Social Security: 3 Charts Show the 3 Biggest Threats to Future Benefits

Earlier this year, the committee in charge of the Social Security trust funds released its latest annual report detailing the financial status of the government-administered social safety net that millions of Americans rely on for income in retirement. The results weren't encouraging.

While the main $2.7 trillion trust fund continues to grow, albeit at the slowest pace in three decades, this trend is expected to reverse over the next few years, most likely around 2022 -- and just for the record, I'm referring here only to the Old-Age and Survivors Insurance program. The balance will then decline at an accelerating rate until the fund is fully depleted in 2034. At that point, the program will be deemed insolvent, and retirement benefits will have to be cut by an estimated 25%.

To help readers appreciate why this is happening, I've outlined three of the biggest threats to the Social Security system. Included along the way are charts that should aid your understanding of the coming crisis.

1. Retirement of baby boomers
If you want someone to blame for the Social Security program's impending deficit, then look no further than the generation of baby boomers.

Starting shortly after the end of World War II, the United States experienced an unprecedented surge in fertility rates. Prior to the war, fewer than 2.5 children were born to the average woman of childbearing age. But as soldiers returned home and a postwar period of prosperity took hold, this figure rocketed higher, topping out at an average of 3.68 children per woman in 1957.

As baby boomers grew older, went to college, and got jobs, they served as a potent stimulus for the economy. But now that they're retiring, their outsized share of the population is skewing the demographics of the U.S. toward retirees.

2. The ratio of workers to retirees
The problem with an aging population from the perspective of the Social Security program is that it distorts the relationship between the number of workers paying into it and the number of retirees drawing benefits from it. Indeed, this is inevitable in any pay-as-you-go system facing similar demographic trends.

As you can see in the chart above, in 2000, the ratio of workers to beneficiaries was 4.02. By 2013, it had dropped to 3.51. And by 2040, it's projected to fall all the way down to 2.43.

3. Receipts vs. expenditures
Because of these trends, the Social Security retirement program is already paying out more in benefits than it receives from payroll taxes. In the most recent fiscal year, the system took in $621 billion in payroll taxes while total expenditures added up to $680 billion.

Given this, how is it possible, as I asserted at the outset, that the main Social Security trust fund continues to increase in size? The answer is that the growing divide between receipts from payroll taxes and expenditures has thus far been offset by other sources of income.

In 2013, the system earned $123 billion in income from other sources. A total of $98 billion was interest income from its $2.7 trillion portfolio of government securities; $21 billion came from income taxes assessed against current Social Security payments; and $4 billion was the result of various intergovernmental transfers.

Should you sweat the coming Social Security crisis?
Unless you're independently wealthy -- in which case, my hat goes off to you -- the solvency of the Social Security system is something you should care deeply about, if for no other reason than the fact that it serves as the primary source of income for a large share of retirees today.

That being said, this isn't the first time we've faced a crisis like this. The situation was even bleaker in the early 1980s, when the fund was projected to become insolvent by 1983. That obviously didn't happen, thanks to policy changes that ushered in three decades of annual surpluses.

While it seems unlikely that lawmakers could muster a similarly dramatic turnaround today, the good news is that we don't need drastic action. Even relatively minor tweaks would suffice to stem the tide of future insolvency. And it's for this reason, as well as the fact that the retired population is a highly coveted voting block, that it's probably safe to assume Social Security isn't going anywhere anytime soon.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.


Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 30, 2014, at 8:23 AM, dusty10x wrote:

    Baby boomers are NOT any problem...We will have saved $3 trillion dollars to help pay 100% of our retirement thru 2034....If you look at the chart you will see around year 2030 it flat lines to equal again..So you are a LIAR....The problem is the government CHOSE to spend the $3 trillion instead of changing the rules to investing the money in the open market and creating JOBS.....So there is no money and only $3 trillion of I.O.U.'s that are forced on the future taxpayers by our ELECTED GOVERNMENT..........

  • Report this Comment On August 30, 2014, at 8:36 AM, dusty10x wrote:

    No major change to the payroll deduction percent should be made until after 2022 or later..That is because it would be a wasted effort.....As extra money is NOT needed until after 2022, the government would just steal the new surplus and spend every penny leaving even more I.O.U's.......Before 2022 the government will engage in ever increasing panic articles to try and scare the workers into accepting more deductions to themselves....That way the government will not have to redeem their I.O.U's at a fast rate and can shift the hardship onto the future retirees instead..( Leaving more taxpayer money in the general tax fund.for their own projects to help get themselves re-elected.)..........

  • Report this Comment On August 30, 2014, at 9:30 PM, BRUCEKRASTING wrote:

    The author says that the SS Trust Fund will run out in 2034. The "Drop Dead Date" will arrive years before 2034:

    A more realistic estimate of SS's economic outlook comes from the CBO. It has the TF running dry in 2030. The reasons for the big difference between CBO and SS is that CBO (correctly) assumes that the Old Age Fund will be drained by the shortfalls in the Disability Fund.

    The SS system can't be allowed to run its TF to Zero. There has to be a positive balance of one year's worth of benefits for SS to operate. (SS runs cash deficits in 10 out of 12 months).

    The SS TF will fall to a level that is equal to one-year's benefits in ~2027.

    This is 6 years earlier than suggested in the article. It is only 13 years from today.

    There is not as much time to 'Fix" SS as is suggested by SS. It is doing the country a disservice by masking the facts.

    The CBO Baseline #s for SS, from April 2014:

    http://www.cbo.gov/sites/default/files/cbofiles/attachments/...

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3083152, ~/Articles/ArticleHandler.aspx, 9/18/2014 7:47:45 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement