Motley Fool: Social Security's $2.9 Trillion in Asset Reserves Could Disappear Sooner Than Expected

This may not come as a surprise to many, but America’s most important social program, Social Security, is in trouble.

According to the newest annual report from the Social Security Board of Trustees, the program has officially hit an inflection point. The intermediate-cost model suggests that $1.7 billion more in benefits and expenses will flow out of the program in 2018 than it generates through its three funding sources:

  1. The 12.4% payroll tax on earned income of up to $128,400.
  2. Interest income on its asset reserves.
  3. The taxation of Social Security benefits.

This will be the program’s first net cash outflow in 36 years. And that’s just the beginning.

Dice and casino chips lying atop Social Security cards.

Image source: Getty Images.

With the exception of 2019, where the net cash outflow will shrink to $0.2 billion, Social Security’s payout deficit is expected to grow rapidly with each passing year. The Trustees’ model projects that more than $700 billion in asset reserves will disappear over the next decade. By 2034, all $2.9 trillion in excess cash is projected to be completely gone. Should this happen and no new revenue is raised, an across-the-board benefits cut of 21% may be needed to sustain payouts through 2092.

This outlook is terrifying, considering that more than 3 out of 5 aged beneficiaries rely on Social Security for at least half of their monthly income. But what if I told you that things could actually be much worse than advertised?

Social Security may be in deeper trouble than we realize

According to a newly released study from researchers at the University of Pennsylvania, the Trustees’ failure to account for certain economic factors has them overestimating the time left before the program exhausts its asset reserves. Using the Penn Wharton Budget Model, researchers found that the asset-reserve depletion date is estimated to be 2032, not 2034 as the Trustees expect.

Why the difference? Among other things, the Penn Wharton Budget Model factors in the impact of growing federal debt on the U.S. economy. In particular, researchers opine that higher federal debt levels will lead to “slow future growth in capital formation, labor productivity, wages, and the payroll tax base.”

This is significant because the payroll tax accounted for $873.6 billion of the $996.6 billion collected by Social Security in 2017. In other words, it’s the program’s key funding source.

A neat stack of hundred dollar bills under tight lock and key.

Image source: Getty Images.

Additionally, the Penn Wharton Budget Model insinuates that after a short period of growth, inspired by the Tax Cuts and Jobs Act, the sunset of individual tax cuts after Dec. 31, 2025 will exacerbate the issues caused by rising federal debt levels.

By 2048, the Trustees’ intermediate-cost model expects that expenses for Social Security’s annual non-interest balance ratio (i.e., payroll tax revenue plus the taxation of benefits, minus expenses) will be minus 3.31%. Meanwhile, the Penn Wharton Budget Model foresees the annual non-interest balance ratio at minus 5.86%. That’s 77% higher than the estimate provided by the Trustees. 

If this Penn model proves (more) accurate, Congress’s time to fix Social Security is shrinking faster than we — and they — realize.

We have the solution(s) — we just don’t have the consensus

What’s perhaps even more irritating than Social Security’s imminent cash crisis is the fact that lawmakers on Capitol Hill have solutions that could fix it right now, yet none have been implemented.

Republicans, who currently control the legislative branch of the government, have favored a gradual increase in the full retirement age, or the age at which you become eligible to receive your full retirement benefit as determined by your birth year. Currently set to cap at 67 years for those born in or after 1960, the GOP has touted proposals to increase the full retirement age to between 68 and 70.

If that happens, workers either would have to wait longer to receive their full benefits or accept a steeper permanent reduction in their payouts if they claim early. Either way, it reduces program expenditures over the long run and should resolve Social Security’s cash shortfall.

A blue Democrat donkey and red Republican elephant squaring off and butting heads.

Image source: Getty Images.

On the flip side, Democrats would prefer to raise additional revenue by raising or eliminating the maximum taxable earnings cap associated with the payroll tax (the noted $128,400 figure, as of 2018). Whereas more than 90% of all workers with wage income under $128,400 are paying into the program with every dollar they earn, the well-to-do are exempt on any wage income north of $128,400. Upping or eliminating this cap would require the rich to pay more into the program, thereby erasing the long-term (75 year) deficit.

The issue here is that both parties have a working plan, and as such, neither is incentivized to back down and find common ground with the other. The fact of the matter is that without 60 votes of support in the Senate, no Social Security amendments can be passed. And if neither party can “play nice” with the other, nothing is going to get done.

Regardless of whether the Trustees or Penn researchers are closer with their asset-reserve exhaustion estimate, Congress needs to get its act together soon, or everyone’s going to lose.

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