It's the five words you never thought you'd hear during your lifetime: "Social Security is in trouble." As much as you'd like to think it's just a bad dream, it's a reality, according to the latest report from the Social Security Board of Trustees.

Big cuts to benefits may be in the offing

Released in early June, the newest annual report from the Trustees highlights an expected cash shortfall of an estimated $13.2 trillion over the long run, which is defined as the next 75 years, through 2092.

A Social Security card standing up on a table, with the name and number blurred out.

Image source: Getty Images.

More specifically, the program is set to hit an inflection point this year. For the first time in 36 years, Social Security will expend more than it collects. Although this net cash outflow will be relatively small at first ($1.7 billion in 2018), it's expected grow rapidly beginning in 2020 and with each subsequent year. By the time 2034 rolls around, the $2.89 trillion in cash that Social Security has built up since inception is forecast to be depleted.

Often a source of confusion, the exhaustion of Social Security's excess cash isn't an end-all for the program. The silver lining for Social Security is that it has two recurring sources of revenue -- the 12.4% payroll tax on earned income of up to $128,400 (in 2018), and the taxation of benefits -- that provided it with 91.5% of collected income in 2017. Even without the interest income the program earns on its excess cash, there would be more than enough revenue collected each year to make payouts to eligible beneficiaries.

The downside, of course, is that this net cash outflow clearly demonstrates the unsustainability of the current payout schedule. Without an infusion of extra revenue and/or a reduction to expenditures, the existing payout schedule won't continue beyond 2034. Instead, the more than three out of five retired workers who are counting on their monthly check for at least half of their income could face a reduction in benefits of up to 21%.

The bare minimum to fix Social Security

There are, however, fixes for this mess offered by lawmakers on Capitol Hill, as well as the Trustees.

One figure regularly touted by the Trustees is what's known as the "actuarial deficit." It's essentially a figure that describes the funding shortfall between 2034 and 2092 and what it would take to fix things right now. The "right now" part is especially important, as the longer Congress waits to act, the costlier the fix gets for American workers.

Two Social Security cards lying atop a W2 tax form, highlighting payroll taxes paid.

Image source: Getty Images.

The actuarial deficit represents the increase (expressed as a percentage) needed in the payroll tax to all working Americans to generate enough additional revenue that no cut to benefits is needed through 2092. As noted, the current payroll tax rate is 12.4%. If you're self-employed, you pay this full rate. Meanwhile, if you're employed by someone else, your employer covers half of your payroll tax responsibility (6.2%), with the remainder (6.2%) falling on your shoulders.

As of 2018, the actuarial deficit is 2.84%. In other words, the payroll tax would need to rise by 2.84% to 15.24% (7.62% for employed workers) in order to generate enough additional income that no cut to benefits would be needed. The actuarial deficit projection also assumes that there would be enough money left in the trust fund reserves to cover one full year of expenditures by 2092. This would, in the best estimate of the Trustees, save Social Security.

But it's not actually the bare minimum that could be done to resolve this crisis. A somewhat unpublicized figure from the Trustees report is the "necessary tax." If Congress were OK with the idea that the program would have no excess cash by the time 2092 rolled around, the payroll tax could be increased by 2.78%, or six basis points less than the actuarial deficit. This would, presumably, entail no cuts to benefits over the next 75 years, but it'd put the program in bad shape, once again, when 2092 rolled around.

Here's what the public wants

Of course, if you asked the public, they wouldn't want to see an across-the-board payroll tax hike. Rather, the most popular solution would be to raise or eliminate the maximum taxable earnings cap associated with the payroll tax.

This year, all earned income between $0.01 and $128,400 is subject to the payroll tax. Any earned income above this amount it exempted from the tax. This means that the fewer than one in 10 workers who earns above this amount won't pay tax on some, or most, of their income.

A well-to-do businessman placing crisp hundred-dollar bills into two outstretched hands.

Image source: Getty Images.

The solution would be to raise this tax cap to say $250,000 or $400,000 (two arbitrary figures that've been thrown around by Democrats in Washington) or to just eliminate it entirely. In doing so, fewer than 10% of workers would be affected, since over 90% are already paying tax on every dollar they earn. Ultimately, it would require high-earners to pay more, resolving the $13.2 trillion cash shortfall.

So, why aren't we taxing the rich? The biggest problem with this solution is that the cap exists for a reason -- namely because there's a cap on benefits at full retirement age as well. It wouldn't make a lot of sense to tax $5 million in earned income per year if the maximum retirement benefit an individual could receive is $2,788 a month at full retirement age.

There's also that "little" issue of getting enough votes in the Senate to pass amendments to Social Security. Democrats and Republicans have virtually nothing in common when it comes to resolving Social Security's cash shortfall, which means neither party has been willing to find common ground with their opposition. This stalemate ensures that an increase to the maximum taxable cap remains off the table.

In short, a fix remains a long way off.

The Motley Fool has a disclosure policy.