Social Security’s trustees released their annual report this week. The program faces a manageable long-term financial shortfall after 2035, after which it can still pay 77% of promised benefits if nothing changes. Importantly, part of this shortfall is due to the growth and persistence of massive income inequality that have been a hallmark of the U.S. economy for much of the past three decades.
Social Security is a vital program for America’s middle class. In total 63 million people received benefits from Social Security in 2018, spread out over the retirement, survivorship and disability programs. The average monthly benefit in 2016, the last year, for which such data are available, was $1,246. Social Security is a crucial, yet basic part of insuring income security for American families.
The importance of Social Security benefits for American families’ financial security has in fact gone up as low-income and middle-income families face increasing financial struggles and find it harder to save. Incomes at the bottom and in the middle have grown only very slowly. And incomes have become less stable. The likelihood to experience a sharp drop in income in particular has gone up.
Both few income gains and high income instability often stand in the way of workers saving for their future. They cannot save much, especially since they already struggle to pay for basics such as health insurance, but workers also regularly need to dip into their savings to pay their bills when incomes unexpectedly go down. As a result, low-income and middle-income families not only have less economic security now, but they are also economically less mobile and face more hardships in retirement than workers in the past did. Social Security’s guaranteed, progressive benefits are one thing workers can count on.
Yet, income inequality adversely affects Social Security’s finances at time when American families need Social Security benefits more. Income inequality rose starting in the 1980s and remained persistently high in recent decades. Income growth at the bottom and in the middle of the income distribution have slowed, but accelerated at the top and grown faster at the top.