Tens of millions of people rely on Social Security, but the retirement benefits program has faced financial challenges for a long time. A flood of new retirees has created a demographic imbalance in the way that Social Security traditionally funded itself, and it's now imminent that the federal government will have to start tapping Social Security's trust funds in order to keep paying benefits at the levels it has promised.
To keep the public informed about the financial condition of Social Security, the trustees of Social Security's trust funds have a legal obligation to issue an annual report. Although the full 270-page Trustees Report has large amounts of sophisticated actuarial analysis standing behind it, its conclusions are relatively easy to understand, and they underscore the size of the challenge facing lawmakers to address a steadily worsening situation. Here are the five most important things to take from the latest Social Security Trustees Report.
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1. Social Security is getting a year's reprieve
The biggest takeaway from the Trustees Report is that the hypothetical combined trust fund balances will reach zero in 2035, which is a year later than last year's 2034 projection. For the trust fund targeting retirement and survivor benefits, last year's projected depletion date of 2034 remained the same. However, with continued declines in applications for disability benefits, the report now expects the disability trust fund to last until 2052 -- fully 20 years longer than in the previous report.
That might suggest to some that simply transferring money from the disability trust fund to the retirement trust fund could be a solution. Yet because the amount of retirement benefits paid each year is so much larger than disability benefit obligations, that only buys the combined program an extra year -- leaving the broader problem unresolved.
2. Retirees will see a smaller benefit cut after 2035 than previously anticipated
Many people mistakenly believe that if Social Security runs out of money, benefits will stop immediately. Yet with continuing revenue from Social Security payroll taxes and other sources, the program will still pay the majority of promised benefits even with no other changes.
In particular, the Social Security trustees believe that the program will cover 77% of retirement and survivor benefits after the trust fund covering those benefits is depleted, unchanged from last year's levels. For disability, the program will pay 91% of scheduled benefits following that trust fund's depletion, down from 96% a year ago. On a combined basis, though, Social Security will be able to pay 80% of expected benefits -- up a percentage point from 2018's numbers and suggesting that recipients will suffer a 20% hit to their Social Security checks once the trust funds no longer have any remaining assets.
3. There are simple but painful solutions to Social Security's problems
The trustees offer a couple of solutions to Social Security's long-term financial shortfall. Lawmakers can cut benefits, raise more revenue, or use a combination of both strategies.
If lawmakers choose to keep Social Security solvent by boosting payroll taxes, it'd take a rise to 7.55% in employee wage withholding, or 1.35 percentage points higher than the 6.2% payroll tax workers currently pay. That's actually a smaller amount than last year's 7.59% figure, with similar increases applying to the employer portion of the Social Security tax.
Alternatively, benefit cuts would need to be severe to cover the shortfall. Implementing an immediate 17% reduction in all payouts both present and future would be sufficient, as would a 20% cut that applied only for those not yet receiving benefits.
4. Waiting only makes things harder to fix
It's tempting to wait until Social Security's financial crisis is right around the corner before taking action. Unfortunately, that only makes the costs of fixing the problem higher.
The trustees estimate that if lawmakers wait until 2035 to take action, it'll require a 1.825-percentage-point increase in employee payroll taxes to 8.025%, with the employer share rising by the same amount. Alternatively, a 23% reduction to all benefits beginning in 2035 would solve the problem from that point forward.
5. Even good luck wouldn't save Social Security without help
Rather than taking dramatic action, many prefer to hope that projections will prove to have been overly pessimistic. However, the trustees use statistical analysis to get a sense of how sensitive their projections are to unexpected changing conditions. Even if things turn out better than anticipated, it still won't necessarily give Americans much more time with full Social Security benefits.
Specifically, the report says that there's 95% confidence that the trust funds will be depleted between 2031 and 2044. That's a year later than 2018's prediction, but the width of the confidence interval remains fairly narrow. An easy resolution will become increasingly unlikely as those dates approach.
It's time to move forward
Some will see the change from 2034 to 2035 in the trust fund depletion date as reason to delay action on fixing Social Security's long-term problems. Yet as another presidential election gets closer over the course of the next year and a half, you can expect a permanent Social Security solution to become increasingly important in the political landscape -- and that might help finally solve the long-standing financial problems that the program faces.
