Social Security is in Danger, But to What Extent?

Social Security isn’t just a check many retired Americans receive each month. It’s a financial lifeline which helps them stay above the federal poverty line and helps make ends meet. According to the Center on Budget and Policy Priorities, the existence of the program income keeps over 22 million people out of poverty each year. More than 15 million of which are retired.

However, this vital program is preparing to have some significant changes in the coming years. The last Social Security Board of Trustees report estimated the program would pay out more in benefits than it’s generating in revenue starting in 2022. In 2034, the $3 trillion in asset reserves that accrue over the previous 40 years, could be completely drained.

What Would Happen if Social Security Exhausts its Asset Reserves?

Social Security’s asset reserves and their possible depletion is a significant source of confusion for Americans both working and retired. Many people think it won’t be there for them when they retire because of the thought that the excess cash from the program could disappear in a dozen years.

If you look at Social Security as a business, things do seem pretty dire. Ever since 1983, the cash flow has been positive for the program every year. Through these years, about $3 trillion in excess cash has built up. These funds have invested in primarily special-issue bonds and some, although to a lesser extent, certificates of indebtedness.

However, between 2022 and 2034, cash outflow could accelerate each year. This outflow is a result of the retirement of baby boomers, longer life expectancies, growth in income inequality, and below-average interest rates that impact the interest income of the program. Therefore, by 2034 there won’t be any extra cash so long as Congress remains stagnant in making changes to the program.

Payroll Tax is Social Security’s Best Friend

The main contributor to Social Security is the payroll tax. In 2016 it accounted for $836.2 billion of the $957.5 billion in the program. This process ensures that Social Security can never go bankrupt. So long as Americans continue to work and make income and Congress keeps the process of Social Security funding, those eligible will still benefit from the program.

So while Social Security can’t run out of money, the program is still in trouble.

Because of the predicted drying up of the reserve, it’s possible the current payout schedule isn’t sustainable. Unless Congresses raises additional revenue or finds another way to help cash shortages, benefits may need cutting by nearly 23%.

With most retirees depending on this program to live, the 23% cut could be devastating and increase elderly poverty rates. Social Security will still be there for everyone, but perhaps not as much as it has been in past generations.