As many Americans are probably well aware, Social Security -- arguably the most important social program in this country -- is in deep trouble. Despite the fact that roughly three out of five elderly beneficiaries rely on Social Security to provide at least half of their monthly income, this vital program is on the verge of a major shift -- and it's all spelled out in the newly released forecast from the Social Security Board of Trustees.

Spare some change? Like $12.5 trillion of it?

According to the latest annual report from the six-member Trustees board, Social Security's asset reserves are set to peak around $3 trillion by 2022. However, in 2022, the program will begin paying out more in benefits than it's generating in revenue via payroll tax, interest on its asset reserves, and taxes on benefits. By 2034, the aforementioned $3 trillion in spare cash is expected to be completely exhausted.

A Social Security card wedged in between cash bills.

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Now, it's important to keep in mind that even if Social Security runs out of excess cash, it doesn't mean the program is insolvent. A vast majority of the funding for Social Security comes from the payroll tax on working Americans, meaning that as long as Americans keep working, money will continue flowing into Social Security for disbursement to eligible beneficiaries.

However, there's worrisome news: The benefit levels that current recipients are used to, and that pre-retirees and working Americans expect when they quit their jobs for good, may need to be cut. According to the latest report, Social Security's long-term cash shortfall (with "long-term" defined as the next 75 years through 2091) jumped by $1.2 trillion to $12.5 trillion in the 2017 report.

Mind you, this $12.5 trillion shortfall is simply what's needed to keep Social Security solvent at current benefit levels (and assuming historically average cost-of-living adjustments). The Trustees have estimated that a 23% cut to benefits beginning in 2034 would resolve the $12.5 trillion shortfall, but it would also take a serious bite out of seniors' monthly income.

Three reasons why Social Security is facing a major budgetary shortfall

Why the need for $12.5 trillion? After all, that's no drop in the bucket.

For starters, it reflects the mass retirement of baby boomers from the workforce. The retirement of more than 10,000 boomers a day for almost two decades is set to drag the worker-to-beneficiary ratio lower, meaning there aren't enough new workers, or payroll tax revenue being generated from these new workers, to counteract the rise in boomers who are eligible for a Social Security benefit.

A baby boomer pondering his Social Security claiming options.

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But this is far from just a boomer issue, because life expectancies have also been rising. Over the past five decades, we've witnessed the average American's life expectancy increase by nearly nine years.  Social Security's architects never intended it to be a program that people lived off of for decades, but that's exactly what it has become.

The rich are also part of the problem, through no fault of their own. They can afford medical care more easily than low-income retirees, so in addition to receiving larger monthly payments (because benefits are based on lifetime earnings), they're living longer on average.

A view of the facade of the Capitol building in Washington, D.C.

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What's Congress to do?

Congress essentially has three choices at this point -- and a rapidly shrinking window in which to make a decision.

On one hand, Congress could choose to boost revenue for the program to make up for the $12.5 trillion cash shortfall. Arguably the easiest way to do this is to lift payroll taxes on all working Americans, adjust the maximum earnings payroll cap, or eliminate the cap altogether. The latter of these proposals is very popular among the public, as it would only affect Americans earning more than $127,000, and it's a key component of many Social Security proposals from Democrats in the House and Senate.

As of 2017, all earned income between $0.01 and $127,200 is taxable by Social Security at a rate 12.4%. Though this might sound like a lot, if you work as an employee for someone else, your employer covers half of this tax, or 6.2%. This means the average American worker is only responsible for a 6.2% tax on earned income up to $127,200. Though this maximum taxable figure often moves up annually in step with the wage index, it still means that roughly one out of 10 workers' income is partially exempt from payroll tax. Since 90% of workers are paying into Social Security with every dollar they earn, they believe it's only fair that the wealthy do, too. Completely eliminating the payroll tax cap is believed to be more than enough to keep benefits steady through 2091.

The words "time to retire" written and circled on a calendar.

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Congress could also choose to increase the full retirement age, which is a solution that Congressional Republicans often favor. Increasing the full retirement age, or the age at which you become eligible for 100% of your monthly payment, would either make seniors wait longer to receive 100% of their benefit or require them to take a bigger permanent reduction if they claimed early. Raising the full retirement age would certainly reduce program payouts, but it would also more accurately reflect our increased longevity.

Lastly, and by far the least popular among the public, Congress could just do nothing and cut benefits by the estimated 23% come 2034. That's a pretty harsh notion for a majority of boomers who are expected to rely on Social Security income during retirement. Then again, the prospect of a steep cut to future benefits might be just the visual catalyst needed to encourage Generation X, millennials, and Generation Z not to follow in their parents' and grandparents' footsteps by failing to save enough to support themselves during retirement.

What will Congress do? No one knows for sure, but they'd better figure it out pretty quickly for the sake of our nation's seniors.

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