Image source: Getty Images.
Without Social Security income, millions of retired American workers would struggle to pay their bills. Out of the 60.7 million people receiving Social Security benefits in September, nearly 41 million were retired workers. A majority of these retired workers -- 61%, according to the Social Security Administration -- rely on Social Security to provide at least half of their monthly income.
As many of you may know by now, the future of Social Security is very much in flux. The good news for current and future retirees is that the program isn't going bankrupt. The sheer fact that payroll taxes are always being generated ensures that the program will have revenue to fund some degree of benefit payments to seniors for many generations to come. But things are far from perfect. Demographic shifts, including the retirement of baby boomers and Americans' rapidly rising life expectancies, mean benefit cuts could be needed to sustain the program for future generations.
Every year the Social Security Board of Trustees runs various models based on factors that include demographic changes, economic forecasts, and inflation. Then the board releases its projections for what the future of Social Security might look like. Earlier this year it released this data, which you can see below in a side-by-side comparison with the 2015 report.
Image source: Social Security Administration via 2016 Trustees Report.
There are four standout figures and dates within the Trustees' report that seniors should be fully aware of. Let's go over them.
1. Year of trust fund depletion: 2034
The most noteworthy item is the forecast that the Old-Age, Survivors, and Disability Insurance Trust, known as the OASDI, will deplete its more than $2.8 trillion in spare cash by the year 2034. It should be noted that this estimate is subject to change based on demographic and economic changes. If we were to look back a decade, we'd see that the Trustees had called for an OASDI depletion date of 2040. Thus, over the past decade we've witnessed six years get shaved off those estimates, and it's quite possible they could change again in the coming years.
2. Share of benefits that incoming revenue will cover after trust fund depletion: 79%
If the trust fund's spare cash is exhausted, then only 79% of the outgoing distributions made by the OASDI will be covered by incoming revenue. In other words, Social Security is on track to become a budget-neutral program that only pays out in benefits what it receives in payroll taxes. It's Congress' job to pass legislation to fix Social Security's long-term flaws, but if it fails to act, benefits could be cut across the board by up to 21%.
3. Year of peak trust fund reserves: 2019
Another important date to be aware of is 2019, which is when the OASDI's spare cash is expected to hit its peak of $2.89 trillion. As you'll note in the comparison data above, the OASDI increased its assets by $25 billion and $23 billion, respectively, in the years analyzed. However, as baby boomers retire in droves, the worker-to-beneficiary ratio will fall. There simply won't be enough new workers and payroll taxes being collected for the OASDI to remain cash-flow positive. Beginning in 2020, the program will hit a tipping point that sees it switch to a cash outflow, ultimately resulting in the Fund's spare cash depletion in 2034.
Image source: Getty Images.
4. 75-year actuarial deficit: 2.66%
Finally, take note of the first figure at the top of the comparison: the 75-year actuarial deficit. This figure is the Trustees' estimate of how much higher payroll taxes would have to be to completely wipe out the projected budgetary shortfall between now and the year 2090. You'll notice it actually dropped slightly from 2.68% in 2015 to 2.66% in 2016.
In plainer English, if payroll taxes were increased from their current 12.4% rate to 15.06% (an additional 2.66%), the Trustees predict that enough revenue will be collected to maintain the current benefit trajectory, including cost-of-living adjustments, for the next 75 years.
Keep in mind that a 2.66% increase to payroll taxes doesn't necessarily mean it would all come directly out of your pocket. If you're employed by someone else, then your payroll taxes are split down the middle. This means you and your employer would each pay 6.2%. Therefore, if a 2.66% payroll tax increase were enacted by Congress, then each party would be responsible for an extra 1.33%, or a total of 7.53%. However, if you're self-employed, then you'd be responsible for the full 15.06% (or 12.4% as it currently stands).
Certain proposals, such as raising the payroll tax cap, could help alleviate some of the budgetary shortfall, but the Trustees report data also clearly suggests that the longer Congress waits to act, the bigger the payroll tax increase would need to be to erase the 75-year projected budget shortfall.
Long story short, big changes are coming to Social Security over the next two decades, whether Congress acts or not.
