Citizens Most in Need Will Suffer Most from the Coming Social Security Crisis
The coming social security crisis is perhaps one of the most underappreciated time bombs around. A slow-motion train wreck few pay attention to because it’s thought of as someone else’s “problem.” But for prime, working-class persons under the age of 55, this “problem” will affect your retirement (or disability benefits for the unfortunate sub-beneficiaries).
What is social security crisis? It’s the systematic drawdown of surplus cash funding the Old-Age and Survivors Insurance and Disability Insurance programs. Each holds funds in two separate trusts. Money is raised through a 6.2% payroll tax to both employee and employer, with maximum taxable earnings capped at $127,200. Currently, enough payroll taxes flow into each program to provide ample coverage. However, official projections estimate that money needed to bankroll both programs will run out by 2034. That, in a nutshell, is the social security crisis explained. (Source: “Social Security trust fund projected to tap out in 17 years,” CNN Money, July 13, 2017.)
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Also Read: The Upcoming Social Security Crisis Explained
While 17 years still seems far away, keep in mind that these estimates are based on rosy economic calculations. They assume perpetually positive economic growth rates at near-historical trends. But we all know in the real world, that doesn’t happen. Not only has the economy been growing below the trend in the entire 21st century, recessions come along every five to 10 years or so. Given the mammoth size of our current credit bubble, the next recession could be particularly fierce. Something on par, or worse, than the U.S. Housing bubble. When this occurs, economic growth will lag for a while.
Given this reality, these programs may bleed red ink years earlier than expected. The next social security crisis could come sooner than most anticipate.
Impact of a Social Security Crisis on U.S. Citizens
The effects of social security crisis are insidious. People still receive their benefits, but they keep eroding over time. Different proposals get adopted over time, which eat into the benefit pool, affecting the quality of life for participants.
Case in point, a 2016 Medicare Board of Trustees proposal calling for Medicare Part premiums to increase by 22.3% for certain recipient classes. This increased Part B premiums to $149.00 per month from $121.80 per month in 2016. As well, certain individuals enrolled in Medicare prior to 2016 who were protected from premium increases under the Hold Harmless Act would have seen Social Security benefits fall by $41.43/month if there was no Cost of Living Adjustment (COLA). (Source: “Average retiree will see Social Security benefit decrease,” CNBC, August 22, 2016.)
Now, throw in the fact that inflation typically hovers around the two- to three-percent area, and we’re talking about real benefit “income” declining five percent or six percent. For those already living on the margin, that’s a significant reduction. The average social security beneficiary only earns around $1,335/month, which is barely enough to cover the necessities. For people still indebted to mortgages or car loans, it might be enough to push them into the red.
President Donald Trump has pledged not to cut Medicare or Social Security. He’s also on record pledging not to raise the retirement level past 67. That’s music to the ears of many people. But the reality is, any deferment in action to address the future solvency of social security must be addressed immediately. So expect the benefit erosion to continue until shock forces wholesale changes to the system.
