You might be skeptical. You've no doubt read headlines before blaring that something is the biggest, best, most important, or another extreme description. And then you find out that it was overhyped.
I truly don't think that's going to be the case this time, though. Here's what I believe really is the most important Social Security chart you'll ever see:
Image source: Congressional Budget Office.
What the chart shows
Let's first gain an understanding of exactly what this chart shows. The green line depicts revenue received each year to fund the Social Security program. This includes money from Federal Insurance Contributions Act (FICA) payroll taxes and income taxes on Social Security benefits. As a percentage of gross domestic product (GDP), revenue is projected to remain relatively steady over the coming decades.
The blue line represents annual Social Security outlays (spending) based on benefits that are scheduled to be paid. These outlays include both retirement and disability benefits.
The black dotted line shows the annual Social Security outlays based on how much the program can actually afford to pay. You might have noticed that this line crossed above the green revenue line in 2010. And I suspect you definitely noticed the steep drop in 2033 where the black dotted line begins to track the green revenue line instead of the blue line showing outlays with scheduled benefits.
Why it's so important
This chart is so important because it captures the problems that Social Security faces in one picture. The first problem, shown where the green line fell below the blue and black dotted lines in 2010, is that Social Security's incoming revenue hasn't been sufficient to fully fund benefits in over a decade.
The upward trajectory of the blue line highlights another problem: Social Security benefits will increase significantly in the future. This is a direct result of the baby boomer generation retiring and claiming benefits.
However, the biggest problem of all is underscored by the black dotted line falling off a cliff in 2033. That's the year when the Congressional Budget Office (CBO) projects the combined Social Security trust funds (the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund) will be depleted.
When this happens, Social Security won't have enough money to continue paying benefits at scheduled levels. Benefits will have to be cut by 25% beginning in 2034.
Image source: Getty Images.
What should retirees and future retirees do?
Social Security was never intended to fully fund retirement. For individuals who haven't retired yet, saving as much money as possible in other retirement accounts is a smart move.
If your employer provides a match for a 401(k) plan, you'll definitely want to at least contribute enough to receive the full matching amount. Sock away any extra money in an Individual Retirement Account (IRA) as well.
But there's arguably an even more important thing for both current and future retirees to do: Make your concerns known to your representatives in the U.S. Congress. The bleak projections on the chart will only become a reality if nothing is done to preserve scheduled Social Security benefits.
The good news is that there are multiple options available to prevent Social Security benefit cuts down the road. You might prefer some options to others, so express your views to your senators and representative.
The chart shown earlier is an important one -- for now. If reforms are made to preserve Social Security benefits, though, it could be rendered meaningless.
