You've probably heard the news by now: Social Security, America's top social program, is in some pretty big trouble.
Every year, the Social Security Board of Trustees releases a report examining the program's short-term (10-year) and long-term (75-year) outlook. For the past 35 years[1], it's been cautioning Congress that long-term revenue creation would be insufficient to cover program outlays. In the 2019 report, the Trustees forecast a $13.9 trillion cash shortfall between 2035 and 2093, using the intermediate-cost model. While this doesn't mean Social Security is on its way to insolvency (thankfully, it can't go bankrupt)[2], an across-the-board cut to retired worker benefits of up to 23% may be just 15 years away.
That's not a very rosy outlook.
But what you may not realize is that it's not a worst-case scenario, either. Based on a number of ongoing trends that can affect the U.S. economy and Social Security, the program appears to be headed down an even worse path that could lead to steeper benefit cuts. Here are three reasons Social Security's long-term cash shortfall could grow significantly in the years to come.
Image source: Getty Images.
1. Growing income inequality
While most people have likely placed some semblance of blame for Social Security's deteriorating financial outlook on baby boomers retiring or increasing longevity, they may have overlooked the growing role that income inequality[3] is having.
Rising income inequality is hurting Social Security two ways. First, we've seen a greater percentage of earned income exempted from the payroll tax in recent decades. While the program has three ways of generating revenue, the 12.4% payroll tax on earned income (wages and salary, but not investment income) ...