Why the Next Social Security Crisis Could Be Just a Year Away

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Most Americans know that the Social Security system faces some long-term financial troubles, as a rising population of retirees relies on ever-fewer workers paying the taxes that finance their benefits. Yet most people focus on the retirement portion of Social Security, which has enough money remaining in its trust fund to cover shortfalls between tax revenue received and monthly benefits paid until 2033.

But there's an aspect of Social Security that many people rarely think about, and it faces much more immediate problems. Social Security also makes payments to disabled workers and their families, who together make up about 11 million recipients. The bad news is that the trust fund that finances disability benefits could run out of money by the end of 2016, according to the most recent Social Security Trustees' Report -- giving lawmakers a lot less time to come up with a solution to the problem.

What's In Store for Social Security Disability

Recently, the Senior Citizens League looked at the problem of Social Security disability and what the current financial difficulties would mean for recipients. Because the portion of payroll taxes that goes toward funding disability payments only covers about four-fifths of what Social Security disability pays out, the program has had to use the trust fund set aside for covering disability shortfalls. Analysts estimate that when that trust fund runs out of money late next year, disability recipients will face a 19 percent cut in their monthly benefits.

The impact on disabled Americans could be catastrophic. Currently, the average disability benefit of $1,146 per month is enough to keep disabled Americans above the poverty line, according to a research report from the Heritage Foundation. But with a 19 percent reduction, the average benefit would fall more than $200, taking it below the poverty line.

Raising the stakes is the fact that Congress has taken steps to avoid what would otherwise be an easy way to put off dealing with the problem. With the trust fund that provides money for retirement benefits still having plenty of money, the simple fix is to authorize a transfer of available funds from the retirement fund to the disability fund. Because the disability fund's spending needs are smaller than the retirement fund's, allowing such a transfer would give disability recipients full benefits for 15 to 20 years while costing the retirement fund only a few years' worth of solvency.

In an effort to require lawmakers to consider a longer-term solution to the bigger problem of Social Security generally, though, the House of Representatives passed a procedural rule that requires trust-fund transfers to be part of a larger Social Security reform plan that makes changes either to the taxes Social Security collects or the benefits it pays. Groups like the Senior Citizens League are skeptical that lawmakers will be able to come up with a broad-ranging reform package, especially given the fact that they have known about the coming crisis for years but haven't taken much action to date.

Are Social Security's Problems Solvable?

The debate over Social Security stems from disagreements about the true purpose of the program. Some believe that Social Security should remain a safety net only for a limited number of Americans, noting the fact that when the government first created the program, fewer people had a long enough life expectancy to collect benefits, and those who did generally collected them for a shorter period of time.

Meanwhile, others note that Social Security has had to assume a role that corporate pensions used to fill, as employers have generally moved to 401(k) plans and other defined-contribution retirement plans that put the onus on workers to figure out how to invest their money well enough to provide needed income in retirement. Those who favor expansion of Social Security point to dramatic moves like lifting the current wage cap on Social Security taxes, which would dramatically boost the amount of tax that high-income earners pay into the system. On the other side of the coin, measures like means-testing Social Security could take benefits away from those who don't absolutely need them. Yet as you'd expect, all of these proposals are controversial.

For now, though, lawmakers have less than two years to figure out how they want to handle the immediate problem of Social Security's disability crisis. Without action, Americans will get to see firsthand what happens when a trust fund runs out of money, potentially giving everyone a look at what could happen within the next 20 years to retirement benefits for tens of millions of Americans.

Motley Fool contributor Dan Caplinger hopes he gets Social Security but is making contingency plans just in case. You can follow him on Twitter @DanCaplinger or on Google+. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.​
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