Surprise! Social Security Has Been in Trouble for a Lot Longer Than You Probably Realize

If you've ever wondered just how important Social Security is to the average American retiree, here are two statistics to knock your socks off.

First, according to the Social Security Administration, 62% of current aged beneficiaries lean on the program to provide at least half of their monthly income. This data is similar to an April 2018 Gallup poll that found 90% of seniors are in some capacity reliant on Social Security income to make ends meet, including 57% who lean on it as a "major source" of income.

A Social Security card wedged in between fanned cash bills.

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The second jaw-dropper, courtesy of the Center on Budget and Policy Priorities, notes that nearly 15.1 million retired workers (and 22.1 million beneficiaries, as a whole) were being kept out of poverty solely as a result of their monthly benefit checks. It's simply that important of a program.

However, it's also a social program with well-documented problems.

We're 16 years from possible disaster

According to the Social Security Board of Trustees' newest report, released in early June, the program is facing an inflection point this year . Based on the intermediate-cost model, $1.7 billion more in benefits is expected to be paid out than the program generates in revenue. This net cash outflow will be Social Security's first in 36 years.

With the exception of 2019, this deficit is expected to accelerate with each passing year, leading to the complete exhaustion of its $2.9 trillion in asset reserves by 2034. Should the Trustees' forecast come to fruition, an across-the-board cut to benefits of up to 21% may be needed to sustain payouts through 2092.

To be clear, Social Security can and will motor on whether it has excess cash or not. Money will continue to flow into the program via its 12.4% payroll tax on earned income and from the taxation of benefits, albeit to a far lesser extent for the latter.

An accountant closely examining figures from his printing calculator while chewing on a pencil.

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Social Security's problems are older than you realize

But what you may not realize is that this isn't a true inflection point for Social Security. That actually occurred all the way back in 2010. Eight years ago, the income generated by the payroll tax plus the taxation of benefits (i.e., non-interest income) was eclipsed by the benefits being paid to eligible beneficiaries.

For the past seven years, interest income earned from Social Security's portfolio of special-issue bonds and certificates of indebtedness has generated enough to keep the program cash flow positive each year. However, interest isn't a guaranteed source of income for the program. In fact, as it begins paying out more in benefits than it generates in revenue, its excess cash will dwindle .

Even with higher interest rates, and therefore better bond yields, interest income is expected to decline on an annual basis. The short-term intermediate-cost model projects a drop in interest income from $85.1 billion in 2017 to around $78 billion by 2027.

Put in another context, if we were to look at Social Security as a business, it's been in deep trouble since 2010, with its costs exceeding its ongoing sources of revenue.

Congress has known for an even longer period of time that Social Security wasn't on solid footing. Each year, the Trustees report examines a long-term (75-year) outlook for the program, and in every year since 1985, a trust fund depletion date has been forecast. Though the forecast has varied wildly, from as early as 2029 to as late as 2050, the point is all the same: Congress has known for 33 years that legislation would be needed to prop up Social Security.

A blue Democrat donkey and a red Republican elephant butting heads.

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Two viable solutions that are miles apart

The question then turns to whether or not Social Security can be fixed -- and the simple answer is yes, it can. In fact, there are two very viable ways to resolve the program's estimated $13.2 trillion cash shortfall between 2034 and 2092.

So why haven't either of those solutions been implemented? Well, that comes down to politics .

Republicans, who currently have control of the legislative branch of the government, would prefer to gradually raise the full retirement age to account for increased longevity. When Social Security was first signed into law in 1935, payouts were only anticipated for a few years after the average worker retired. Today, the average 65-year-old will live for another two decades.

By raising the full retirement age -- the age when you become eligible for 100% of your benefit -- it would coerce aged beneficiaries to either wait longer to receive their full benefits or accept a steeper reduction in their benefits if claiming early. Either way, it reduces the lifetime benefit paid to beneficiaries and saves the program a lot of money.

Comparatively, Democrats would prefer to raise revenue by increasing taxes on the wealthy . Currently, the payroll tax has a maximum taxable earnings cap of $128,400. This means that all wage income below this figure is subject to Social Security's 12.4% payroll tax, while income above this amount is exempt.

Only a small percentage of workers earn above this amount, meaning that over 90% of working Americans are paying into Social Security on every dollar they earn. By raising or eliminating the $128,400 figure (which adjusts annually with the National Average Wage Index), the wealthy would be required to pay more, thus raising revenue and eliminating the imminent cash shortfall.

To be clear, both of these plans work individually and would work if spliced together. Unfortunately, with both parties believing they have the superior solution, and neither party wanting to be blamed for altering Social Security, the stalemate drags on.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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