Please ensure Javascript is enabled for purposes of website accessibility

Here's the Timeline for Social Security Benefit Cuts

By Sean Williams - Jun 28, 2020 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

Across-the-board benefit cuts may happen sooner than you realize.

For more than eight decades, the Social Security program has played a critical role in providing a financial foundation for our nation's retired workers. According to the Centers for Budget and Policy Priorities, it singlehandedly pulls more than 15 million retirees out of poverty every year.

But it's also a program that's facing serious financial hurdles in the years that lie ahead. For each of the past 35 years, the Social Security Board of Trustees report has cautioned that there wouldn't be enough revenue collected over the long run (defined as the 75 years subsequent to the release of a report) to cover all projected outlays, including cost-of-living adjustments. While this doesn't mean bankruptcy or insolvency, it does imply that Social Security benefit cuts may become necessary to maintain program solvency.

How big would these benefit cuts be? Though the answer tends to change every time the U.S. economic outlook is altered or broad-sweeping fiscal measures are introduced, the 2020 report calls for a possible 24% across-the-board reduction to retired worker and survivor payouts. That's not negligible.

A half-emptied hourglass on a table next to a calendar.

Image source: Getty Images.

The big question is, when might this happen? Let's take a closer look at the timeline of events that could lead to a significant Social Security benefits cut.

2021: The first year of net cash outflows

You might be surprised to learn that the first in series of events is expected to occur as soon as next year.

The latest Trustees report forecast that Social Security would bring in a $4.4 billion net cash surplus in 2020, but see $21.1 billion in net cash outflows in 2021. The last time the program suffered a net cash outflow (i.e., more spending than revenue collected) was all the way back in 1982, the year before the Reagan administration passed the last major bipartisan overhaul of the Social Security program.

Although the program entered the decade with almost $2.9 trillion in asset reserves (net cash surpluses built up since inception), the projection is that almost $1.1 trillion will be gone by the end of 2029, leaving $1.82 trillion. This net cash outflow is expected to worsen every year this decade.

2034: The OASI exhausts its asset reserves (if treated separately)

Social Security is actually comprised of two trusts:

  • The Old-Age and Survivors Insurance (OASI) trust, which provides payouts to retired workers and survivors of deceased workers; and
  • The Disability Insurance (DI) trust, which supplies payments to workers that are long-term disabled.

When the Trustees examine the long-term outlook for Social Security, they hypothetically combine the financials of these two trusts into one (known as the OASDI). But if these two trusts were examined individually, the OASI is in far greater danger of exhausting its asset reserves sooner. Based on the latest report, the OASI is expected to deplete its asset reserves by 2034, at which point benefit cuts would become necessary to sustain solvency.

A Social Security card wedged between a fanned pile of cash bills.

Image source: Getty Images.

2065: The DI depletes its asset reserves (if treated separately)

By comparison, the DI Trust has a considerably longer runway before it runs into trouble. The 2020 Trustees report opines that the DI Trust won't exhaust its asset reserves until 2065, which is actually 13 years later than what was projected in the 2019 Trustees report.

According to the newest report, this change stems from a historically low rate of disability insurance applications and benefit awards, as well as reduced disability incidence rate modeling over the long run.

2035: The likeliest year when benefit cuts will be needed

Now, for the bottom line of when Social Security benefit cuts are likely. Since revenue collection can be diverted to the OASI or DI via congressional action, as necessary, the combination of the OASDI is expected to completely exhaust its almost $2.9 trillion in asset reserves by 2035.

In spite of the DI trust's 45-year runway before it runs out of its net cash surpluses, the DI Trust only accounts for $95.2 billion of the $2,897 billion that's currently held in asset reserves. Thus, the DI Trust would only add about a year of cushion to the OASI's funding shortfall. 

If Congress were to fall to act by raising additional revenue and/or reducing outlays, this 24% reduction for retired workers and survivors would be expected to take place in roughly 15 years.

An up-close view of a woman wearing a face mask.

Image source: Getty Images.

But wait -- there's more

Then again, the Trustees report is just one educated group's opinion of what might happen with the most successful social program in the United States.

One thing that the Trustees report doesn't take into account is the impact of the coronavirus disease 2019 (COVID-19) pandemic. Since Social Security's primary source of revenue is the 12.4% payroll tax on earned income, and the unemployment rate has skyrocketed from a 50-year low of 3.5% to a nearly nine-decade high of 13.3% in a couple of months, there's little question that the program's near-term income-collecting capacity has been harmed by COVID-19.

Worse yet, the coronavirus pandemic is unlikely to allow the U.S. economy to bounce back at the flip of a switch. This means long-lasting negatives for Social Security.

In a recently released analysis utilizing the Penn Wharton Budget Model (PWBM) from the University of Pennsylvania, Social Security's projected asset reserve depletion has been moved forward by two to four years, depending on the pace of the economic recovery. If the U.S. economic recovery is swift and V-shaped, Social Security will exhaust its asset reserves by 2034 instead of 2036, as the PWBM had previously forecast. But if it's a slower U-shaped recovery, Social Security could burn through its nearly $2.9 trillion by 2032, a full four years earlier than originally expected.

Keep in mind that these estimates are taking into account a large number of dynamic variables, including birth and mortality rates, net immigration, fiscal and monetary policy, the inflation rate, and economic growth forecasts, to name a few. They're not perfect or set in stone.

But one consistent message the American public has seen from these forecasts is that the need for possible Social Security benefit cuts is closing in, and lawmakers are running out of time to implement an effective fix.

The Motley Fool has a disclosure policy.

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 analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/16/2022.

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

Premium Investing Services

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