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Munnell notes that there are two ways for Congress to solve the current long-term funding issue. "A lot of our population has nothing else to rely on other than Social Security, so you really don't want to have that benefit level cut." What can Congress do about Social Security's funding issue? "The 401(k) system has worked well for, let's say the top 40% of workers and is not much help for the bottom 60%," says Munnell. With only half of private sector employees having a 401(k) at any time, Social Security is one of the most important aspects of retirement income's 'three-legged stool', says Munnell. The National Institute on Retirement Security (NIRS) describes retirement income as a 'three-legged stool', consisting of Social Security, a pension plan and individual retirement savings through accounts like a 401(k) or an individual retirement account (IRA). According to the Center on Budget and Policy Priorities, half of seniors get half (or more) of their retirement income from Social Security. While Social Security is intended to supplement peoples' retirement savings, many retirees end up relying on the program's benefits as their primary source of retirement income. A 2020 AARP survey found that the program was supported by 90% of Democrats, Republicans and independents. Social Security is vital to many retirees and is one of the few social programs that enjoys broad support across the political spectrum. This means that retirees could receive reduced monthly benefits or fewer checks each year, according to Romig - that is unless there is a policy change made by the U.S.
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Starting in 2034, the Social Security administration will run out of the excess reserves it has and will only be able to pay out a portion of a retiree's full benefits - 77% to be exact. "People are having fewer children and because the birth rate is declining you just have fewer workers paying for beneficiaries," says Romig.
This is due to a decline in the birth rate after the baby boom period that took place right after World War II, from 1946 to 1964.
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Over the next ten plus years, the Social Security administration will draw down its reserves as a decreasing number of workers will be paying for an increasing number of beneficiaries. "You want to have the worker to beneficiary ratio at a sort of healthy level where you don't have too few people paying for too many beneficiaries." "It's all predicated on money going in from current workers to money going out to beneficiaries," says Kathleen Romig, a Senior Policy Analyst at the Center on Budget and Policy Priorities. In recent years, there has been an excess of reserves in the Social Security Trust Fund: the amount of money that the Social Security administration collects through payroll taxes exceeds the amount of money the administration pays out in benefits. The other 15 cents goes to a trust fund that pays benefits to people with disabilities and their families In 2022, for every dollar you pay in Social Security payroll tax, 85 cents goes towards the Social Security trust fund that pays monthly benefits to current retirees and their families (and surviving family members of workers who have died), according to the Social Security Administration. Current workers are paying into a system that pays for the benefits of all current retirees. When a worker pays their Social Security payroll tax, that money doesn't go to a specific Social Security fund allocated just for them.
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