The Social Security program has had financial challenges for a long time, and retirees are increasingly worried about its future. Although the latest report from the Social Security trustees regarding the financial health of the trust funds that support benefit payments pushed out the time they're expected to run out of money by a year from 2034 to 2035, few believe that this year's respite is likely to repeat itself.

In response to the threat, many have come up with potential solutions to fix the Social Security financial crisis. They include a wide range of proposals. Some favor raising revenue through higher payroll taxes. Others like the idea of cutting benefits, either through dramatic measures like widespread reductions in payments or with more subtle moves like reducing the pace of inflation-related upward adjustments to benefit checks. Still, others have suggested even broader changes to Social Security that would add more benefits, with funding proposals that would impose even larger taxes on those paying into the system.

The task of getting lawmakers in Washington to agree to a solution for Social Security is so monumental that few believe it can ever get done. Yet the reality of the situation is far simpler to understand -- and the eventual solution will almost certainly leave Social Security looking very similar to how it looks right now.

Two dice on top of a Social Security card.

Image source: Getty Images.

The size of the problem

The 2019 Social Security trustees report went into detail about the scope of the problem facing the program. Right now, revenue from Social Security payroll taxes, income taxes on benefits, and interest on trust fund balances is almost exactly the same as what the program pays out in benefit payments. However, with the demographic shift in the U.S. population leading to more retirees collecting benefits and fewer workers paying into the Social Security system through payroll taxes, the trustees anticipate that the program will start having to tap the trust funds to continue to make benefit payments at their current level.

According to the report, once the trust funds run out of money in or around 2035, revenue for retirement and survivor benefits will be enough to cover 77% of benefits scheduled to be paid out. The corresponding number on the disability side of the program is 91%. When you combine the two trust funds, the revenue coming in would be enough to pay 80% of the amounts expected to go to Social Security recipients.

The obvious conclusion to draw from that analysis is that benefits will drop by 20%. However, the practical answer demands looking more closely at the finances involved.

The easy out for lawmakers

Instead of actually fixing the problem, the easiest thing for government officials to do will be simply to provide external government funding for benefits. By supplementing existing revenue sources with contributions from the general fund, the funding gap will be closed at the expense of widening overall budget deficits.

The scope of the problem makes such a move less politically disastrous than one might think. Consider the current size of Social Security, which in 2018 paid total benefits of $988.6 billion. If you take 20% of that amount, you'd have $197.7 billion.

That's a considerable amount of money, but it's only about a quarter of the $779 billion budget deficit that the U.S. government posted in its 2018 fiscal year. It's an even smaller fraction of the nearly $900 billion budget deficit expected in the federal government's current fiscal year.

Given a choice of cutting benefits for 60 million or more Social Security recipients or adding a relatively small incremental amount to an already ballooning budget deficit, it's easy to guess which path lawmakers are likely to choose. Despite the fiscal imprudence of allowing the national debt to keep rising, history suggests that legislators will take the lazy course of action and force future generations to foot the bill.

Prepare for whatever comes

None of this will stop policymakers from proposing changes to Social Security in the name of strengthening its financial condition. And indeed, lawmakers in the 1980s did set their disagreements aside and found consensus in making real reforms to the program. However, in the current political environment, it's still most likely that Washington will do nothing until 2035 is a lot closer -- and even then, taxpayers will probably end up footing the bill for their elected officials' inaction.