The recently released 2018 Social Security trustees' report confirmed the findings from a year ago -- that the trust funds, which currently hold about $2.9 trillion in reserves, are expected to run out in 2034, just 16 years from now. After this time, incoming revenue from payroll taxes and other sources will be enough to cover 77% of promised retirement benefits.

This may seem odd. After all, Social Security has run at a surplus in recent years. In 2017 alone, the program's income exceeded its expenditures by more than $44 billion.

However, it's important to point out a couple of things. First, the program's tax revenue was not enough to cover its costs. Social Security's costs for the year were $952 billion, and its non-interest income (mostly payroll taxes) came to just $911 billion. The reason for the surplus was the $85 billion in interest income on Social Security's massive trust fund, which is invested in U.S. Treasury securities.

Social Security card inserted in money.

Image source: Getty Images.

Second, the surplus in 2017 is expected to be the last one for the foreseeable future -- unless changes are made. The projected deficit for 2018 (including the interest income) is $2 billion and is expected to get larger in the coming years.

What's the problem?

There are two main reasons Social Security's financial condition is expected to deteriorate rapidly over the next decade and a half.

For one thing, Americans are living longer and longer lives. For example, the average male who turned 60 in 1950 could be expected to live about 15.5 more years, while the average male turning 60 in 2011 can be expected to live another 21.5 years, on average. In other words, people are collecting Social Security benefits for a greater number of years than in previous generations.

Second, the massive baby boomer generation is going to be reaching retirement age over the next 17 years or so, simultaneously eliminating a large portion of the workforce paying into Social Security and adding a large number of people drawing retirement benefits.

Over the past several decades, there have been about 3.2 to 3.4 people paying into Social Security per beneficiary. By 2017, this has fallen to 2.8. By 2035, when most baby boomers will have retired, the ratio is expected to drop significantly to 2.2:1.

In other words, too many retirees will be collecting benefits, and not enough will be paying in to the system.

Closing the $13.2 trillion funding gap

The unfunded Social Security obligations over the next 75 years are estimated to be about $13.2 trillion. However, since there isn't $13.2 trillion sitting around that can be readily added to Social Security's coffers, any Social Security fix will need to come in the form of increasing revenue or decreasing expenditures, or some combination of the two.

There are two main ways to increase Social Security's tax revenue. We could increase Social Security payroll taxes across the board, for one. Currently, employers and employers each pay 6.2% of taxable payroll, and a report by the National Academy of Social Insurance estimates that by gradually raising this to 7.2% over a period of 20 years, it would take care of 52% of the funding gap. The other way involves increasing or eliminating the taxable earnings cap. By eliminating the earnings cap over a 10-year period, it would solve nearly three-fourths of the funding gap with no other changes.

As far as decreasing expenditures goes, there are a few ways to do it. Across-the-board benefit cuts are extremely unpopular, but other possibilities include raising the full retirement age, or lowering benefits for wealthy Americans.

The sooner, the better

The takeaway is that Social Security can be fixed. And, history tells us that something will be done.

However, it's important to realize that if we act sooner, it will be far less painful than waiting until the trust funds run out before dealing with the problem. To give you an idea of what I mean, the Social Security trustees' report estimates that from a tax-hike perspective, a payroll tax increase of 2.78% (1.39% each for employees and employers) would solve the funding gap for 75 years if it's done now. If we wait until 2034, when the trust fund is depleted, the required increase jumps to 3.87% (about 1.94% each).

The bottom line is that while something will likely be done, it would certainly be less painful for Americans if we tackle the looming Social Security problem sooner rather than later.

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