Social Security Is Failing Even Faster Than We Thought

In last year's Trustees Report, the Social Security Administration warned that the program's trust fund was likely to run out of money in 2036, leading to deep cuts in benefits. If that weren't bad enough for anyone expecting to be alive then, a more recent projection from the Congressional Budget Office paints a much worse picture.

This year's CBO report forecasts that by the end of this decade, the combined Social Security Old Age and Disability Trust Funds will be about $800 billion smaller than last year's SSA projections. That's a very substantial drop -- and a sign that this year's Trustees Report will likely bring another downward revision to the year it expects those Trust Funds to dry up and benefits to be cut.

What a Difference a Year Makes

The table below shows that widening chasm between last year's SSA projections and this year's CBO projection:

Sources: Congressional Budget Office, Social Security Administration.

Sure, they're different agencies and may have different methods behind their projections. But last January's CBO numbers put the combined Trust Fund balances at $3,409 billion in 2020 -- much closer to what the SSA was projecting. That suggests that when the 2012 Trustees Report comes out, its own projections will probably be revised downward as well -- closer to the CBO numbers.

A downward revision wouldn't be anything new for the Social Security Administration. Check out the trend over the past five years:

Source: Social Security Administration.

With several hundred billion in projected 2020 dollars vanishing in less than a year, it wouldn't be surprising to see the 2012 Trustees Report lopping another year or two off the projected run-out-of-cash date. And remember, when the Trust Fund runs out of cash, benefit payments are expected to fall, too.

Time is running out

If you're expecting to retire and are planning to rely significantly on Social Security, this is bad news indeed. Quite simply, it means time is becoming your enemy on both sides. On one side, you're a year closer to your anticipated retirement date. On the other side, the day you can no longer count on your full anticipated Social Security benefit keeps getting pulled closer, too. Put the two together, and the message gets crystal clear: Save more for your own retirement, or face a scary -- and rapidly approaching -- future.

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Assume, for the sake of discussion, that Social Security's 2012 projection moves the Trust Fund expiration date closer by two years to 2034. That's still 22 years away -- enough time to do something about it, but approaching the point where it gets significantly tougher to catch up.

As of January 2012, the average Social Security check for a retired worker was around $1,229 per month. When the Trust Fund is gone, that amount is expected to fall by about a quarter. That works out to a shortfall of around $307.25 per month. Using what's known as the 4% rule, covering that gap from your own investments will require $92,175 in additional savings. The table below shows how much you'd need to save each month to reach that number, depending on how many years head start you get and what rate of return you achieve:

Source: Author's calculations.

The bottom line is simple: Social Security's Trust Fund is on borrowed time. You still have the opportunity to save enough to make up for what you'll be missing when it's gone, but you need to get started on it now, or it'll soon become an impossibly high hurdle to clear.