2020 marked the first time in its 86-year history that Social Security paid out more than it takes in. If that trend continues, and there’s no reason to believe it won’t, the Social Security reserve fund will run dry in 2033. Once that happens, retirees will receive only 77 percent of their scheduled benefits. Here are the three main reasons Social Security is failing.

1. Changing Demographics

People are living longer and having fewer children. Like all developed nations, the birthrate in the U.S. has steadily declined over the past 50 years. That coupled with increased longevity has led to a shift in demographics.

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14 percent of the U.S. population is age 65 or older. Over the course of the next 60 years, that number is expected to rise to 23 percent. During that same time period the working-age population is expected to decrease from 60 to 54 percent. All of that adds up to an aging population and a Social Security program that will continue to pay out more than it takes in.

2. Full Retirement Age has not Kept Pace with Life Expectancy

When Social Security was signed into law back in 1935, the average U.S. life expectancy was 60 years. Full retirement age, the earliest age at which one can draw full Social Security benefits, was set at 65. So at its inception, Social Security was designed to benefit only those who win the genetic lottery. That is, people who live 5 years beyond average life expectancy. 

Today the average life expectancy in the U.S. is 79. If the law had been written, as some believe it should, to adjust the full retirement age on an annual basis to 5 years beyond average life expectancy, today full retirement age would be 84. 

What have our politicians in Washington done in response? Over the life of the Social Security program which has seen average life expectancy rise from 60 to 79, our lawmakers have seen fit to raise the full retirement age from 65 to 67. Two years.

3. The Payroll Tax Cap Allows the Rich to Pay Less Taxes

Normal income taxes are progressive, meaning the rich pay a higher percentage of their income than those who earn less. For whatever reason, payroll taxes are exactly the opposite.

The collection of Social Security payroll taxes ends beyond a certain point known as the Taxable Maximum. The taxable maximum, or payroll tax cap as it is more commonly known, is currently set at $168,600. That means once an individual earns more than $168,600 in a single year, their earnings are no longer taxed for Social Security. So the average person earning $50,000 per year gets taxed on 100 percent of their earnings, but someone earning a million dollars a year is only taxed on about 15 percent. Does that sound fair?

Closing Thoughts

Any sane, rational person can see that both the full retirement age and the payroll tax cap need to be increased. What is equally clear is that congress will continue to do nothing about it. 

In 2033 when the reduced Social Security checks start hitting people’s mailboxes, the idiocy will begin. There will be all-night sessions of congress and filibusters and last-minute stop-gap measures. It will be handled with all the dexterity of our federal budget, which usually ends in government shutdowns. Until then, the Social Security reserve fund will bleed dry and no politician will even mention it.

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