The annual Social Security trustees report looks at the status of the Social Security funding and makes projections about how the program is likely to perform in the years to come. At this point, Social Security is running under a deficit with funds going out faster than they're coming in. However, the trustees say that Social Security won't go entirely bankrupt, although they admit some changes are in order to keep the program paying full benefits going forward.

The Social Security deficit

Social Security's primary source of funding is payroll taxes. If you're an employee, you'll see these taxes listed as withdrawals on every paycheck. This has worked really well for a long time thanks to the baby boomers; because there are so many baby boomers compared to other generations, while they were working, they paid far more in payroll taxes than Social Security was spending on benefits. The government put the extra money into two trust funds, one for retirement and survivor's benefits and the other for disability benefits.

Unfortunately, now that the baby boomers are entering retirement in large numbers, the bulge in the population is going in the wrong direction for Social Security's financial well-being. In other words, there are now far fewer workers to support each retiree than in the past. In 2010, the Social Security Administration began drawing interest from the trust funds to make up the gap. By 2021, they'll need to start withdrawing trust fund principal as well, and by 2034, the trust funds are predicted to run out of money.

Stacked Social Security cards

Image source: Getty Images.

Is Social Security going bankrupt?

If the trust funds do run out of money, that doesn't mean that Social Security will automatically cease to exist. After all, payroll taxes are still coming in -- they're just not enough to cover benefits at the current level. At this point, the taxes are enough to provide around 75% of currently mandated benefits. So even if the government declines to raise taxes or otherwise increase financing for the program, Social Security can keep limping along – but benefits will have to drop significantly.

Two proposed solutions

When the money coming in is less than the money coming out, you have two possible ways to solve the problem: increase income or cut expenses. Both options have been proposed as ways to resolve the Social Security shortfall.

Representative Sam Johnson (R-TX), Chairman of the House Ways and Means Social Security Subcommittee, has proposed several cuts to benefits that would bring expenses in line with income for Social Security. He suggests that retirement age be increased to 69, benefits for above-average earners should drop, and cost-of-living adjustments (COLA) should be reduced for high-income recipients.

Representative John Larson (D-CT), also a member of the House Ways and Means Social Security Subcommittee, suggests a different approach. He proposes that the combined payroll tax of 12.4% be raised by 0.1% a year until it hits 14.8% in the year 2042. He also wants to apply the payroll tax to earnings over $400,000 per year (as of 2017, the tax is applied only to earnings up to $127,200). https://www.ssa.gov/oact/cola/cbb.html Finally, he proposes a series of slight benefits enhancements, which includes using a different version of the Consumer Price Index (one that rises faster than the base CPI) to calculate COLAs.

Next steps

Social Security is widely considered the "third rail" of politics: any politician who touches it, dies. Thus, Congress will be very reluctant to cut benefits for the program. On the other hand, tax increases aren't exactly popular with the public either. So legislators are faced with two unappealing and unpopular options for fixing the Social Security deficit, which likely explains why Congress has done nothing so far even though they've known about the problem for years. While it's highly unlikely that the government will allow Social Security to fall into the projected deficit, legislators will probably wait until the last minute before acting. That's unfortunate, because the longer they wait, the smaller the trust fund surplus will become and the less money Social Security will have to draw on in future deficits.

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