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Will Social Security Be Solvent When You Retire?

In less than a month, the Social Security program will celebrate its 85th anniversary of being signed into law. Over that period, it has provided uninterrupted payments to eligible retired workers for more than 80 years, and is responsible today for pulling an estimated 22 million people out of poverty every year.

These figures would imply that Social Security is a bulletproof social program, but that's not the case.

A person holding a Social Security card between their thumb and index finger.

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Social Security is staring down nearly $17 trillion in unfunded obligations

Each year, the Social Security Board of Trustees releases a report on the short-term (10-year) and long-term (75-year) outlook for our nation's top social program. Since 1985, the Trustees have cautioned that long-term revenue collection would be insufficient to cover outlays. Or, in English, Social Security isn't expected to bring in enough income to cover all of its expected costs in the 75 years following the release of a report.

Although Social Security currently has almost $2.94 trillion in asset reserves (i.e., net cash surpluses built up since inception), the latest Trustees report estimates that the program will begin spending more than it brings in next year. That would be the first time that's happened since 1982. The problem is that these net cash outflows, brought on by a slew of ongoing demographic changes, are only expected to worsen with each passing year. By 2035, it's estimated that Social Security will have completely exhausted its asset reserves.

The big question is: Then what? If Social Security exhausts its more than $2.9 trillion in asset reserves and is facing an estimated $16.8 trillion in unfunded obligations between 2035 and 2094, is there any chance that it'll be solvent and there for you when you retire?

A person filling out a Social Security benefits application form.

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Yes, you can count on Social Security being there

While there's no question the data presented by the Trustees report is bleak, there is a silver lining for current and future retired workers: Social Security will be there for you. The program generates income three ways, and its two recurring sources of revenue are its key to longevity. These three income sources are:

  • A 12.4% payroll tax on earned income, up to $137,700 in 2020.
  • The taxation of Social Security benefits on individuals and couples earning above pre-set income thresholds.
  • Interest income earned on the program's asset reserves.

Interest income, while important, isn't a recurring source of revenue. This is to say that as Social Security's asset reserves dwindle, it'll be generating less in the way of interest income. If these asset reserves are gone by 2035, the program won't be able to bring in any interest income.

By comparison, the 12.4% payroll tax on earned income and the taxation of Social Security benefits can continue indefinitely. As long as people continue to work, payroll tax revenue and income from the taxation of benefits will be collected for disbursement to eligible beneficiaries.

The fact is, the only way Social Security won't be there for you when you retire (no matter when you eventually do) is if lawmakers in Washington, D.C., change how the program is funded. And there's pretty much no chance of that happening, because no political party or lawmaker wants to be responsible for compromising the most successful social program in history.

Scissors cutting a one hundred dollar bill in half.

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Future Social Security payouts could face steep cuts

The fact that Social Security will be solvent when you retire is good news. The bad news is the program's survivability isn't the same as its payout sustainability.

If lawmakers continue to sit on their hands and kick the can down the road on Social Security's very clear funding shortfall, the program will exhaust its asset reserves in 15 years. Should this happen, the Trustees have projected that the Old-Age and Survivors Insurance Trust, which pays monthly benefits to retired workers and the survivors of deceased workers, could face an up to 24% reduction to benefits. Based on what the average retired worker brings home a year from Social Security, this works out to an annual reduction of more than $4,350. That's worrisome when you consider that 62% of retired workers net at least half their income from Social Security.

To be clear, lawmakers have an abundance of solutions at their disposal to raise additional revenue, cut outlays, or do some combination of the two. But since any solution involves some group of people being worse off than they were before, lawmakers are hesitant to make any changes, because it could cost them their elected seats. The result of this inaction is that Social Security's funding shortfall keeps widening with each passing year.

Ultimately, the cost to fix Social Security is likely to fall on working Americans, meaning the longer Congress waits to act, the more painful that fix will be. Americans shouldn't worry about Social Security lasting until they retire. Rather, they should be worried about what percentage of their expected payout could disappear if lawmakers don't fix things relatively soon.

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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.

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