Most people have heard about the financial challenges that the Social Security program faces. As the generation of baby boomers enters retirement, the payroll taxes that they've contributed to the system throughout their careers will turn instead toward withdrawals in the form of retirement benefits. Despite having established Social Security Trust Funds to save up for this long-expected demographic shift, the amount that the trust funds have been able to set aside is insufficient to cover the long-term expenses that the program will incur.

Every year, the trustees of the Social Security Trust Funds are required by law to issue a report on the financial condition of the program. The Social Security Trustees did a better job this year in being not quite as late with their report, but unfortunately, the news didn't improve from the warnings that they gave in 2017. You can access the full 270-page report PDF here, but the five points below neatly condense what the trustees said in voluminous detail in their full report.

Two Social Security cards and a $100 bill laid out on a flat surface.

Image source: Getty Images.

1. Social Security is still expected to run out of money in 2034

Last year, the Trustees Report expected the theoretical combined Trust Fund balances to run out in 2034, and that's the same projection that this year's report made. Technically, there are two separate funds, one to hold disability insurance reserves and the other to hold the money that gets paid out as old age and survivors benefits. The prospects for those two funds went in different directions over the past year. For the disability fund, projections last year had indicated that its assets would run out by 2028, but favorable experience in disability applications and benefit awards allowed that portion of the program to extend its depletion date four years into the future, to 2032. In contrast, the old age and survivor insurance fund saw its expected date of running out of money pulled forward a year, to 2034.

In the past, lawmakers have taken steps to even out the two trust funds when they've threatened to get out of balance. In particular, a shift in the way that payroll tax revenue gets allocated between disability and old age benefits in late 2015 helped prevent an immediate depletion of disability trust fund assets. Similar moves should ensure that both trust funds run out of money at roughly the same time, but they can't by themselves solve the potential problem.

2. Retirees can expect a smaller decline in benefits after 2034

It's a common myth that once the Social Security Trust Funds run out of money, Social Security benefits will cease entirely. That's not the case, because the program will still be able to receive revenue from payroll taxes and income taxes on benefits. However, based on current projections, that money won't be enough to cover the program's costs, in part because as trust fund balances decline, the amount of interest that the investments the trust funds hold will fall as well.

Last year, the Social Security Trustees believed that the program would be able to provide just 77% of benefit payments overall following the depletion of the trust funds. That was composed of 93% of disability fund benefits and 75% of old age and survivors benefits. The 2018 report saw some improvements on these lines, with the overall figure improving to suggest Social Security will be able to pay 79% of combined scheduled benefits. The corresponding percentages for the two individual funds are 96% for disability fund benefits and 77% for old age and survivors benefits. Every little bit helps, but a cut of more than 20% for most retirees would be devastating for many, given the financial challenges older Americans already face.

3. How lawmakers could solve the problems Social Security faces

There are two fairly simple ways that Social Security could make changes that would ensure the indefinite financial viability of the program. Raising the rate of payroll taxes that workers and employers have to pay into the Social Security program is one solution, while reducing the benefits that the program pays is an alternative.

If lawmakers wanted to increase payroll taxes in order to solve the Social Security funding problem, they'd have to boost the tax that employees pay from the current level of 6.2% to 7.59%. Employers would face a similar-sized increase in the share of payroll taxes that they pay into Social Security. The total tax of 15.18% would be very slightly higher than the 15.16% projection that the trustees made in 2017, continuing an upward trend from past years.

If lawmakers instead chose to reduce benefits, they'd need to make dramatic reductions. If they cut all benefits, both among current and future Social Security participants, then they'd have to implement a 17% reduction in overall payouts, matching the same figure as last year. Alternatively, they could choose only to cut benefits on future beneficiaries, leaving current recipients unchanged. That would require a 21% cut to future benefits, up from the 20% estimate in the 2017 report.

Neither of these moves is realistic, as lawmakers have been reluctant to make even small changes to the program over time. Nevertheless, they show the extent to which dramatic action is necessary even with trust fund depletion still 16 years into the future.

4. The cost of procrastination is high

In all likelihood, Washington will wait to make substantial changes to Social Security until the crisis is much closer to actually happening. That procrastination comes with a high price, as even more aggressive action would be necessary at that time.

In particular, if lawmakers do nothing until 2034, they'll have to boost payroll taxes to a total of 16.27%, split in even 8.135% parts between employees and employers. Alternatively, all benefits would need to be cut by 23%. Neither of those solutions is particularly attractive or feasible for current and future retirees, but some combination of them will be inevitable if Washington refuses to act before then.

5. Even good luck wouldn't save Social Security without help

Some people are inherently suspicious about the statistics that the Social Security Trustees use in their annual report. Yet the trustees themselves incorporate confidence-interval testing to support their projections, and as time goes by, experts are getting more confident in their predictions.

Specifically, the report says that there's 95% confidence that the trust funds will be depleted between 2030 and 2043. Those are the same dates as predicted last year, but the confidence interval has narrowed over the past several years. As years go by, you can expect even greater confidence in a narrowing range of likely dates for final trust fund depletion.

Demand action

It's easy to ignore annual updates like the 2018 Social Security Trustees Report, especially when they don't have much new information that people weren't aware of before. However, as the day of reckoning grows nearer, it'll be increasingly incumbent on us to put pressure on Washington to address the Social Security issue head-on and find a reasonable solution sooner rather than later.

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