Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Uh-Oh! Social Security's 36-Year Streak Is in Serious Jeopardy

By Sean Williams - Nov 23, 2019 at 6:06AM

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

Social Security's problems can no longer be swept under the rug, according to this new data.

For the past eight decades, Social Security has played a pivotal role in providing a financial foundation for our nation's retired workforce. Today, close to 45 million retired workers receives a benefit check from the program each month. Additionally, more than an estimated 22 million workers, which includes the disabled and survivors of deceased workers, are collectively being kept out of poverty as a result of their guaranteed monthly payout.

Unfortunately, our country's most successful social program is facing a plethora of problems that could weaken its ability to financially protect low-and-middle income retired workers and their families. We know this, because the Social Security Board of Trustees has been predicting an unwanted shift in the program anytime now.

A person tightly gripping a Social Security card between his thumb and index finger.

Image source: Getty Images.

Social Security hasn't had a net cash outflow since 1982

Since 1985, every annual report from the Board of Trustees has predicted that long-term revenue -- that is, revenue collected over the next 75 years from the date of a given report -- would be insufficient to cover long-term expenditures. More specifically, not only would costs outweigh income, but every cent in assets reserves, which is the net cash surplus the program has built up since inception, would be exhausted well before this 75-year period is up.

Despite these repeated warnings, lawmakers on Capitol Hill have mostly kicked the can further down the road. This is by no means for lack of solutions. Rather, it has to do with the fact that any amendments to Social Security would require bipartisan support, which has been virtually impossible to achieve in the Senate in recent decades.

These warnings from the Board of Trustees aren't likely to be taken seriously until the program expends more than it collects in revenue for a given year. In the 2019 report, the Trustees estimated that 2020 would be the first year of a net cash outflow since 1982. However, this 36-year streak looks to be in serious jeopardy this year, at least based on newly released investment holdings data from Social Security.

A fanned pile of one hundred dollar bills lying atop a fanned pile of U.S. Treasury bonds.

Image source: Getty Images.

Social Security's asset reserves have declined from where they began the year

Although it's not exactly a well-known fact, the Social Security Administration (SSA) is required by law to invest the program's net cash surpluses into a mixture of special-issue government bonds and (to a far lesser extent) certificates of indebtedness. These are exceptionally safe investment tools that allow the program to generate interest income on nearly $2.9 trillion in asset reserves. Last year, Social Security received a little over $83 billion in interest income on its asset reserves.

Because the SSA is regularly purchasing new special-issue bonds, or having existing bonds mature, it provides a monthly report available to the public that details its holdings. More importantly, this monthly investment holdings report provides an aggregate figure of just how much the combined Old-Age and Survivors Insurance Trust and Disability Insurance Trust have in asset reserves.

As of the end of Dec. 2018, Social Security had $2,895,174,946,000 in asset reserves. But as of the end of Oct. 2019, Social Security had $2,886,912,310,000 in combined asset reserves. In layman's terms, Social Security has spent $8.26 billion more than it's generated in revenue on a year-to-date basis, through October. While there are still two months to reverse this trend, it's very possible that Social Security's 36-year streak of building up its asset reserves is close to ending. This would be the final straw that demonstrates Social Security is in trouble.

A pile of one hundred dollar bills, with Ben Franklin's eyes peering out from between the bills.

Image source: Getty Images.

A good news/bad news scenario

Now, there is some good news buried among this data. Namely, that despite all of Social Security's mounting problems, it has absolutely no chance of becoming insolvent or going bankrupt. That means you'll be receiving a Social Security retired worker benefit when you retire (assuming you qualify for one), whether that's in five, 20, or 50 years from now.

Even though there is a real possibility that one of Social Security's three sources of income (interest earnings) could disappear by 2035, the program's two remaining sources of income -- the 12.4% payroll tax on earned income and the taxation of benefits -- ensure that it can't go bankrupt. As long as Americans continue to work, payroll tax revenue, and to a smaller extent the taxation of Social Security benefits, will provide cash that can be freely distributed to eligible beneficiaries.

That's the good news. Now for the not-so-great news.

Although Social Security is at no risk of going bankrupt, this imminent shift toward an environment where the program is expending more than it's collecting is proof that its existing payout schedule is unsustainable. In other words, Social Security's survivability isn't in question, but the sustainability of its current payout very much is. Unless Congress were to amend Social Security prior to 2035 to generate new revenue and/or reduce program expenditures, retired workers could be looking at an across-the-board benefit cut of up to 23%. That's certainly not going to sit well with the 62% of retirees currently leaning on Social Security for at least half of their monthly income.

To be clear, there's still time for lawmakers to act to strengthen Social Security. Perhaps a year of net cash outflows from the program might be the wake-up call that Washington needs.

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 service.

Stock Advisor Returns
652%
 
S&P 500 Returns
142%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/09/2021.

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

Our Most Popular Articles

Premium Investing Services

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