Please ensure Javascript is enabled for purposes of website accessibility

Is Social Security Really in Trouble?

By Todd Campbell – Nov 22, 2018 at 9:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here's what you need to know about Social Security's bankruptcy risks.

Social Security is an important source of retirement income for millions of Americans. And since most people have little in retirement savings, there's significant concern that if Social Security were to go bankrupt, it would have dire consequences for the elderly. Is Social Security's future financially secure, or should you be nervous that this critical financial safety net is failing?

What's at stake?

Social Security provides critical retirement income to 9 out of 10 Americans over age 65.

A man in a suit lies flat to create a bridge between two rocks.


Although the program is designed to replace about 40% of the average worker's preretirement income, 48% of married couples and 69% of single retirees rely on it for 50% or more of their income, and it accounts for 90% or more of retirement income for nearly one in five married retirees and 44% of single retirees.

The heavy reliance on Social Security in retirement is especially concerning because the average income received by retirees is relatively small. After a 2.8% cost-of-living increase for 2019 is factored in, the typical person will only collect $1,461 per month next year.

Is bankruptcy in its future?

In this pay-as-you-go program, payments to the 43 million retired workers collecting Social Security today are funded by a 12.4% payroll tax on current workers.

In the past, the number of workers exceeded the number of people collecting Social Security benefits, so Social Security was running a surplus. However, a surge in retirees caused by aging baby boomers has led to Social Security payments outstripping payroll tax revenue since 2010.

Fortunately, the extra money collected by Social Security during the surplus years was set aside in a trust fund, and until this year, the interest earned on investments held in that fund has closed the gap between the program's income and spending.

Unfortunately, interest income alone isn't going to make up for the shortfall from here on out. By 2030, every baby boomer will be over age 65, and by 2035, there will be more seniors than children for the first time in America's history. A surge in seniors means Social Security will have to start tapping the principal in its trust fund next year, and by 2034, the trust fund will be entirely wiped out.

The inability to meet its obligations once the trust fund is empty won't bankrupt the program, but it will force a severe 25% cut across the board to all recipients' benefits.

A balance scale with a clock on one side and a dollar sign on the other side.


Running out of time

This year isn't the first time that Social Security's spending has outstripped its revenue and threatened its future. It also happened in 1982. 

The last time around, Congress made important changes in 1983 to put Social Security back on solid financial ground, including increasing payroll taxes, raising the full retirement age, and subjecting some Social Security to federal income taxes when a retiree's income is above specific levels.

The difference this time is that there doesn't appear to be enough willpower in Washington, D.C., to solve the crisis sooner rather than later. A slate of changes similar to those enacted in 1983 has been suggested, but nobody has put forth a bill with those changes yet. That's a shame, because the sooner Congress acts, the less onerous any fixes will have to be.


The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.