News About Social Security Trust Fund Shortfall Only Gets Worse

Last week's report by the Social Security Administration Trustees confirmed that the program's finances are still falling apart. Indeed, as a recent Congressional Budget Office projection suggested would happen, things are apparently getting worse at an ever-faster pace.

The Trustees' Report projected that the Trust Funds would be bankrupt by 2033, three years earlier than predicted in 2011. Unfortunately, that change should not have come as a surprise. A review of the past five Trustee reports shows that to be an alarming -- but recurring -- event:

Source: Social Security Administration.

Over the past five reports, eightyears have been knocked off the timeline projecting the emptying of Social Security's Trust Fund. In a very real sense, it's as if 12years have been lost over that period -- eight years due to the program's failing finances and four due to the inevitable march of time.

It's Not Stabilizing

In fact, there are signs that Social Security's condition may still be getting worse. That same Trustees' report cautioned that the retirement of the baby boomers, the smaller sizes of the generations following them, and our longer lives in general are working together to make the program's financial outlook bleak.

Combine those demographic realities with Social Security's actuarial life expectancy table, and the picture becomes quite ugly for an average man who is younger than 60 or a woman younger than 64 today. Statistically speaking, those folks are expected to still be around when the Trust Fund tank hits empty, and are thus on track to see their Social Security benefits cut by about a quarter.

Even more ominously, remember that people can take Social Security benefits as early as age 62. The Trust Fund expiration date in this year's Trustees' Report means that for the first time since this collapse began, significant numbers of currentSocial Security recipients are expected to see their payments slashed.

This probably explains why even the AARP recently said it was willing to consider changes to Social Security. The problems have become so large that even many of AARP's current members -- not just its prospective ones -- can expect to see their benefits cut if nothing is done to fix the system.

21 Years to Plan

If there's a bright side to Social Security's collapse, it's that it's happening in such plain sight and with such a long lead time that you have the opportunity to prepare. The ugly reality at this point, though, is that you're rapidly running out of time to protect yourself from the Trust Fund's inevitable collapse. If you don't start planning now, it quickly gets progressively much harder to cover the gap.

Based on the Social Security Administration's projections that benefits will be reduced by about a quarter, a typical household can expect to see its annual benefit cut by around $5,000. Using the 4% rule for retirement withdrawals as a guideline, covering that $5,000-per-year gap from savings will require a nest egg of around $125,000. The table below shows the monthly savings it will take to get there, depending on when you start and the rate of return you earn on your money:

Source: Author's calculations.

It's tough enough now to come up with that kind of money, but look how much tougher it gets if you wait. And remember -- this is just the additional savings it'll take to cover Social Security's expected shortfall after the Trust Fund is drained. Even before that collapse happens, Social Security only covers around 40% of a typical person's pre-retirement income. If you want to live on any more than that, you'll have to have another source of money.

Gallery:

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Generally speaking, those other sources of money come from either your savings or the vanishing breed of retirement benefits known as pensions. Unless you're one of the few who is well-covered by other sources of income, now may be your last chance to start funding any semblance of a comfortable retirement.

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Motley Fool contributor Chuck Saletta welcomes your comments.