People have worried about the financial condition of the Social Security system for decades, and every year, many people look to the annual release of the report from the trustees who oversee the trust fund for Social Security. This year, the 2015 Social Security Trustees Report came almost four months later than its legal March 31 deadline, but the 266-page report (opens PDF) released on Wednesday has everyone's attention once again focused on the financial prospects for the key source of financial support for tens of millions of American retirees. Let's look more closely at the 2015 Social Security Trustees Report to pick out the most important pieces of information about the financial health of the program and how likely it is that you'll get all the benefits you expect.
1. Social Security's financial status remained little changed, but disability recipients are in bigger trouble than retirees.
This year's Social Security Trustees Report largely had slightly favorable conclusions about the financial health of the program's trust funds. For the Old Age and Survivors side of Social Security, which is what funds benefits for retirees and their families, the trustees expect that the program will be able to pay full benefits until 2035, which is a year later than it expected in last year's report. After that date, the report says that tax revenue from payroll taxes and other sources will provide enough funds to cover $0.79 of every dollar of benefits due under the law. These projections assume that no legislative changes to Social Security get made.
The problem, though, is that the situation for the Disability Insurance portion of Social Security is much more immediate and dire. The Trustees still expect the Disability Trust Fund to run out of money next year, which is the same deadline it has had for several years now. The large number of baby boomers who haven't yet hit retirement age but who have become disabled have left the Disability Trust Fund in poor financial shape, and although making the transition to retirement benefits could ease the Disability Trust Fund's burden, it's likely too late to avoid a problem without more dramatic action. Proposals to make transfers from the Old Age and Survivors Trust Fund would meet the immediate need, but it would also move up the date on which the total program's money runs out to 2034. That figure is also a year later than forecast last year.
2. Substantial changes now would be needed to ensure Social Security's future.
The 2015 Social Security Trustees Report then turned to some of the possible solutions that would be necessary in order to avoid a catastrophic loss of benefits for Social Security recipients in the future. Two solutions took the spotlight: increasing payroll taxes or cutting benefits for current or future beneficiaries.
Using the payroll tax as the sole means of boosting revenue would require a substantial increase to the current tax rate. According to the trustees, it would take a raise in payroll taxes by 2.62 percentage points to make it likely that retirees and other recipients could keep getting benefits through 2090. Thanks to some changes in methodology as well as new parameters about expected long-term growth, this tax hike is less than last year's projection for a 2.83 percentage-point increase. Yet it would still take the current employee Social Security payroll tax up from 6.2% to 7.51%, with employers also shouldering an identical increase in their tax burden on their employees' behalf.
Cutting benefits would also be costly for current and future beneficiaries. It would take an immediate benefit cut of 16.4% to close the funding gap if it applied to everyone entitled to receive Social Security. That's a full percentage point better than last year. Yet if you limit benefit cuts to those who haven't yet started receiving Social Security, then fewer people would be affected, but the required benefit reduction would balloon to 19.6%. The measures aren't mutually exclusive, as a combination of the two methods or some other alternatives could give Social Security more options.
3. Social Security's assumptions have some wiggle room, but you should still be worried.
The Social Security Trustees Report methodology has some inherent uncertainties, and the report admits that you can't take its baseline projections as inevitable. Therefore, Social Security does a sensitivity analysis for its findings by using different sets of assumptions on which to base its conclusions. This analysis gives a better sense of the range of likely outcomes rather than a simple straight-line projection.
If the high-cost assumptions, which assume low fertility rates, longer life spans, higher unemployment, and lower wage differentials and interest rates, prove to be correct, then the trust fund would run out of money as early as 2028. Lower-cost assumptions, which use the opposite set of parameters, could theoretically even allow the Social Security Trust Fund to survive through 2090 with a positive balance.
The report doesn't believe that those extreme cases are particularly likely to occur, putting just a 5% probability of Social Security running out of money outside the range between 2029 and 2046. That's still an extensive period of time, but the variables on which Social Security's solvency relies are simply too difficult to predict that far out into the future to have the certainty you'd prefer to have. Moreover, those dates are one to two years later than last year's equivalent figures, giving Americans some hope that Social Security's condition isn't as troubling as many think.
The 2015 Social Security Trustees Report's results were far from the worst they could have been, but they still indicate that policymakers need to work together to find long-term solutions in the quest for funding your dream retirement. Without that assistance, it'll be hard for you to make firm plans about your retirement going forward.
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