Americans rely on Social Security, but its financial future has been unclear for a long time. Every year, it's the responsibility of the Social Security Trustees to report on the health of the Social Security Trust Funds, which hold the assets that will help fund future retirement benefits for Social Security recipients. Once again, the trustees missed their statutory deadline and were three and a half months late getting the 2017 Social Security Trustees Report done. The report, which you can access by PDF here, is 269 pages long, but the most important aspects confirm most of what those who've followed Social Security in the past have seen for years.
1. The disability trust fund again improved, but Social Security's trust funds overall will still run out of money in 2034.
Most of the headline numbers regarding Social Security stayed the same as they've been for a couple of years now. The 2017 report repeated its previous projections that the combined overall trust fund reserves will be depleted in 2034. When you look solely at the Old Age and Survivors Trust Fund, which covers the Social Security benefits that older Americans and their families receive, 2035 is still the date at which that portion of the overall program will run out of money.
The Disability Insurance Trust Fund, however, has gotten more financially healthy. The depletion date for that fund is now 2028, five years later than it was last year. The report noted that favorable experience for applications and benefit awards for disability benefits has been helpful, continuing a trend of falling applications for disability since 2010. The number of disabled workers actually getting benefits has also fallen each year since 2014, and despite expectations that this trend would reverse itself, the numbers at the end of 2016 confirmed its continued improvement. Disability is a small portion of the overall Social Security program, so even if favorable trends continue, optimism about that trust fund won't be enough to provide a meaningful extension of time for Social Security as a whole.
2. Americans will face a benefit cut after the trust funds are depleted.
Many people mistakenly believe that once the Social Security trust funds are out of money, the program will be completely bankrupt. That's not the case, because the program gets income from Social Security payroll taxes and other sources. What will happen, though, is that recipients will only get a fraction of their scheduled benefits.
The 2017 trustees report said that following the spending of all trust fund balances, Social Security on the whole will only get enough revenue to cover 77% of scheduled benefits. When you break that down by the type of benefit, the Old Age and Survivors Fund will receive enough income to cover 75% of payments, while the Disability Fund will be able to cover 93% of what it owes beneficiaries.
3. Here's what it would take to fix Social Security's financial problems.
Trustees reports typically offer some thoughts about how to close the shortfall between Social Security's long-term financial obligations and its current financial resources. The 2017 report made a couple of suggestions about how lawmakers could immediately solve the problem, although the measures are so draconian that they would never happen in reality.
One solution would be for the government to increase the current payroll tax that goes toward Social Security. For 2017, employees pay 6.2% on the first $127,200 in wages that they earn. Employers have to match that amount with a 6.2% tax of their own. In order to cover 100% of future benefits over the next 75 years, the government would have to increase that total tax by 2.76 percentage points, bringing the overall total to 15.16%. That's considerably larger than the 2.58 percentage point increase that the 2016 report said would be necessary.
Alternatively, lawmakers could cut benefits. But even if they acted right now to cut all benefits -- including those that current Social Security recipients get -- then it would take a 17% cut to get the job done. That's up from 16% last year. If you spare current recipients but apply a reduction to future beneficiaries, the reduction would have to be even greater at 20%. That too is one percentage point higher than the corresponding figure in the 2016 report.
4. It only gets tougher to fix Social Security later.
The solutions above assume immediate action. If lawmakers wait, the actions required to fix Social Security get even harder.
The 2017 report looks at what would be necessary if nothing changes until 2034. It would take a payroll tax increase of almost 4 percentage points to close the funding gap at that point. Immediate benefit reductions of 23% would also get the job done. Those cuts won't be any more palatable in the future than they are today.
5. Social Security's date of reckoning is getting more certain.
The Social Security Trustees Report has to make assumptions about the future, and that introduces uncertainty in their projections. However, the likely range of trust fund depletion dates is getting narrower, reflecting greater visibility as the dates get closer.
Last year, the 2016 report said that it was likely that the trust funds would run out of money between 2029 and 2045, with a 95% confidence level for that range of dates. This year, the range in the 2017 report narrowed to between 2030 and 2043.
The trustees did acknowledge that under low-cost assumptions, there is a theoretical possibility that the Social Security trust funds won't run out of money. It would take higher fertility rates, slower rises in life expectancy, lower unemployment, and favorable macroeconomic factors to get to that low-cost scenario, however, and the trustees see that scenario as extremely unlikely.
Most of those who follow Social Security will dismiss the 2017 Social Security Trustees Report as having few big changes from previous years. Yet as the impending depletion of trust fund balances approaches, lawmakers have to tackle the issue with more resolve if they want to avoid huge problems within the next 15 to 20 years.
The Motley Fool has a disclosure policy.