The 2018 Social Security Trustees' report was released recently, and it confirmed what we already knew -- Social Security is projected to run through its $2.9 trillion trust fund by 2034.
There are several myths about why Social Security is running out of money. These generally have to do with some form of mismanagement by the people running the program, or the government "raiding" Social Security's reserves and spending the money elsewhere. To be perfectly clear, many of the rumors you may have heard (including these two) are completely false.
With that in mind, let's clear up these unfortunate misconceptions and take a look at a chart from the Trustees' report that sums up the main problem with Social Security.
Image Source: Getty Images.
First, here's what isn't to blame for Social Security's condition
Let's set the record straight on a couple of rumors, before we talk about what Social Security's real problem is.
One common myth is that Social Security is in trouble because of waste, fraud, or generally inefficient leadership. In fact, Social Security is a highly efficient program. Last year, Social Security paid out $941.5 billion in benefits and spent just $6.5 billion on administrative costs -- just 0.7% of the program's total expenditures. And while there is certainly some fraud taking place within the program, every piece of solid evidence that exists shows that it's a relatively negligible amount.
Second, there's a myth that the U.S. government "raided" Social Security or "stole" its reserves, and that the trust fund is actually filled with a bunch of IOUs.
This is true in the sense that Social Security's reserves aren't simply a giant pile of cash sitting in a warehouse somewhere. In order to responsibly store its reserves, Social Security's excess money is invested in interest-bearing U.S. government securities. So, yes, the government "owes" Social Security trillions of dollars, but this is no different in principle than when you buy U.S. Treasuries or savings bonds. If you gave the government $1,000 in exchange for a savings bond to help fund your child's education someday, would you run around saying that the government "raided" your wallet? Of course not.
So, what is wrong with the program?
If it's not waste and fraud that's causing Social Security's troubles, and the government didn't steal all of its reserves, why is a program with nearly $3 trillion in reserves expected to go broke in less than two decades?
The answer is in two parts. First of all, senior citizens are living much longer lives than when the Social Security program was established. Even over the past decade, life expectancies have risen significantly.
For example, a 65-year-old man can be expected to live another 17.8 years on average, based on the Social Security Administration's 2015 actuarial life tables. This is more than a year longer than a 65-year-old man would have been expected to live in the SSA's 2005 tables. Similar trends can be seen for women, as well as for other ages.
In other words, the average new beneficiary today can be expected to collect their retirement benefit for a year longer than the average new beneficiary just 10 years ago. Based on the average retirement benefit of $1,365 per month, this means that today's average beneficiary will collect $16,380 more throughout their lifetime.
The second part of the problem is the massive baby boomer generation. For comparison, the baby boomer generation is estimated to be about 74.1 million people in the U.S., while the younger Generation X is estimated to consist of about 61.2 million people.
As the baby boomer generation continues to retire over the next decade and a half or so, the takeaway is that lots of people will be leaving the workforce, resulting in fewer people paying Social Security taxes and more people drawing a benefit.
The most important Social Security chart
The effect of these two issues is that there won't be enough people paying Social Security payroll taxes to support the benefits that will be paid out. Here's a chart that does a great job of illustrating this in action:
Image Source: Social Security 2018 trustees' report.
The problem is already starting to get worse. From 1980-2008, there were between 3.2 and 3.4 workers paying into Social Security for every beneficiary. By 2017, this ratio had dropped to 2.8. In fact, the only reason Social Security ran a surplus last year was the interest income on its reserves. Payroll taxes are already not enough to cover benefits.
Going forward, it's expected to get much worse. By 2035, when most baby boomers will have retired, there will only be 2.2 taxpayers for every beneficiary, and the ratio will linger between 2.0 and 2.2 for the foreseeable future afterwards.
In a nutshell, there will be one fewer person paying Social Security taxes in the future for every single beneficiary than there has been in the past. That's why Social Security is in trouble.
