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3 Threats to Social Security Benefits: How Much Could Your Payment Get Cut?

When the Social Security Administration recently released its 2013 Trustee Report detailing the financial health of its trust funds, the news was mixed. The data turned out to be worse than last year's report, but the trustees claimed that improved projection methods meant that the trust funds would still empty in 2033, the same as last year's projection.

What does this mean to your benefits when you retire? Everything.

If you're counting on Social Security to cover a significant part of your retirement income, you'd better hope the trustees' new projections are right. Because once the trust funds run out of cash, if nothing else changes, benefits will be cut by somewhere around one-fourth.

Here are three key threats to Social Security -- factors to watch closely to see whether the worsening data or the improved projection methods win in the end.

Here's what could slash your Social Security benefits
No. 1: The next decade. Even with the improved projection methods, the trustees expect the trust funds to shrink more quickly for around the next decade or so before slowing its decline.

This is a risk because as the trust funds shrink, there's less money earning interest and less of a balance to draw from if reality turns out to be worse than projections.

The following table has the gory details from the Social Security Administration:

Year End

2013 Projected Balance
(in billions)

2012 Projected Balance
(in billions)

Difference
(in billions)

2013

$2,760.3

$2,776.3

($16.0)

2014

$2,783.5

$2,818.8

($35.3)

2015

$2,808.0

$2,861.9

($53.9)

2016

$2,835.7

$2,908.1

($72.4)

2017

$2,866.6

$2,957.8

($91.2)

2018

$2,897.9

$3,006.8

($108.9)

2019

$2,918.9

$3,043.7

($124.8)

2020

$2,922.4

$3,061.0

($138.6)

2021

$2,907.4

$3,053.0

($145.6)

2022

$2,865.7

$3,017.1

($151.4)

2023

$2,797.3

$2,948.6

($151.3)

2024

$2,698.8

$2,843.8

($145.0)

2025

$2,566.5

$2,699.4

($132.9)

2026

$2,397.2

$2,511.6

($114.4)

2027

$2,187.0

$2,268.3

($81.3)

2028

$1,924.2

$1,967.1

($42.9)

2029

$1,605.2

$1,605.4

($0.2)

2030

$1,226.9

$1,179.7

$47.2

2031

$786.8

$687.7

$99.1

2032

$281.8

$127.5

$154.3

Projected balances from the Social Security Administration. Difference calculated by author.

No. 2: High -- and rising -- disability rates. As if the trust funds' conditions weren't bad enough already, their health is heavily dependent on both the number of people contributing and the number of people taking benefits.

From a Social Security Disability perspective, the trends don't look promising. As the following chart from the Congressional Budget Office shows, the percentage of the working-age population on Social Security Disability is at a very high level. And it's projected to keep growing:

Chart from the Congressional Budget Office.

Working-age people on Social Security Disability get benefits paid out of the trust fund, hastening its collapse. In addition, as they're generally not working much, if at all, they're typically not contributing much to the trust fund through payroll taxes.

Bottom line: If the growth in disability claims continues, the trust funds' balances could very easily deplete faster.

No. 3: Quickly dwindling workforce participation. Whether because of disability, the lousy economy, or other factors, there is simply a smaller portion of the working-age population actually working these days than in recent history. Since Social Security relies on payroll taxes to replenish the trust funds, a low and falling labor force participation portends further problems for the trust funds' balances.

The following chart from the Bureau of Labor Statistics shows just how ugly it has gotten:

Chart from the Bureau of Labor Statistics.

What can you do about it?
Between the near-term dips for the trust funds, the worrisome disability trends, and the abysmal labor force participation rate, the question isn't whether the trust funds will empty, but when.

There's little you can do to stop the collapse from happening, but you can prepare yourself for that eventual date.

By increasing the money you're investing now, you can improve your nest egg when the trust funds do empty, better protecting your lifestyle from those pending benefit cuts. Here are four investments to consider as you sock away extra money to make up for Social Security's shortfall:

  • The S&P Depository Receipts (NYSEMKT: SPY  ) is one ETF that tracks the S&P 500, providing a low-cost way to get stock market return potential to help build your nest egg.
  • For the potential of providing portfolio ballast, the iShares Barclay's US Treasury Bond (NYSEMKT: GOVT  ) ETF owns U.S. Treasury bonds. With interest rates so low, the returns from the bonds in that ETF are not likely to be stellar, but they at least do carry a government-backed guarantee of repayment.
  • If you're worried about inflation ravaging your purchasing power over time, the iShares Barclay's TIPS Bond (NYSEMKT: TIP  ) ETF offers a way to buy government bonds that will increase along with inflation. But while those bonds may be able to keep up with the official inflation rate, they won't help much if your costs, like many people's, increase faster than inflation as you age.
  • For the potential of an income stream that may grow faster than inflation but carries more risk of potential default or reduction, Vanguard's Dividend Appreciation ETF (NYSEMKT: VIG  ) may fit the bill. It's a low-cost way to invest in companies with solid track records of increasing their dividends. Still, there's a trade-off in that unlike Treasury bonds, there are no guarantees that dividends will get paid.

