Social Security is a critical resource that tens of millions of seniors rely on when they hang up their work gloves for good. According to April 2018 data from the Social Security Administration, nearly 45 million seniors were netting a Social Security benefit, with close to 43 million of them receiving the retired worker benefit. Out of these retirees, some 62% are reliant on Social Security for at least half of their monthly income, while just over a third (34%) depend on Social Security's guaranteed monthly check for essentially all of their monthly income (90% to 100%).
The fact that Social Security has been around for 83 years, and has been making payments to retired workers for 78 of those years, is a comfort to seniors who may need a financial foundation during retirement. But, truth be told, Social Security itself isn't in the best of shape.
Remember that big change coming to Social Security in 2022?
In an annual report released last summer by the Social Security Board of Trustees, it was estimated that Social Security was just a few years away from a monumental change. Having generated more revenue than what it was paying out to beneficiaries since 1982, the Trustees projected that by 2022 the program would begin paying out more in benefits than it was collecting in revenue. Or, to put it in even simpler terms, Social Security's excess cash that it's saved up over more than three decades would begin to dwindle.
Why would this switch even occur in the first place, you ask? It has to do with a confluence of factors, but can be succinctly summarized by saying that the ongoing retirement of baby boomers, a steady lengthening of life expectancies, inaction by Congress, and growing income inequality are mostly to blame.
What happens when Social Security's asset reserves start going down? Well, as you might rightly imagine, people panic. Though these folks do have every right to be concerned, the good news is that under no circumstances can the program go bankrupt. Social Security generates most of its revenue from a 12.4% payroll tax on wage income between $0.01 and $128,400, as of 2018. As long as Americans keep working, money will continue to flow into the program, which ultimately can be disbursed to eligible beneficiaries.
However, the 2017 Trustees report -- and virtually every Trustees report since the mid-1980s -- was very clear of one thing: The current payout schedule isn't sustainable. The 2017 report estimated that the program's asset reserves would be completely depleted in 2034, upon which an across-the-board cut in benefits of up to 23% may be needed to guarantee payouts through the year 2091. Between 2022 and 2034, Social Security was expected to burn through approximately $3 trillion in excess cash.
Big change is happening, right now
However, the newly released 2018 report from the Social Security Board of Trustees paints an even scarier picture for retirees. Rather than Social Security waiting until 2022 before it pays out more in benefits than it generates in revenue, that event is now anticipated to occur this year. In 2018, Social Security is expected to see $1.7 billion more head out to beneficiaries than is collected by the program.
Should this surprise anyone? Well, yes and no. On one hand, Social Security's cost has exceeded its annual noninterest revenue -- i.e., payroll tax revenue plus income from the taxation of benefits -- since 2010. Keeping in mind that the Board of Trustees' annual report is nothing more than an estimate, it's not too shocking to see this monumental switch occurring earlier than expected.
On the other hand, it is somewhat unnerving how far off the 2017 Trustees reports' short-range estimates (those looking at the upcoming 10-year period) were for the Old-Age, Survivors, and Disability Insurance Trust (OASDI) in relation to where they are now for the intermediate-cost model.
|Year||2017 Trustees Report||2018 Trustees Report|
|2017||$58.6 billion increase||N/A|
|2018||$44.7 billion increase||$1.7 billion decrease|
|2019||$29.3 billion increase||$0.2 billion decrease|
|2020||$16.8 billion increase||$16.7 billion decrease|
|2021||$3.3 billion increase||$32.9 billion decrease|
|2022||$18.2 billion decrease||$51.9 billion decrease|
|2023||$46.4 billion decrease||$73.8 billion decrease|
|2024||$75.7 billion decrease||$96.3 billion decrease|
|2025||$108.9 billion decrease||$122.4 billion decrease|
|2026||$143.8 billion decrease||$137.5 billion decrease|
|2027||N/A||$169 billion decrease|
As you can see, the new report projects a worse cash outflow each year, with the exception of 2026. Rather than Social Security's asset reserves declining by nearly $395 billion in the short-range forecast, as estimated in the 2017 Trustees report, it's now projected to decline by just over $700 billion in 10 years. Ouch!
According to the Trustees report, the passage of the Tax Cuts and Jobs Act, along with the assumed discontinuation of the DACA program, caused the Trustees to adjust their short-range forecast model this year.
There are a few silver linings
It is worth noting that the 2018 Trustees report did offer minor concessions of good news for seniors, given their reliance on the program. For example, even though Social Security is expected to begin depleting its asset reserves four full years ahead of last year's estimate, the long-range asset reserve exhaustion year remains 2034. In other words, Social Security's outlook didn't get noticeably worse, at least through 2034.
Also, assuming lawmakers are unable to come to a resolution in terms of raising additional revenue for the program, the across-the-board cut in benefits needed to sustain payouts over the next 75 years would be an estimated 21%, which is a bit better than the 23% called for in last year's report. Nevertheless, a 21% cut in benefits is bound to be felt by the more than three in five seniors that leans on Social Security for at least half of their monthly income.
Ultimately, this report serves as a reminder to today's working Americans that Social Security was never designed to replace more than 40% of their working wages. With long-touted (and worried) changes finally here, perhaps this'll be the impetus to get working Americans to save more, as well as to push lawmakers on Capitol Hill to fix Social Security for current and future beneficiaries.
The Motley Fool has a disclosure policy.