Will the Social Security System Go Broke in the Next 20 Years?

By Markets Fool.com

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President Roosevelt signed the Social Security Act into law on Aug. 14, 1935. Could the program's 80-year history be coming to an end?

It's no secret that Social Security, in its current form, is in trouble. Many young workers today are told to plan for retirement as if Social Security will no longer be around. And many soon-to-be retirees lose sleep over whether or not their safety net will be in place when their Golden Years begin.

The reason for the pinch is clear. The program has current workers pay for the benefits of retirees. If there's a relative balance between the number of workers and the number of retirees, then the program runs fine. But with a wave of baby boomers entering retirement -- and living longer than any generation before them -- the program is out of whack and spending much more than it's taking in.

Trustees estimate that the Social Security Trust Fund will run out of money around the year 2033. But what exactly does that mean? We asked three Motley Fool analysts whether they thought the program would go broke within 20 years. Here's what they had to say.

Dan Caplinger: No -- technically, it can't
Strictly speaking, the Social Security system won't go broke so long as there's payroll-tax revenue coming in to fund it. When most people say the program is "going broke," they mean that the Social Security Trust Fund could run out of money. Under current projections, that would lead to a shortfall in the benefit amounts Social Security could pay out starting in the mid-2030s. Recipients could see their benefits cut by about a quarter.

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Traditionally, Social Security has gotten most of its funding from Social Security-specific taxation, including the income tax on benefits and the tax on wages most workers pay. Yet there's nothing stopping lawmakers from deciding to use general revenues to fund Social Security going forward. When the Trust Fund runs out of money, the most politically expedient thing to do might well be simply to incur larger budget deficits in order to meet Social Security's commitment to retirees. Although reforms could eliminate the need for such measures, the fact that the government hasn't done so in the decades since Social Security's financial problems were first identified suggests that it's unlikely to find compromise within the existing program to keep Social Security relatively self-supporting.

Dan Dzombak: Yes, but not for long
Yes, the Social Security system will go broke in the next 20 years.

The current status of the Social Security system is like someone who has a huge savings account but spends more than their paycheck each month and has to draw down their savings. This person's salary and level of spending are also strictly defined. (Social Security's taxation and payout levels are mandated by law and cannot change unless Congress changes the law.)

In about 20 years, the Social Security system will be living "paycheck to paycheck," relying entirely on incoming tax revenue and only paying out about 75% of what it does today.

While it's misguided to speculate about events 20 years out, I'll go out on a (rather sturdy) limb and predict that Congress will make no lasting changes until Social Security is on the brink of crisis. Here's why.

For one, it would be political suicide for either political party to raise taxes on everyone in order to fund Social Security. One of many alternatives would be to raise the payroll tax earnings cap. Currently, people are only subject to Social Security taxes on their first $118,500 in annual earnings. The Center for Retirement Research at Boston College estimated that removing this cap would eliminate 40% of the earnings shortfall, pushing the go-broke date past the 20-year mark. This would likely only happen if Democrats controlled the White House and Congress, so it may be a while.

Personally, I expect that, as with the fiscal cliff, politicians will kick the can down the road, the Social Security system will go broke, and Social Security benefits will be reduced in 2034. Then, after a public uproar, legislators will come together and find a solution.

Brian Stoffel: No -- Congress will eventually figure something out
It's difficult to understate just how important Social Security is to today's (and tomorrow's) retirees. The program's Office of Policy estimates that "Social Security will account for about two-fifths of projected income for baby-boomer retirees." That's an enormous amount.

While I agree with Dan Dzombak that raising taxes to help close the funding gap will be a politically difficult task, I don't think we should underestimate the political force tomorrow's retirees will have.

In 2010, there were 40 million people in the United States over the age of 65, representing about 13% of the total population. But the Census Bureau estimates that by 2040, that number will more than double to over 81 million. At that point, 20% of the population will be over the age of 65, and because kids can't vote, retirees will make up an even greater percentage of voters.

I believe these combined forces will help usher in political leaders who are able to work out some solution to the depletion of Social Security's Trust Fund.

The article Will the Social Security System Go Broke in the Next 20 Years? originally appeared on Fool.com.

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