A major Social Security change is coming in 2022

Without taking anything away from Medicare, Social Security is arguably the most important social program in this country.

For many of the more than 62 million beneficiaries -- 42.8 million of which are retired workers, as of March 2018 – Social Security is more than just a check. It's a financial lifeline or foundation for retired workers, the disabled, and the survivors of workers who've passed away. The Center on Budget Policy and Priorities found in 2016 that Social Security's guaranteed monthly payout ensures that 22.1 million people, 15.1 million of which are retired workers, are kept out of poverty.

A major shift is forthcoming in Social Security

But this crucial program that so many workers have come to trust and lean on during retirement is just a few years away from undergoing a major change, at least according to estimates from the Social Security Board of Trustees in its 2017 report, released last summer.

In every year since 1982, the Old-Age, Survivors, and Disability Insurance Trust (OASDI) has generated more in income than it's paid out in benefits. This has allowed Social Security's asset reserves to grow to almost $2.9 trillion. By 2021, this excess cash figure, which is primarily invested in special-issue bonds, is expected to hit roughly $3 trillion. But that's when things change.

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According to the intermediate-cost forecast from the Board of Trustees, 2022 will mark the first time in four decades that Social Security will pay out more in benefits than it collects in revenue. Worse yet, this cash outflow is only expected to get worse with each subsequent year. Here's a glimpse of the Board's net increase or decrease projections for the OASDI, based on the intermediate-cost model (page 48 of the 261-page report, for those interested):

  • 2017: $58.6 billion increase

  • 2018: $44.7 billion increase

  • 2019: $29.3 billion increase

  • 2020: $16.8 billion increase

  • 2021: $3.3 billion increase

  • 2022: $18.2 billion decrease

  • 2023: $46.4 billion decrease

  • 2024: $75.7 billion decrease

  • 2025: $108.9 billion decrease

  • 2026: $143.8 billion decrease

By 2026, not only will Social Security's asset reserves be depleted by almost $395 billion from their peak in 2021, but the trust fund ratio, which describes the percentage of asset reserves relative to scheduled benefits to be paid, will have fallen from 298% in 2017 to just 165% in 2026.

Why is this happening?

The first question probably springing up is "Why?" Why is this happening to a program that's been in place for more than eight decades? The answer is the result of a number of factors.

To begin with, part of the problem is that baby boomers are exiting the workforce and entering retirement in droves. We certainly can't place the blame on baby boomers for when they were born, but this rapid increase in eligible beneficiaries is weighing down the worker-to-beneficiary ratio. In even plainer English, there just aren't enough new workers to counteract the number of boomers entering retirement and becoming eligible for Social Security benefits.

Increased longevity has been another core problem for the program. When signed into law in 1935, Social Security's creators envisioned it providing a financial foundation for low-income workers for a few years during their retirement. But since 1960, the average life expectancy in the U.S. has risen by roughly nine years. Data from the SSA shows that the average 65-year-old today lives about two more decades, allowing seniors the chance to receive a payment from Social Security for decades, rather than years, as originally intended.

Income inequality is also somewhat to blame. The well-to-do have access to preventative care and medicine as needed, which isn't always the case with lower-income folks. This results in the wealthy typically living longer than low-income workers, on average. This increased longevity, along with the fact that higher earnings often means a bigger Social Security benefit, has allowed the rich to strain the program.

Even the Federal Reserve may be partly to blame. Keeping interest rates at a record low for seven years negatively impacted the yields on those aforementioned special-issue bonds that Social Security invests its excess cash into. This has a negative impact on interest income.

All of these factors, along with Congress' inability to agree on a solution to fix Social Security, has aided in Social Security's forthcoming shift from being a cash flow positive to cash flow negative program.

What does this mean for current and future retired workers?

Now for the other all-important question: What does it mean for you, the worker?

I won't sugarcoat things. It's not good news. But it's also not as dire as you might think, even if the Trustees report is correct and Social Security's asset reserves are completely exhausted by 2034.

The good news, if there's a silver lining to be found here, is that Social Security can't go bankrupt. America's most important social program is funded in three ways:

  • A 12.4% payroll tax on earned income between $0.01 and $128,400, as of 2018

  • Interest income earned on its asset reserves

  • The taxation of Social Security benefits

These latter two categories account for a reasonably small percentage of the revenue collected each year. In 2016, the taxation of benefits generated $32.8 billion, while interest income added $88.4 billion. Meanwhile, the payroll tax accounted for $836.2 billion (87.3%) of the $957.5 billion collected in 2016. As long as the payroll tax remains the primary funding mechanism for Social Security, and Americans keep working, the program will collect revenue that can be disbursed to eligible beneficiaries. This ensures that the program can't go bankrupt.

The downside is that this doesn't protect against the potential for a cut to current or future benefits. If Social Security's asset reserves dwindle beginning in 2022, it's a sign that the current payout schedule isn't sustainable. The Trustees report suggests that an across-the-board cut in benefits of up to 23% may be needed to sustain payouts through 2091. With 62% of today's seniors reliant on Social Security for at least half of their monthly income, a cut of up to 23% could prove devastating.

Ultimately, the Board of Trustees report is a wakeup call for today's working Americans to reduce their expected reliance on Social Security during retirement. It's not out of the question that lawmakers come to a resolution and find new ways to generate additional revenue and/or cut program costs prior to 2034. But given how often lawmakers in Washington have kicked the can on Social Security, betting on politicians to save the program from steep benefit cuts doesn't seem like a smart move.

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