Column: Counting on Social Security to fund your retirement? Think again

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In just nine years, the oldest Gen-Xers will reach Social Security’s normal retirement age of 67. But they have a rude awakening when they learn that the program’s trust fund is empty, leaving it able to pay out only as much in benefits as it takes from the paychecks of those then working.

That’s straight from the Social Security trustees 2024 report. It also notes that without congressional action, benefits will have to be cut by 21 percent across the board — including for those already retired — beginning in 2033.

For the average beneficiary, who receives about $22,000 a year from Social Security, that 21 percent cut will translate into a loss of $4,600 per year. As Social Security benefits will grow faster than payroll taxes for the foreseeable future, benefit cuts will reach 31 percent at the end of the trustees’ 75-year projections.

Simply maintaining currently scheduled Social Security benefits would require large tax increases. The program’s trustees estimate that payroll taxes would have to rise immediately from 12.4 percent to 15.7 percent, adding $2,500 to the median household’s annual Social Security taxes.

Even that projected hike may be too conservative. The Congressional Budget Office estimates that a 17.5 percent tax, or an extra $3,800 per year for the median family, is necessary to maintain current Social Security benefits.

Such high tax rates are a far cry from Social Security’s original intent. The program started out as a 2 percent tax, and its founders promised it would never take more than 6 percent of workers’ paychecks.

And for a program that currently replaces about 40 percent of workers’ earnings during retirement (and will decline to 32 percent beginning in 2033), the current 12.4 percent tax is a hefty price to pay. If workers invested that amount in a conservative mix of stocks and bonds, they should have enough at retirement to replace at least 75 percent of their earnings.

Even as Social Security was never intended to be the sole source of income in retirement, its rising taxes have made it increasingly difficult, particularly for lower- and middle-income workers, to save for retirement.

In fact, Social Security’s growing size and scope could be exacerbating wealth inequality because the hard truth is that Social Security is not a savings program, and workers have no ownership of the Social Security taxes they pay.

Despite Social Security’s original intent to be a predominantly pre-funded and effectively forced-savings program, it now functions as a pure intergenerational transfer program. That happened because Social Security’s benefits increased more than its tax hikes.

In every year since 2011, Social Security has paid out more in benefits than it has received in tax revenues. This means that workers’ payroll tax “contributions” aren’t saved and don’t earn a positive rate of return over time.

Although the formula that determines retirees’ benefits is based on what they paid in Social Security taxes, their actual benefits come directly from younger workers’ paychecks. After 2033, retirees’ benefits will be entirely dependent on how much future lawmakers are willing to extract from workers’ paychecks.

The fact that Social Security taxes aren’t saved makes the program a bad deal for most Americans. It can also exacerbate wealth inequality among low-income and minority Americans who have lower life expectancies.

One out of every four African-American men dies between the ages of 45 and 64, having paid tens or even hundreds of thousands of dollars in Social Security taxes. But because they have no ownership of their contributions, they and their family members receive little or nothing in return. What could have been a $350,000 retirement account that a low-income worker would have to pass on to his family is often just a $255 death payment instead.

With less than a decade left before Social Security runs out of money and automatic 21 percent benefit cuts ensue, lawmakers must act now to prevent insolvency and to improve the program for future generations. Some commonsense solutions include gradually shifting to a universal benefit based on years of work instead of total earnings, automatically updating the program’s eligibility age to align with changes in life expectancy, and using more accurate statistics to adjust benefits.

These reforms would translate into bigger paychecks for all Americans by allowing Social Security’s tax rate to decline over time.

Moreover, if coupled with a personal ownership option, Social Security reform could help more Americans build wealth that could increase their retirement incomes and provide a leg-up to help their children and grandchildren pursue goals like education, home ownership, or starting a small business.

Whatever lawmakers do, they must act soon. Time isn’t on our side.

Rachel Greszler is a Senior Research Fellow in workforce and public finance in the Roe Institute at The Heritage Foundation.