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$700 billion will disappear from Social Security's coffers in next decade

The Motley Fool logo The Motley Fool 7/5/2018 Sean Williams

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For nearly eight decades -- it began payouts in 1940 -- Social Security has been a financial rock for a number of retired workers. Today, it's a program that more than 60% of all aged beneficiaries rely on to provide at least half of their retirement income. And, looking forward, Gallup's April 2018 survey suggests it's a program that 84% of nonretirees will need in some capacity to make ends meet during retirement. 

But for as great as Social Security has been for retired workers, the disabled, and survivors of deceased workers, the nation's most important social program is about to hit its biggest speed bump in history.

Say goodbye to $700 billion

The newly released annual report from the Social Security Board of Trustees highlights some very big changes that are now underway with the program. Beginning in 2018, and continuing with each passing year, through 2034, Social Security will be paying out more in benefits than it's generating in revenue. That hasn't happened since prior to the reforms passed during the Reagan administration in 1983.

In 2018, an estimated $1.7 billion more in benefits will paid to eligible beneficiaries than is collected in revenue via the payroll tax, interest earned on its asset reserves, and the taxation of benefits. Though this net cash outflow will lessen modestly in 2019, it will reaccelerate in a big way in 2020 and beyond, according to the intermediate-cost model, as shown (all figures are estimated):

  • 2018: $1.7 billion net cash outflow
  • 2019: $0.2 billion net cash outflow
  • 2020: $16.7 billion net cash outflow
  • 2021: $32.9 billion net cash outflow
  • 2022: $51.9 billion net cash outflow
  • 2023: $73.8 billion net cash outflow
  • 2024: $96.3 billion net cash outflow
  • 2025: $122.4 billion net cash outflow
  • 2026: $137.5 billion net cash outflow
  • 2027: $169 billion net cash outflow

Adding this net cash outflow up works out to an outflow of $702.4 billion over the next decade. In the process, the Old-Age, Survivors, and Disability Insurance Trust's asset reserves will drop from just north of $2.89 trillion to $2.19 trillion by the end of 2027. 

Why's this happening, you ask? It's due to a combination of factors that includes the ongoing retirement of baby boomers, the lengthening of life expectancies over many decades, and growing income inequality, to name a few.

Things get much worse after 2027

Of course, based on the projections of the Trustees, $700 billion disappearing from Social Security's coffers is peanuts compared to what's expected to happen between 2028 and 2034. According to the intermediate-cost model, the remaining $2.19 trillion will disappear, leaving the program with no excess cash by 2034.

If there is good news here, it's that Social Security doesn't need any money in its asset reserves to continue paying benefits to eligible beneficiaries. Though interest income will disappear without any cash in its coffers to buy special-issue bonds, the 12.4% payroll tax on wage income of up to $128,400 (as of 2018), and the taxation of benefits to a lesser degree, will ensure that revenue continues to stream in, which can then be disbursed to beneficiaries.

Please keep in mind that these are estimates from the Trustees and that they do tend to change a bit with each passing year. Also, understand that the above figure are based on an average-cost model. If costs come in substantially lower or higher than expected, that would certainly change the dynamics of the program.

But as things stand now, Social Security's payout schedule isn't sustainable. By 2034, an estimated across-the-board cut to benefits of 21% may be needed to sustain payouts through the year 2092, without any additional reductions. That's not exactly a rosy outlook for those folks who are heavily reliant on their monthly Social Security check.

All eyes turn to a fix

Given the crucial role Social Security plays in the lives of older Americans, it's up to Congress to carve out a solution that supports current and future beneficiaries to the best of their ability. But the path lawmakers propose taking to fix Social Security differs greatly by political party.

Though Democrats have offered a bevy of solutions, none has been more consistent than the call to raise of eliminate the maximum taxable earnings cap associated with the payroll tax. Right now, any wage income above $128,400 is exempt from the payroll tax, which provides a means for a small percentage of workers (less than 10%) to escape taxation on some of their earnings. As Democrats have argued, these well-to-do individuals can likely afford to pay more into Social Security, thusly lowering or cancelling out the estimated $13.2 trillion cash shortfall the program is facing between 2034 and 2092.

Meanwhile, Republicans have no shortage of proposals of their own. Yet none is more prevalent than the idea to gradually raise the full retirement age, which is the age you become eligible to receive 100% of your retirement benefit, as determined by your birth year. Currently set to peak at age 67 by 2022 for those born in 1960 or later, Republicans would prefer to see this figure raised to between age 68 and 70 to account for increased longevity. In doing so, workers would either wait longer to receive their full payout or accept a steeper permanent reduction in their payout by claiming early. Either way, it saves Social Security money over the long run.

Arguably, the biggest issue in finding a Social Security fix is political hubris. Since both the Democrats' and Republicans' core proposals would, in theory, eliminate Social Security's long-term (75-year) cash shortfall, neither party has been willing to compromise with their opposition. This stalemate is only making things worse, as any proposed "fix" is going to require more drastic measures the longer lawmakers wait to implement it.

In sum, Social Security is headed toward deep trouble, and the inaction of politicians is making it worse.

Related gallery: 15 finer points about Social Security that you should know

The ins and outs of the program: Sooner or later, the odds are good that you'll count on Social Security to provide you with much-needed income at a key point in your financial life. Whether retirement is the first time you claim benefits or you have to receive disability benefits earlier in life, Social Security offers core financial support when you need it. Yet the ins and outs of Social Security can be complicated, making it difficult to figure out exactly what you're entitled to receive. The following 15 points offer some useful details about how Social Security works and what you can do to get the most from the program.ALSO READ: 96% of Americans Are Not Taking Advantage of This Social Security Benefit 15 finer points about Social Security that you should know

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