America's reliance on Social Security has likely never been higher. According to national pollster Gallup, 89% of current retired workers rely on their monthly benefit to help make ends meet. Meanwhile, an all-time high 88% of nonretirees anticipate needing their Social Security income to meet expenses during retirement.

For more than 80 years, the Social Security program has paid benefits, without fail. But there's growing concern that this financial rock of a program won't be there when millennials and Generation Z hang up their work coats decades down the line.

It begs the question: Is Social Security going broke?

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America's top social program is facing a $16.8 trillion black hole

Before answering, let's take a closer look at some of the figures and trends that are perpetuating the idea that America's top social program is doomed.

Every year for the past eight decades, the Social Security Board of Trustees has released a report analyzing the short-term (10-year) and long-term (75-year) outlook for the program. Since 1985, the Trustees have cautioned that long-term revenue collection wouldn't support outlays. In plainer English, the program would be facing a funding obligation shortfall.

In the 2020 report, the Board of Trustees projected that the program will completely exhaust its $2.9 trillion in asset reserves by 2035. These asset reserves are Social Security's net cash surpluses built up since inception. The program hasn't had an annual net cash outflow occur since 1982, but the Trustees are forecasting one in 2021 (and every year through 2035).

What's more, the program is facing an estimated $16.8 trillion cash shortfall between 2035 and 2094. For context, that's up $2.9 trillion from the 2019 report and $5.7 trillion since 2015. The longer lawmakers wait to resolve Social Security's financial shortcomings, the costlier the fix is becoming. 

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Why is Social Security in such dire financial straits?

If you're wondering how such a pivotal social program could suddenly find itself in financial distress, you should know that none of Social Security's issues are sudden. They've been building over time due to a number of ongoing demographic changes. In no particular order:

  • Boomers are retiring: Baby boomers have been leaving the workforce for more than a decade and will continue to do so for another 10 years or so. There are simply not enough new workers to offset the departure of boomers from the labor force.
  • Longevity is increasing: Over the past eight decades, the average life expectancy at birth has increased by more than 16 years. At the same time, Social Security's full retirement age has risen by less than two years. The result is that seniors are collecting payouts for much longer than initially expected.
  • Birth rates are plummeting: The past decade has seen U.S. birth rates tumble to an all-time low. Couples are waiting longer to get married, putting off having children, and taking advantage of easier access to contraceptives. Two major recessions over the last 13 years may also have couples thinking twice about having kids.
  • Net legal immigration has been halved: Legal immigration is a necessity for a healthy Social Security program. Legal migrants tend to be young and will often spend decades in the labor force contributing via the payroll tax. Over the last two decades, average annual net legal immigration into the U.S. has been nearly halved.
  • Income inequality is on the rise: The divergence between the rich and everyone else is also weighing on Social Security. The well-to-do usually have no financial constraints with regard to receiving medical care and prescription medicines. The same can't be said for everyone else. As a result, the rich are living substantially longer and pocketing bigger monthly benefit checks in the process.

These trends have been in place for a long time and are directly responsible for Social Security's nearly $17 trillion in long-term unfunded obligations.

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Relax: Social Security isn't going broke

While it's unfortunate that these demographic changes are unlikely to stop pressuring Social Security anytime soon, the program is in absolutely no danger of going broke or being insolvent. The reason has to do with how the program is funded.

Social Security generates revenue three ways:

  1. A 12.4% payroll tax on earned income
  2. The taxation of benefits over certain income thresholds
  3. Interest income earned on its asset reserves

If the Trustees are correct and the program's $2.9 trillion in asset reserves are exhausted by 2035, there won't be any interest income to collect in less than 15 years. However, the payroll tax on earned income and the taxation of benefits will continue to be collected as long as Americans keep working. These two recurring sources of income were responsible for 92% of the $1.06 trillion collected in 2019. Unless lawmakers were to drastically change how the program is funded, it's incapable of going bankrupt. The money collected from these recurring revenue sources can be disbursed to eligible beneficiaries.

However, just because Social Security isn't going broke doesn't mean there aren't potential repercussions of a nearly $17 trillion funding shortfall. If lawmakers fail to provide a fix by or before 2035, sweeping benefit cuts of up to 24% may be needed for retired workers to ensure long-term payouts.

In short, Social Security will be there when you retire -- but the monthly benefit you receive could be a bit lower than expected.