For better or worse, Social Security is a program leaned on by a growing number of aged beneficiaries each month. As of November, 43.7 million retired workers were receiving a monthly benefit, with 62% of these retirees leaning on Social Security for at least half of their income.

However, this indispensable program that's been laying down a financial foundation for senior citizens over a span of nearly eight decades is facing what might be its biggest challenge since inception. As some pundits have suggested, it's "running out of money."

Dice and casino chips lying atop two Social Security cards.

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Here's why so many folks believe Social Security is headed toward insolvency

How could Social Security "run out of money"? The thesis is that the program is facing a number of ongoing demographic changes that are increasing its expenditures at a much faster rate than its collected revenue. These changes include the retirement of baby boomers, increased longevity over many decades, growing income inequality, lower recent fertility rates, and even congressional inaction caused by a growing divide between Democrats and Republicans.

According to the latest Social Security Board of Trustees report, the program was set to expend more than it collects in 2018 for the first time in 36 years. This inflection point is viewed as a tangible wake-up call that the existing payout schedule isn't sustainable and that Social Security is in genuine trouble.

How much trouble, you ask? Let's take a look at a handful of recent surveys to get an idea.

In June, the Transamerica Center for Retirement Studies released its 18th annual report that examined various aspects of retirement preparedness among American workers. The survey, which questioned 6,372 people, noted that 76% were either strongly or somewhat concerned that, when they're ready to retire, Social Security wouldn't be there for them. 

This also jibes with a Pew Research Center survey from 2014 that found that 51% of millennials didn't expect to receive a dime from Social Security during retirement. In other words, there's the very real belief that Social Security is on a collision course with insolvency.

A fanned pile of hundred-dollar bills lying atop fanned Treasury bonds.

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Americans' big misunderstanding

The fact of the matter is that most Americans are misconstruing what "running out of money" actually means when it comes to Social Security.

The aforementioned Trustees report forecast that the program would endure a net cash outflow in 2018 of $1.7 billion and that, following a minor reprieve in 2019, this net cash outflow will balloon in 2020 and beyond. Understandably, Social Security can't continue to expend more money than it collects, which'll force it to lean on its nearly $2.9 trillion in reserve assets. These asset reserves, as required by law, are invested in special-issue Treasury bonds that are yielding an average of about 2.9%. In 2017, these bonds helped generate $85.1 billion in interest income for Social Security.

As time moves on and these annual net cash outflows grow in size, the amount of excess cash the program has will indeed dwindle. In fact, the Trustees have projected that, at the current payout schedule, Social Security will have completely exhausted its almost $2.9 trillion in asset reserves by 2034.

Now, here's what most folks don't understand: Yes, Social Security's excess cash will have run out, but the program itself will not be out of money. In reality, as long as the American public keeps working and Congress doesn't change how the program is funded, it'll be impossible for Social Security to ever run out of money.

A smiling senior woman holding a neat pile of cash bills in her outstretched hands.

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Social Security, thankfully, can't run out of money

You see, Social Security has three sources of funding right now:

  1. A 12.4% payroll tax on earned income between $0.01 and $132,900
  2. The taxation of Social Security benefits over certain earning thresholds
  3. The interest income generated from its asset reserves

If Social Security's excess cash goes away, this third form of funding (interest income) will disappear. However, workers would continue to pay into the system via the payroll tax, which comprised more than 87% of the $996.6 billion collected in 2017. Higher-earning taxpayers that are receiving Social Security benefits would also contribute via the taxation of benefits. Put another way, Social Security would still have plenty of money coming in that it could divvy out to eligible beneficiaries. It doesn't need a cent in excess cash to survive.

But running out of excess money does mean that Social Security's payout schedule isn't sustainable. According to the Trustees report, this would lead to an across-the-board reduction in benefits of up to 21% by 2034.

Long story short, Social Security isn't running out of cash in the traditional sense that a lot of folks think it is. The program's excess cash could very well run out, and benefit cuts of up to 21% could follow, but there's absolutely no indication that Social Security payments will cease.

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