The mother of all political battles is coming, and it’s about a wall.
No, not that one. It’s another, much bigger wall. One that fewer people are talking about — so far.
It’s the wall that Social Security is due to run into in just 15 years.
That’s when, say Social Security’s trustees, the program’s trust fund is scheduled to run out of money. If nothing else is done, they say, after 2034 Social Security’s annual income will only be enough to pay “about three-quarters of scheduled benefits.”
We’re talking about a 25% cut in payments.
How big a deal will this be?
As it happens, the Federal Reserve just put out a report that tackles this. Alas, it got very little attention, because the media and politicians were covering a $5 billion boondoggle that may or may not get built in the desert.
According to Fed data, at most one quarter of people currently nearing retirement are going to be able to shrug off any cuts at all in Social Security. Actually, it’s probably considerably less than one quarter.
And everyone else will be in serious trouble. Half of those nearing retirement will end up in dire straits. That’s because most of them have little or nothing in private retirement plans.
The country’s 401(k)s and individual retirement accounts? The old-fashioned company pension plans? Most of these assets are owned by the wealthiest 25% of the country, the Fed calculates. Between 83% and 85% of the total balance is in the hands of the highest-earning one-fourth.
For everyone else? It’s down to Social Security or bust. And that’s especially so for the bottom half of the income distribution. “Social Security is the key to understanding retirement resources for most families,” says the Fed.
For example, the Fed looked at the balance sheets of those currently in their 50s who are nearing retirement. For the middle two quartiles by income — in other words, the middle 50% — Social Security accounts for somewhere between 47% and 64% of their total retirement wealth. For those in the bottom 25% it’s nearly all of it. They hold, on average, just $28,000 in private retirement plans.
Oh, and even the figures at the top are less good than they appear. The top 25% of earners might look all right, but they are “averaged” in the Fed data, so they include people like Tom Cruise and Sandra Bullock as well as your Aunt Sue.
So, when Social Security hits that wall, will benefits be cut, or taxes raised? No one yet knows.
But here’s what we do know.
In 10 years’ time, when this issue becomes urgent, people in or near retirement will make up more than half the voting age population.
They’ll make up and even bigger share of the actual likely voters.
And those people, as we’ve just seen, can’t do without Social Security — no way, and no how.
According to the U.S. Census, by 2030 those over age 65 will account for 26% of the voting age population, and those aged 45 to 59 and nearing retirement another 29%.
And according to the U.S. Elections Project, in the last presidential elections just 43% of those in their 20s bothered to vote. The figure for the over 60 was 71%.
(Even in 2008, amid Obama-mania among the young, only 48% of those in their 20s voted.)
Put those two things together, and by 2030 around 60% of likely voters will be over 45 — and half of those — will already be over 60.
Good luck passing a 25% Social Security cut.
Balancing the Social Security account instead would need extra taxes of about 1% of GDP, say Social Security trustees. (Balancing Medicare would need another 0.4%.) These will not be politically trivial sums: Current taxes are only about 16.5% of GDP, so we’re looking at a hike of nearly 10%.
Good times.