4 Reasons Social Security Is In Trouble - Will You Be, Too?

Studio shot of social security card and banknotes
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On Monday, the Social Security Trustees published its annual Trustees Report on the health of the Social Security system. The bottom line has changed very little since last year's report, and the trustees still expect the Trust Funds to empty in 2033. Once the Trust Funds empty, the program will only be able to pay around 77 percent of its scheduled benefits.

Still, while the trustees maintain their overall projection for the program, its underlying financials continue to crumble.

For one thing, the program's 75-year actuarial deficit increased to 2.88 percent of payroll, up from 2.72 percent last year. For another, the retirement-related Trust Fund -- when considered on its own -- is on the path toward emptying a year sooner than last year's projections. The table below shows the details:

Social Security
Trust Fund

2014 Trustees

2013 Trustees

Retirement Trust Fund

Empties in 2034

Empties in 2035

Disability Trust Fund

Empties in 2016

Empties in 2016

Combined Trust Funds

Empties in 2033

Empties in 2033

Source: 2014 Social Security Trustees Report.

What's Driving This Decline?

There are at least four key drivers behind Social Security's weakening condition:

1: Falling labor force participation rate. This metric measures the percentage of the U.S. population age 16 and older either working or actively looking for work. Unfortunately, as the chart below from the Bureau of Labor Statistics shows, that measure has dropped substantially this century.

<b class="credit">Source: Bureau of Labor Statistics </b>
Source: Bureau of Labor Statistics

Social Security is primarily financed by payroll taxes. The fewer people working (or even looking for work), the smaller the potential wage base to support the program.

2: The relentless rise in the disability rate. The two charts below show the Congressional Budget Office's current and projected disability rates by age, the first for males and the second for females. The disability rates have risen relentlessly since around 1990, and the trends show no sign of stopping.

<b class="credit">Source: Congressional Budget Office</b>
Source: Congressional Budget Office
<b class="credit">Source: Congressional Budget Office</b>
Source: Congressional Budget Office

This is a double whammy for Social Security. For one part, the disabled often qualify for Social Security Disability benefits. The more people who are on Social Security Disability, the bigger the strain becomes on that part of the combined Trust Fund. For the other part, people collecting Social Security Disability rarely earn much (if any) income. People who aren't earning income aren't paying into the Social Security system.

3: The aging population. Longevity is a wonderful thing (especially for those of us who aren't getting any younger). Still, the longer people live and the more people who survive into their retirement years, the higher the cost of Social Security will be. The chart below from the Congressional Budget Office shows how the population of those ages 65 and older is expected to grow -- both on its own and as a percentage of the overall U.S. population.

<b class="credit">Source: Congressional Budget Office</b>
Source: Congressional Budget Office

Once you stop working in your retirement, you stop paying into Social Security, and instead, you start collecting. Additionally, the longer you live, the higher the total amount the system needs to pay to cover your benefit.

4: Low interest rates. While most of Social Security's income comes from payroll taxes, it also makes money from the interest earned on the Trust Funds. Those Trust Funds are invested in special Treasury bonds, and like any Treasury bond, they mature. In our current low-interest-rate environment, the Social Security Trust Funds are forced to buy lower-interest bonds to replace higher-interest ones that mature.

The chart below shows the billions of dollars in annual interest lost since 2010 to lower interest rates:

<b class="credit">Author's calculations based on data from the Social Security Administration. </b>
Author's calculations based on data from the Social Security Administration.

Social Security is already spending more in benefits than it takes in as payroll tax revenue, and interest is the program's next largest source of income. The longer low interest rates go on, the larger the negative impact those low rates have on the Social Security Trust Fund's solvency.

What Can You Do?

For those four key reasons, Social Security is, and will continue to be, in trouble. With the Trust Funds expected to empty in 2033, you need to prepare. Your most prudent course is to invest as though you'll need to cover the gap between your expected Social Security benefit and what the program anticipates being able to pay.

The sooner you get started, the easier and cheaper it is to get there. With around 19 years before the Trust Funds are expected to empty, you've still got time to build a reasonable plan, but the longer you wait, the tougher it gets. So get moving now.

Chuck Saletta is a Motley Fool contributor. For more on ensuring a comfortable retirement for you and your family, see our new free report in which Motley Fool retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule to boost your retirement income.