This has been a challenging year in so many respects for the American public. The COVID-19 pandemic has completely changed the way we interact with one another, and it's displaced more than 20 million workers. If you're an investor, you were also taken on a wild ride, with the stock market packing about 10 years' worth of volatility into a period of four months. And don't even get me started about the murder hornets.

But one of the few solaces working Americans have always been able to take is the idea that, if they earn 40 lifetime work credits, a Social Security benefit will be waiting for them when they retire.

A person holding a Social Security card between their thumb and index finger.

Image source: Getty Images.

The Social Security program has navigated through 13 recessions prior to the COVID-19 pandemic. Despite some obviously grim outlooks during those previous recessions, you'll note that Social Security is still here, and it's been paying continuous retired-worker benefits for more than 80 years. This is why it's often referred to as America's most successful social program.

But just because it's been a historically successful program doesn't mean it's necessarily in great shape to service future generations of retirees.

Social Security is facing a nearly $17 trillion funding shortfall

Since 1985, the annually released Social Security Board of Trustees report, which examines the short-term (10-year) and long-term (75-year) outlook for the program, has cautioned that long-term revenue collection would be insufficient to cover outlays. In other words, Social Security wouldn't bring in enough money to cover the estimated payments to all beneficiaries over the coming 75 years. Based on the 2020 report, the program's unfunded obligations have now swelled to $16.8 trillion (yes, with a "t").

How does this happen? Let me assure you that baby boomers simply being born (and now retiring) isn't the sole factor. There a more than a half-dozen factors that have played into Social Security's widening funding shortfall, including increased longevity, lower birth rates, lower levels of net legal immigration, and even income inequality.

If lawmakers fail to deal with this funding shortfall soon, the Trustees have estimated that the program will completely deplete its $2.9 trillion in asset reserves (i.e., net cash surpluses built up since inception) by 2035. What happens then is often a point of great contention.

Scissors cutting a one hundred dollar bill in half.

Image source: Getty Images.

The average retired worker benefit could be cut by more than $4,300 in less than 15 years

The good news, if there's a silver lining to pull out of this mess for seniors and future retirees, is that Social Security won't be bankrupt, even if Congress fails to act. Two of Social Security's three sources of funding -- the 12.4% payroll tax on earned income and the taxation of benefits -- are recurring sources of revenue. As long as the American public continues to work, money will be flowing into the Social Security program for disbursement to eligible beneficiaries.

On the other hand, no money left in asset reserves would mean that the existing payout schedule, inclusive of cost-of-living adjustments, would no longer be sustainable. Translation: Benefit cuts would be necessary to maintain Social Security's solvency for decades to come.

According to the latest Trustees report, the Old-Age and Survivors Insurance Trust would only be able to pay 76% of scheduled benefits once its coffers are cleaned out. Put another way, it means retired workers and survivors could face an across-the-board benefit cut of 24% by 2035.

Now, think about this for a moment. In May 2020, the Social Security Administration published data showing that the average retired worker was bringing home $1,512.63 a month. That's $18,151.56 a year for the typical retiree. A 24% benefit cut would, in May 2020 dollars, equate to a benefit cut of $4,356 a year. That's terrifying when you consider that 62% of retired workers rely on their monthly payout to account for at least half of their income.

The facade of the Capitol building in Washington, D.C.

Image source: Getty Images.

What are the options to strengthen Social Security?

At this point, all ideas are on the table to resolve Social Security's funding shortfall. But the brass tacks is that a Social Security fix involves either raising additional revenue, reducing expenditures, or instituting some combination of the two.

Most Democrats in Congress favor raising additional revenue to tackle Social Security's cash problem. This would be accomplished by increasing or eliminating the payroll tax cap associated with the 12.4% payroll tax on earned income. In 2020, all wages and salary up to $137,700 are subjected to the payroll tax, while earnings above this level are exempt. Raising or eliminating the cap would require higher-income workers to pay more into the program. For added context, the amount of earnings exempted from the payroll tax has soared from north of $300 billion in 1983 to $1.2 trillion by 2016.

As for Republican lawmakers, most prefer the idea of reducing long-term outlays to strengthen Social Security. This would be done by gradually increasing the full retirement age from its expected peak of 67 years in 2022 to as high as age 70. In doing so, future generations of retirees would have to decide between waiting longer to get their full monthly payout and accepting a steeper monthly reduction for claiming early. No matter their choice, lifetime benefits paid would decline for future generations of retired workers.

A third option exists whereby Democrats and Republicans work together on a bipartisan solution, which in my view would be the most optimal fix for Social Security.

The problem is, Democrats and Republicans each have a solution that they believe works, and have therefore been unwilling to find common ground with their opposition. This battle of political hubris is putting Social Security into a precarious position -- and the longer Congress waits to act, the more painful the fix will be on working Americans.

If lawmakers don't get their act together soon, current and future beneficiaries may be forced to prepare for the reality of losing thousands of dollars in annual income to sustain the solvency of Social Security.