Every month, more than 62 million people receive a Social Security benefit check. Nearly 45 million of these beneficiaries are seniors, with close to 43 million of them receiving a traditional retired worker benefit. Though this retired worker benefit isn't particularly large -- an average of $1,411 a month, according to Social Security Administration data from April 2018 -- it's enough to keep more than 15 million seniors above the federal poverty level, according to the Center on Budget and Policy Priorities. 

Yet for as much of a lifesaver as Social Security has been for senior citizens, it's also a program that's in some pretty big trouble over the long run.

A hundred dollar bill being cut in half by scissors.

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Social Security's problems come to a head

The newly released Social Security Board of Trustees report estimates that a big shift is occurring with Social Security right now. Though last year's Trustees report had projected that Social Security would begin paying out more in benefits than it generates in annual revenue by 2022, the passage of the Tax Cuts and Jobs Act, along with the assumed end of the DACA (Deferred Action for Childhood Arrivals) program, coerced the Trustees to change their tune in the 2018 Trustees report. In 2018, not 2022, Social Security will pay out more in benefits than it generates in revenue, by $1.7 billion. With the exception of a small retracement in 2019 -- a $0.2 billion outflow -- Social Security's cash outflow is expected to get worse with each passing year, at least through 2027. 

You're probably wondering what happened with America's most important social program that's allowed things to get so dire? What I can tell you is that it wasn't a single factor, but instead a group of problems that have manifested over time.

For instance, yes, baby boomers are somewhat to blame. But the fact that roughly 4 million boomers are reaching the eligible claiming age each year is far from the only reason Social Security is switching from a cash-flow positive program to one that's suddenly burning through its asset reserves.

Other issues include increasing longevity (Americans are living an average of nine years longer than they were in 1960), growing income inequality, the Federal Reserve keeping interest rates at or near historic lows for an extended period of time, and thusly reducing the program's interest income, and even inaction by lawmakers in Washington, D.C. You'll note that I didn't mention Congress "stealing" Social Security's funds, because that's a commonly believed myth that simply isn't true.

A senior citizen counting a fanned pile of cash bills in his hands.

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Who's ready for a big cut to their Social Security benefits?

So, what happens to Social Security now that it's beginning to burn through its $2.9 trillion in asset reserves? For the next 16 years, not much. The program will continue to burn through its asset reserves, and by 2034, it will have completely depleted its excess cash. The payout schedule to beneficiaries would likely remain unchanged during this period.

However, things get a bit dicey once we move beyond this period. According to the Social Security Board of Trustees, the Old-Age, Survivors, and Disability Insurance Trust (OASDI) -- a hypothetical combining of the Old-Age and Survivors Insurance Trust and Disability Insurance Trust -- would only be able to cover 79% of scheduled benefits through 2092. Or, in layman's terms, the average OASDI beneficiary could be looking at a 21% reduction to their Social Security benefits.

If there is a positive to be taken out of Social Security's woes, it's that the program isn't going anywhere, even if its asset reserves are completely gone. Social Security is protected from bankruptcy by the fact that it's primarily funded by its 12.4% payroll tax on wage income. As long as the American public keeps working and earning income, the payroll tax, along with the taxation of benefits to a lesser extent, will ensure that America's most important social program has funds that can be disbursed to eligible beneficiaries.

The downside here, though, is obviously that we're staring down a very big cut in benefits in the not-so-distant future. Considering that 62% of retired workers lean on Social Security for at least half of their monthly income, and 34% rely on the program for virtually all of their monthly income (90% to 100%), such an across-the-board cut in benefits could really wreak havoc on elderly poverty rates.

Two Social Security card lying on a fanned pile of cash bills.

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Hey, Congress, are you paying attention?

There is a way that Social Security's long-term (75-year) cash shortfall, estimated at $13.2 trillion, can be abated, and the payout schedule kept consistent through 2092. That solution is congressional action. Of course, getting lawmakers to agree on virtually anything when it comes to Social Security is easier said than done.

The last time there was any major overhaul to Social Security was in 1983. And, to put it plainly, the only reason reform occurred in 1983 was because the program's asset reserves were nearly gone. Essentially, Congress has waited until the last minute to fix Social Security before, and it may do the exact same thing again, since it's such a polarizing issue.

Another blunt truth about Social Security is that there are plenty of options that would fix, or significantly improve, the financial health of the program, but which have been unable to get sufficient support. This is because Democrats and Republicans each believe they have the best solution for Social Security and, as a result, neither has been willing to back down and compromise with the opposing party. Whether it's raising additional revenue by lifting or eliminating the maximum payroll earnings cap, as Democrats would prefer, increasing the full retirement age, as Republicans have proposed, or implementing some combination of these two solutions, Social Security can be completely fixed for current and future generations of retirees. Yet, without cooperation, there's simply not enough votes to pass any legislation on Capitol Hill.

So, if you're listening Congress, you better get your act together. Otherwise the American public better get comfortable answering the following question: Who's ready for a 21% cut to their Social Security benefits?

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