National Labor Relations Act (1935), which protected workers’ rights to organize, the Securities and Exchange Commission (1934) to provide oversight to Wall Street, the Fair Labor Standards Act (1938) to restrict the exploitation of hourly workers, and the Federal Deposit Insurance Corporation (1933) to ensure low-income and middle-class assets were safe from bank failures.

There is no question that each of these accomplishments has played a critical role in the safety and security of the nation’s workforce, but many remember FDR for one achievement above all others. In 1935, Roosevelt signed the Social Security Act into law, guaranteeing basic income for retirees.

Who Was The First Person To Have Social Security?

The plan was to begin tax collection in 1937 but pay only lump sum benefits to retirees until the program was fully funded. The very first lump sum payment was made to Ernest Ackerman, who retired the day after Social Security’s official launch. His total benefit was 17 cents – an impressive return on the five cents in Social Security taxes withheld from his paycheck for the one day of work he completed after the program began and before his retirement.

In 1940, the number of Social Security beneficiaries was 222,488, and the Social Security Administration (SSA) paid out just over $4 million in benefits.

By the year 2000, there were approximately 45.5 million beneficiaries, and the program cost taxpayers $34.8 billion – though it is important to note that benefits are paid exclusively from the Social Security tax, not general tax funds. Just nine years later, in 2009, there were 52.5 million people relying on Social Security payments that totaled nearly $56 billion.

All in all, Social Security distributed $11.3 trillion from its inception in 1937 through 2009. The good news is that it was able to make those payments as promised because it operated at a surplus.

The SSA collected $13.8 trillion during the same period. That’s not to say that the books balanced properly every single year.

During the first 72 years, there were 11 years in which the SSA did not take in enough income to pay out benefits to eligible recipients, primarily between 1975 and 1981. The SSA took approximately $24 billion in trust fund bonds to make up the difference.

How Big Is The Social Security Unfunded Liability?

Given the popularity of the program and its strong record of success, it’s surprising to hear lawmakers discuss dismantling Social Security. The topic comes up regularly, despite the fact that roughly 80 percent to 90 percent of today’s workforce has indicated through Gallup surveys that they will rely on Social Security income when they retire.

Lawmakers who suggest privatizing Social Security or otherwise canceling the program state that this is a necessary step due to the fact that Social Security has, in its current state, an unfunded liability.

The total unfunded liability figure projected by the Social Security Board of Trustees is estimated at $20.4 trillion through 2096 if the current schedule of benefits and cost-of-living adjustments (COLA) remains constant. Without action, the concern is that Social Security will become insolvent, leaving taxpayers on the hook for the full shortfall.

How is that possible if the program is designed to pay for itself? The contributions from today’s workers are distributed to today’s beneficiaries. In theory, this should result in a surplus. Or at least the program should break even… right?

Why Is Social Security Going Broke?

In fact, Social Security is not projected to break even or operate at a surplus when the Social Security Board of Trustees calculates cash flow over the next 75 years. However, the cause of the issue – and possible solutions – have become a source of contention. Many myths surround Social Security, and a meaningful percentage of voters believe that longer life spans and an increasing population of disabled citizens are the root of the problem.

While it is accurate to say that there is an imbalance in the number of people paying into the program versus those receiving benefits, longevity isn’t the cause. The massive Baby Boomer generation has reached retirement age, and a large portion of this group has already started drawing monthly payments.

Meanwhile, after the Baby Boomer generation, birth rates in the United States declined. Women went from an average of three children to an average of two children, which resulted in a smaller workforce. The imbalance is projected to resolve by 2035, which will help with the underfunding issue, but that’s not the whole story.

It is not uncommon for politicians to point the finger at immigration when the topic of Social Security’s financial troubles comes up. Immigration is a deeply divisive subject and strong emotions fuel misinformation on both sides.

In this case, there is some truth to the suggestion that immigration is to blame for the coming challenges faced by Social Security.

However, the issue is not with undocumented immigrants. In fact, individuals who are not legally authorized to work in the United States cannot receive Social Security benefits, though in many cases, they pay into the program.

One study determined that in 2016, these workers contributed $13 billion in payroll tax revenue – one percent of Social Security’s annual revenue – though they cannot qualify for benefits due to their undocumented status.

Instead, the issue is the substantial decline in legal immigration. Since 1998, the number of immigrants coming to work in the United States through various immigration programs has gone down every year.

The United Nations estimates that the total drop over the full 25-year period is approximately 57 percent. These individuals are primarily on the younger side, so they contribute to Social Security through payroll taxes. Their absence, in conjunction with lower birth rates, has created the current imbalance between Social Security’s income and the benefits due to retirees.

What Is The Future For Social Security?

The size of the unfunded liability seems insurmountable, but the truth is that there is no reason to worry about Social Security. The program cannot go bankrupt because of its pay-as-you-go design. Even if no action is taken, Social Security will continue to pay benefits. The worst-case scenario is that benefit payments are reduced.

In its current state, Social Security benefits would have to be reduced by 22 percent in 2034. By 2095, benefits would be reduced by 26 percent. That will only happen if Congress does not take action to remedy the issue. As the Social Security Administration frequently points out, since Social Security was put in place, Congress has always ensured that benefits can be paid at 100 percent.

In other words, workers who contribute to Social Security today can count on benefits when they reach retirement age – though perhaps at a reduced rate. However, regardless of the total amount of those benefits, it is critical to build a comprehensive retirement plan. Even at 100 percent, Social Security is just enough for necessities. Other income is a must for those who want a more comfortable lifestyle.

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