It's the five words today's seniors and millions of working Americans probably don't want to hear, but it's the truth: Social Security is in trouble.
For 78 years, Social Security has been making payments to eligible beneficiaries, and in the process, keeping a number of them above the federal poverty level. An analysis from the Center on Budget and Policy Priorities from 2016 suggests that 22.1 million beneficiaries owe their ability to live above the federal poverty level to their guaranteed Social Security checks.
Social Security will survive, but it won't look the same
But this program, which so many retirees are currently leaning on or will rely on in the years and decades to come, is just an estimated 16 years from an inflection point, according to the latest Social Security Board of Trustees report released in early June. Beginning in 2018 and continuing with each subsequent year, Social Security will be paying out more in benefits than it generates in revenue.
Even though this net cash outflow will start off small ($1.7 billion in 2018 and $0.2 billion in 2019), it's expected to accelerate with each passing year, beginning in 2020. By 2027, per the intermediate-cost model, $169 billion more in benefits will flow out of Social Security than is expected to be collected in revenue.
Obviously, the program can't continue running a deficit forever. Since the last major Social Security reform in 1983, it's built up approximately $2.9 trillion in asset reserves. However, it's expected to take just 16 years to completely exhaust these reserves, such that by 2034, there'll be nothing left, assuming no additional revenue is raised or cost-cuts implemented by lawmakers.
What does this mean exactly? Well, the silver lining is that Social Security won't be bankrupt, despite whatever myths and misinformation might be out there. The only way Social Security could go bankrupt is if there were no more money flowing into the program. Thankfully, two of its three funding sources -- the 12.4% payroll tax on earned income and the taxation of benefits -- would continue to supply Social Security with income that can be disbursed to eligible beneficiaries.
But the depletion of these asset reserves suggests that the current payout schedule isn't sustainable. The Trustees have opined that an across-the-board cut of up to 21% may be needed to sustain payouts through the year 2092 without any further cuts. Considering that more than 3 out of 5 current retirees lean on their Social Security checks for at least half of their monthly income, a 21% haircut could prove disastrous.
Here's when Congress is likely to tackle Social Security's issues
As for Congress, it's well aware that Social Security is headed toward trouble. Each and every Trustees report for the past 33 years has included a Trust Fund depletion date ranging between 2029 and 2050 (currently it's 2034). This probably has you and a lot of the American public wondering when Congress is going to fix this mess. While no one knows that answer for certain, I'm of the opinion that lawmakers will wait until the 11th hour to work out a bipartisan bill to support Social Security (i.e., 2033 or 2034).
Though there are a number of Social Security amendments that've been passed since its inception, the program has only been in serious trouble once before. This was "resolved" with the passage of the amendments in 1983 that gradually increased the payroll tax and full retirement age, as well as established the taxation of benefits, among other things.
However, this resolution in 1983, along with comments made by President Trump in March 2013, offer clues as to how lawmakers are likely to approach fixing Social Security.
For example, while the Reagan administration amendments are hailed as saving Social Security, they were passed during the 11th hour by necessity rather than good judgment. Congress witnessed the Social Security program pay out more in benefits than it generated in revenue beginning in 1975 and observed the trust fund ratio -- a measure of the program's asset reserves at the end of the year divided by expenditures for that year, expressed as a percentage -- decline in each and every year since 1970. In other words, lawmakers knew for more than a decade that Social Security was headed in the wrong direction but punted the issue down the road so many times that by 1983, they had no choice but to deal with it.
The other clue comes from comments made by Donald Trump at the Conservative Political Action Conference in 2013. Said Trump, courtesy of the Washington Times:
As Republicans, if you think you are going to change very substantially for the worse Medicare, Medicaid and Social Security in any substantial way, and at the same time you think you are going to win elections, it just really is not going to happen... What we have to do and the way solve our problems is to build a great economy."
Effectively, Trump is suggesting that it's political suicide for politicians to tackle Social Security's issues. While it eventually has to be dealt with, the truth of the matter is that all Social Security solutions involve someone coming out as a loser.
If, for instance, the payroll tax cap is raised or eliminated, then the rich will have to pay more into the program, despite not receiving one extra cent in lifetime benefits. Meanwhile, if the full retirement age were increased, future retirees would have their lifetime benefits reduced while protecting existing retirees. No matter what tough choices need to be made by lawmakers, someone will come out a loser -- and apparently no lawmaker wants to be responsible for making that call.
All we can do is hope Congress comes to its senses sooner rather than later. In the meantime, I'd suggest you continue saving and investing for your future such that Social Security never becomes more than a Plan B or C.