Social Security’s Long-Term Cash Shortfall, Quantified

When it comes to America’s most important social programs, it’s pretty hard to top Social Security. Aside from the fact that it provides a benefit to more than 62 million people each month, the Center on Budget and Policy Priorities has found, via an analysis, that Social Security benefits are responsible for keeping in excess of 22 million people (including 15.1 million seniors) out of poverty. It truly is a financial foundation for millions of retired workers.

However, it’s also a program that’s in pretty deep trouble. According to the newly released Social Security Board of Trustees report, Social Security is in the midst of a major change. After generating positive cash flow since 1982 — i.e., collecting more in revenue than it’s paid out in benefits to eligible recipients — the program is expected to pay out $1.7 billion more in benefits this year than it collects in income. Beyond 2019, this outflow is expected to grow in size with each passing year.

Image source: Getty Images.

The Social Security blame game

Why is Social Security struggling? A lot of finger-pointing is often directed at baby boomers, approximately 4 million of whom are hitting the Social Security’s eligibility age each year. As boomers retire, the worker-to-beneficiary ratio is expected to fall, putting greater pressure on those remaining in the workforce to supply payroll tax revenue for those who are retired.

A relatively steady increase in life expectancies over the long run has also played a role in pressuring Social Security. What was once a program designed to benefit low-income seniors for a few years during retirement has turned into a financial lifeline that some folks will rely on for decades. Since 1960, the average life expectancy in the U.S. has jumped by about nine years.

Lesser-known issues that have worsened Social Security’s outlook include growing income inequality and a lack of congressional action.

In terms of income inequality, the issue is that the well-to-do have access to preventative care and medicine without any financial constraints. Lower-income folks may not have preventative care access, and/or the ability to afford medicine. This has pushed life expectancies for the rich well beyond those with low incomes, thus allowing the wealthy to collect a Social Security benefit for an extended period of time. And since annual earnings are one of the many factors that go into calculating an individual’s Social Security retirement benefit, it also means that these wealthier folks are receiving a well-above-average monthly check, further pressuring Social Security.

Then there’s Congress, which has been playing kick the can with Social Security for decades. The last major overhaul to the program occurred in 1983, and was necessitated because the program was in danger of exhausting what little cash reserves it had at the time. In other words, lawmakers waited till the last possible moment to fix Social Security in 1983, and may do the same thing once again.

Image source: Getty Images.

How much cash does Social Security need to not cut benefits?

So, what does the future hold for America’s most important social program? According to the latest Board of Trustees report, Social Security will pay out more in benefits than it collects in revenue for each of the next 16 years. Over that time, the nearly $2.9 trillion in asset reserves that were built up over the previous 35 years will be drained. By 2034, the Trustees report projects that this excess cash will be completely exhausted.

On one hand, the idea of depleting Social Security’s spare cash probably sounds terrifying. There is, however, a bit of a silver lining among all of Social Security’s woes: Social Security isn’t going bankrupt. Even if Social Security’s extra cash is completely gone, the program would still continue to generate income thanks to its 12.4% payroll tax on wage income between $0.01 and $128,400 (as of 2018) and the taxation of benefits.

On the other hand, removing this excess cash from the equation means that Social Security’s payout schedule isn’t sustainable. The Trustees have estimated that, if lawmakers don’t raise any additional cash, an across-the-board cut to benefits of 21% may be needed to sustain payouts over the long term (75-year period), through 2092.

Of course, if Congress is able to raise additional revenue for Social Security, reduce its long-term expenditures, or institute some combination of revenue raising and cost saving, benefit cuts may prove unnecessary.

Just how much cash does Social Security need to remain solvent at the current payout schedule? The report notes that there’s a $13.2 trillion cash shortfall between 2034 and 2092, which is up $0.7 trillion from the 2017 report and is $1.8 trillion higher than the 2016 report. Essentially, the longer lawmakers wait to act, the larger Social Security’s cash shortfall grows over the long term.

Image source: Getty Images.

The real kick in the pants

Perhaps the biggest headscratcher of all is that there’s no shortage of solutions to fix Social Security’s funding shortfall. Unfortunately, lawmakers in Congress can’t find a middle ground between the Democrats’ and Republicans’ core proposals.

Democrats have proposed raising or eliminating the maximum taxable earnings cap associated with Social Security’s payroll tax. As noted, wage income between $0.01 and $128,400 is subject to Social Security’s payroll tax in 2018. However, any wage income earned above $128,400 is exempt from this tax. Democrats propose raising or eliminating this limit, thereby subjecting more income from the well-to-do to added taxation. This extra tax revenue collected from the wealthy should completely bridge Social Security’s cash shortfall through 2092.

Meanwhile, Republicans have proposed gradually raising the full retirement age from a peak of 67, which will be hit in 2022, to somewhere between ages 68 and 70. Raising the retirement age would help account for increased longevity and, over the long run, reduce the program’s expenditures. Though there would be no effect on current retirees, such a move could impact today’s working Americans set to retire in perhaps two decades or beyond. This reduction in cash outflow could also completely cover Social Security’s estimated $13.2 trillion cash shortfall through 2092.

Both of these core proposals work — and that’s the problem. Since each party believes they have the golden ticket to fix Social Security, neither side has been willing to compromise and find a middle ground with the other party. Without finding common ground, getting enough votes to pass any sort of meaningful overhaul to Social Security is going to be nearly impossible.

With Congress having shown a penchant for waiting until the last possible moment to fix Social Security, it’s looking ever more likely that Social Security’s long-term cash shortfall may continue widening in the years to come.

The $16,728 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.

You May Also Like

About the Author: Over 50 Finance