No matter how you invest, the reality is that even lousy investing beats not investing at all. It certainly beats waking up sometime in the next two decades to find that your Social Security check has been slashed by a fourth and not having any alternative source of cash.

Even weakened, Social Security will still be there in some form
Even with the expected cuts as the Trust Fund empties, Social Security will still provide most of the benefits people expect from it. In our brand-new free report "Make Social Security Work Harder for You," our retirement experts give their insight on making the key decisions that will help ensure a more comfortable retirement for you and your family. Click here to get your copy today.


Read/Post Comments (15) | Recommend This Article (6)

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 July 13, 2013, at 4:48 PM, neamakri wrote:

    Before the year 2010 there are about four workers for every retired person (age 65). Sometime after 2010, because the Baby Boomers will retire, the ratio will dramatically change to 3:1. This means that either those workers must contribute 33% more in taxes, or else the retired persons must accept a 25% reduction in benefits in order to keep the same pay-as-you-go dollar ratio.

    Let me introduce Jose Pinera. He is from Chile. He was in charge of the Social Security system in Chile. In 1980 Chile converted to a privatized system. Since then the country of Chile has far less poverty than before, and their entire economic system has progressed more than twice as fast as before. It seems all we have to do is copy their success and be done.

  • Report this Comment On July 14, 2013, at 7:01 AM, mattstrooper wrote:

    As long as interest is paid? the gov. pays interest with printed money and it means nothing.

  • Report this Comment On July 14, 2013, at 7:53 AM, mobadthangood wrote:

    They need to take alcoholics, drug addicts, illegal immigrants and anyone that has NOT paid into Social Secutrity OFF of Social Security Disability.

  • Report this Comment On July 14, 2013, at 8:07 AM, EdHamox wrote:

    Franklin Delano. Roosevelt

    32nd. President, Democrat

    Terms of Office March 4, 1933, to April 12, 1945

    Our Social Security A Democrat, introduced the Social Security

    (FICA) Program. He Promised:

    1.) That participation in the Program would be Completely voluntary,

    2.) That the participants would only have to pay 1% of the first

    $1,400 of their annual Incomes into the Program,

    3) That the money the participants elected to put Into the Program would

    be deductible from Their income for tax purposes each year,

    4.) That the money the participants put into the Independent 'Trust

    Fund' rather than into the General operating fund, and therefore, would Only

    be used to fund the Social Security Retirement Program, and no other

    Government program, and

    5.) That the annuity payments to the retirees would never be taxed as

    income.

    Since many of us have paid into FICA for years and are now receiving a

    Social Security check every month -- and then finding that we are getting

    taxed on 85% of the money we paid to the Federal government to 'Put Away' --

  • Report this Comment On July 14, 2013, at 8:08 AM, NowUknow wrote:

    So let me make sure I have this correctly, I work, pay a LOT into Social Security EVERY payday. I am going to find that when I need the money the most (old age) there will be NO MONEY. RIGHT, so why am I putting MY money into this DEAD system anyway. Because the GOVERNMENT said I have to. How else can they STEAL from me? OH LET ME COUNT THE WAYS……..

  • Report this Comment On July 14, 2013, at 8:08 AM, EdHamox wrote:

    Dwight David Eisenhower

    34th. President, Republican,

    Term Of Office: January 20, 1953 to January 20, 1961

    Insert by Vincent Peter Render,

    If I recall correctly, 1958 is the first year that Congress, not President

    Eisenhower, voted to remove funds from Social Security and put it into the

    General Fund for Congress to spend.

    If I recall correctly, it was a democratically controlled Congress.

    From what I understand, Congress logic at that time was that there was so

    much money in Social Security Fund that it would never run out / be used up

    for the purpose it was intended / set aside for.

  • Report this Comment On July 14, 2013, at 8:09 AM, EdHamox wrote:

    Lyndon Baines Johnson 36th.President, Democrat

    Term Of Office: November 22, 1963 to January 20, 1969

    Question: Which Political Party took Social Security from the Independent

    'Trust Fund' and put it into the General Fund so that Congress could spend

    it?

    Answer: It was Lyndon B. Johnson

    and the democratically Controlled House and

    Senate.

