Who's Ready to Kiss Up to 23% of Their Social Security Benefit Goodbye?
Sean Williams, The Motley Fool
Updated
Just as we go to our doctor's office for an annual physical, Social Security just completed its annual checkup with the Board of Trustees, and as you might have imagined, it didn't go all that well.
Since 1985, the long-term outlook (i.e., the next 75 years) from the Trustees report has featured a plain-as-day warning -- namely that the program wasn't going to bring in enough revenue to cover growing expenditures. In layman's terms, this was the Trustees' way of saying that the current payout schedule was unsustainable over a long period of time without extra revenue and/or outlay reductions.
Two Social Security cards and two hundred dollar bills lying on a Social Security payout chart.
Image source: Getty Images.
Weighing in on the 2019 Social Security Trustees report
Just how bad do things look as of 2019? According to the newly released report, Social Security's cash shortfall over the next 75 years has climbed by $700 billion for the second consecutive year, to $13.9 trillion. The report has made clear in the past that the longer Congress waits to act on a fix, the costlier that fix is going to be on working Americans, and this rapidly growing cash shortfall estimate is proving that point.
If there is an ever-so-modest bright side, it's that the program's asset reserve depletion date was pushed back one year from 2034 to 2035. Social Security's asset reserves are its aggregate net cash surpluses since inception that are invested in special-issue federal bonds, as required by law. Currently, the program has close to $2.89 trillion "saved up." But according to estimates, this $2.89 trillion will be completely gone by 2035, leaving Social Security with no buffer.
What does this mean, exactly? Well, on the one hand, it means that Social Security has more than enough revenue flowing into the program from its payroll tax and the taxation of benefits to continue to provide benefits for a long time to come. Insolvency simply isn't going to happen.
On the other hand, it does imply that a sizable benefit cut could be in the offing for then-current and future beneficiaries in 2035. The report notes that the Old-Age, Survivors, and Disability Insurance Trust (OASDI) would only have the ability to pay out 80% of benefits by 2035, suggesting a reduction in aggregate payouts of 20%.
Two red dice next to a sliver of paper with the words Will Your Social Security Be Enough?
Image source: Getty Images.
Most beneficiaries could be facing a larger benefit cut than is being advertised
Then again, the "OASDI" is a fictitious fund that the Trustees refer to in order to simplify the presentation of complex data. There are actually two separate Social Security trusts -- the Old-Age and Survivors Trust (OASI) and the Disability Insurance Trust (DI) -- and their longer-term outlooks vary quite a bit.
Fewer disability claims have significantly lengthened the asset reserve depletion date of the DI Trust from 2032 to 2052, according to the latest Trustees report. By 2052, when the DI Trust's asset reserves run dry, it would be expected to pay out 91% of scheduled benefits, without any additional revenue raises or expenditure cuts.
Meanwhile, the OASI is expected to see much steeper cuts. The Trust that's responsible for paying out benefits to retired workers and the survivors of deceased workers will only be able to fund an estimated 77% of scheduled payouts after 2035. Or, to put this in another context, then-current and future beneficiaries, which make up close to five out of six recipients today, could be facing an across-the-board payout cut of up to 23%, which is even worse than the 20% reduction that's touted for the entire OASDI.
Considering that the average retired worker was taking home $1,467.17 a month as of March 2019, a 23% benefit cut would reduce this payout to $1,129.72 a month, in 2019 dollars. This works out to $13,557 a year, which is only a little more than $1,000 higher annually than the federal poverty level for a one-person household ($12,490).
A visibly concerned elderly man in deep thought with his head resting on the palm of his hand.
Image source: Getty Images.
Current and future retirees best be prepared for reduced benefits
As much as we'd like to believe that lawmakers on Capitol Hill are going to come to our rescue, history suggests that current and future retirees should be prepared for an across-the-board cut to benefits.
The biggest issues standing in the way of a Social Security fix are immediacy and ideology.
In terms of immediacy, the last time Social Security was facing an asset reserve depletion, it took until months before the program was to run out of its excess cash before lawmakers actually struck a deal and amended the law. Congress has a long history of waiting until a fix becomes absolutely necessary before directly addressing Social Security's problems. Again, that's bad news for the working Americans who traditionally shoulder the costs of a fix.
There are also ideological differences surrounding a solution. Both Democrats and Republicans have a core idea that would resolve Social Security's cash shortfall, but they are, of course, on opposite ends of the spectrum. Democrats want to raise revenue by increasing or eliminating the earnings cap associated with the payroll tax, thereby requiring the wealthy to pay more into the system. Comparatively, Republicans prefer gradually increasing the full retirement age, which would reduce lifetime benefit payouts by requiring future beneficiaries to either wait longer to receive their full payout or take a steeper reduction for an early claim. Republicans won't support a tax increase on the well-to-do, and Democrats won't endorse any measure that reduces benefits for future retirees. Thus, we have a stalemate.
Until a middle-ground solution is reached, the likelihood of an across-the-board benefits reduction is growing. Sadly, this means that you should be prepared to kiss up to 23% of your retired worker benefit goodbye within the next 16 years.
