Few, if any, social programs shoulder the importance that Social Security does. Each and every month, more than 62 million people, many of whom are age 65 and over, receive a benefit check.
Of these aged beneficiaries, the Social Security Administration notes that 62% count on the program to provide at least half of their monthly income. Sixty-two percent! Suffice it to say, without the guaranteed monthly payout that the program has provided for the past 78 years, we'd likely be staring down an elderly poverty rate problem.
Unfortunately, the mere existence of Social Security may not be enough to avoid calamity for seniors in the years that lie ahead.
Social Security's issues loom large
According to the newly released Social Security Board of Trustees report for 2018, America's most important social program is transforming before our eyes, whether we're ready for it or not. Beginning this year and for the first time in 36 years, Social Security will pay out more in benefits than it generates in revenue. Though this net cash outflow is only estimated at $1.7 billion using the intermediate-cost model, it's expected to really start accelerating in 2020 and beyond. Through 2027, approximately $700 billion of Social Security's $2.9 trillion in built-up asset reserves is expected to be gone.
What the heck is happening that's causing Social Security to be turned on its head? It's a combination of factors that includes the ongoing retirement of baby boomers, which is lowering the worker-to-beneficiary ratio, a steady lengthening of life expectancies over many decades, growing income inequality, and the inaction of Congress.
And don't think for a moment that the trouble ends with the short-range forecast (defined as 10 years by the Trustees). According to the long-range forecast (defined as 75 years), there's an estimated $13.2 trillion cash shortfall between 2034, the year where the program's asset reserves are expected to run out, and 2092.
Confidence is high that Social Security's excess cash will soon disappear
There's an important point to keep in mind when reviewing forecasts from the Trustees. Though they're very forthcoming with projections and data, they are, ultimately, only estimates. Laws change, demographics shift, immigration patterns adjust, and longevity, birth, and death rates can change. These factors, along with the health of the U.S. economy, can impact the outlook for Social Security.
As you'll note, the most commonly used projection from the Trustees is the intermediate-cost model. However, the report also presents a low-cost and high-cost model for a number of topics. Though these models are far less likely to come true in the future, these projections aren't impossible, either.
When it comes to Social Security's $2.9 trillion in asset reserves, the aforementioned 2034 depletion estimate is the midpoint of the Trustees' stochastic modeling (i.e., there's a 50% confidence rate of complete exhaustion by 2034). Comparatively, that confidence rate is in the low single digits for exhaustion by 2030 and closer to 100% by 2043. Based on the Trustees' intermediate-cost model, there's a 95% confidence rate that Social Security's asset reserves will be gone between 2030 and 2043, which is 12 to 25 years from now.
What Social Security's asset-reserve depletion actually means
The idea of Social Security sitting on $2.9 trillion in asset reserves right now and having $0 by sometime in 2034 probably sounds terrifying -- and it is. But the depletion of this excess cash is often a source of great confusion and can be cleared up right now.
Declining asset reserves and a lack of excess cash by 2034 doesn't mean Social Security is bankrupt or that the program doesn't work. Though one of the three sources of funding for Social Security will gradually disappear -- the interest income earned on its asset reserves -- the other two sources of funding ensure that Social Security cannot go bankrupt. The 12.4% payroll tax on earned income and the taxation of benefits respectively provided $873.6 billion and $37.9 billion out of the $996.6 billion the program collected in 2017.
As long as Americans keep working, the payroll tax on wage income and the taxation of benefits will keep money flowing into the program for disbursement to eligible beneficiaries.
What this asset-reserve depletion does signal is that the current payout schedule isn't sustainable beyond 2034. The Trustees' report projects the need for an across-the-board cut in benefits of 21% to sustain payouts through 2092, assuming Congress doesn't generate any new revenue between now and 2034. That's what's really scary about this whole mess -- a potential haircut to current and future retirees of 21% a month.
Thus, the more than 62 million current beneficiaries and roughly 175 million covered workers are waiting for lawmakers to hash out a solution. But if history is any indication of what to expect, Congress will probably wait until the last possible moment to fix the program. Since "hope" isn't a solid retirement strategy, these annual Trustee reports are a regular reminder that reducing your reliance on Social Security, as well as saving and investing for the future, is the only prudent strategy.