  • Report this Comment On July 14, 2013, at 8:11 AM, EdHamox wrote:

    Question: Which Political Party eliminated the income tax Deduction for

    Social Security

    (FICA) withholding?

    Answer: The Democratic Party.

    William Jefferson Clinton

    (Bill Clinton)

    42nd. President

    Democrat Term of Office: January 20, 1993 to January 20, 2001

    Albert Arnold Gore, Jr.

    45th. Vice President

    Democrat Term of Office: January 20, 1993 to January 20, 2001

    Question: Which Political Party started taxing Social Security

    annuities?

    Answer: The Democratic Party, with Albert Arnold Gore, Jr. (Al Gore)

    casting the 'tie-breaking' deciding vote as President of the Senate, while

    he was Vice President of the US ...

  • Report this Comment On July 14, 2013, at 8:13 AM, EdHamox wrote:

    James Earl Carter, Jr

    39th President, Democrat

    Term of Office: January 20, 1977 to January 20, 1981

    Question: Which Political Party decided to start giving Annuity payments

    to immigrants?

    ANSWER: JIMMY CARTER, AND THE DEMOCRATIC

    PARTY.

    IMMIGRANTS MOVED INTO THIS COUNTRY, AND AT AGE 65, BEGAN TO RECEIVE SOCIAL

    SECURITY PAYMENTS: THE DEMOCRATIC PARTY GAVE THESE PAYMENTS TO THEM, EVEN

    THOUGH THEY NEVER PAID A DIME INTO IT!

    Then, after violating the original contract (FICA), the Democrats turn

    around and tell you that the Republicans want to take your Social Security

    away!

    And the worst part about it, is uninformed citizens believe it!

    If enough people this, maybe a seed of Awareness will be planted and maybe changes WILL evolve!

    Maybe not, some Democrats are awfully sure of what isn't so. But it's worth a try.

    Actions speak louder than bumper stickers.

    Thomas Jefferson

    3rd. President, Democrat

    Term of Office: January 20, 1777 to January 20, 1781

    "A government big enough to give you everything you want,

    is strong enough to take everything you have".

    Thomas Jefferson

  • Report this Comment On July 14, 2013, at 9:50 AM, onempo wrote:

    @EdHamox - Thank you for listing all the myths on Social Security in your posts. To get the facts on Social Security, please visit FactCheck.org and search for the article "FDR’s “Voluntary” Social Security". This debunks the myths on FDR, the trust fund, benefits for illegal immigrants, and even the fake Jefferson quote that originated from a 2009 chain e-mail.

    @NowUknow - Please re-read the article. If the trust fund is depleted, Social Security will still be able to pay 75% of promised benefits. 75% is still more than zero.

  • Report this Comment On July 14, 2013, at 9:58 AM, ImtheBaldEagle wrote:

    These problems with SS are government created and driven. One help would be simply to remove those on disability who shouldn't be there, another is to remove illegal aliens who shouldn't be drawing any type of aide except emergency medical treatment.

  • Report this Comment On July 14, 2013, at 11:09 AM, sabebrush6 wrote:

    If those retards in the District of Corruption would keep their sticky fingers off the taxpayers money & quit trying to bail out every country in the world with our money, there would be plenty.

    It seems like there is billions to give to foreign aid but none for the people who provided it.

    It's like getting invited to a pot luck, they take your food and then turn you away. None for you.

  • Report this Comment On July 14, 2013, at 11:45 AM, VegasSmitty wrote:

    If social security was ever cut there would be 535 dead politicians in D.C.

  • Report this Comment On July 14, 2013, at 4:06 PM, Dadw5boys wrote:

    and how many will die between now and then ?

    TOO MANY ASSUMPTIONS !!!

  • Report this Comment On July 20, 2013, at 11:11 AM, drwerewolf wrote:

    Hi Chuck,

    Thanks for *trying* to write an intelligent and worthwhile article about social security. Unfortunately, as the comments appear to prove, it's impossible to write one -- or at least one that anybody will read with any care -- because everybody already thinks they know about social security.

    My take on the situation, for what it's worth:

    Social security benefits can only be cut if Congress allows them to be. Seniors are the #1 voting bloc by far and Congress is very, very receptive to their concerns. If and when it looks like payments will *really* be cut, seniors (and about-to-be seniors) will raise absolute hell, and Congress will fix the program to ensure that benefits are not cut.

    What can you do, as a senior or to-be senior? Contact your representatives in congress and raise holy hell. Make clear that no representative who votes against preserving social security will be re-elected.

    I'm only in my 40s but I have little doubt I will see social security continue at its current, or greater, benefits during my retirement -- and my son's as well.

    Which is not to say I'm not saving for retirement! I'm saving every danged dime I can find!

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Chuck Saletta
TMFBigFrog

Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.

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