Nearly $100 Billion in Annual Social Security Revenue Will Disappear by 2034

By Sean Williams Markets Fool.com

Social Security plays a vital role in providing a financial foundation for our nation's retired workers. A study from the Center on Budget and Policy Priorities (CBPP) found that the mere presence of Social Security benefits has pushed the poverty rate of seniors in this country under 9%. If Social Security income weren't available, the CBPP estimates the senior poverty rate would be north of 40%!

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Data from the Social Security Administration (SSA) appear to complement the CBPP's study. The SSA finds that 61% of retired workers rely on their monthly Social Security benefit to comprise at least half of their income.

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Social Security is flirting with disaster

But there's a problem with America's most important social program: It's on an unsustainable path. When Social Security was conceived back in the mid-1930s, life expectancies were considerably shorter and the costs of certain goods and services, such as medical care and housing, were running more or less in line with inflation. Over the past eight decades, medical care and housing expenses have soared well beyond the nominal rate of inflation, and people are living longer than ever. Couple this with the fact that the architects of Social Security could never have predicted the surge in baby births following World War II, and we have a recipe for disaster.

According to the 2016 report from the Social Security Board of Trustees, the program is slated to begin paying out more in benefits than it's receiving in revenue by 2020, with its spare cash peaking at nearly $2.9 trillion. By 2034, this spare cash will be completely exhausted, and based on the Trustees' estimates, it may result in an across-the-board cut in benefits of up to 21%. The budget shortfall for the program could top $11 trillion over the next 75 years.

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Part of the problem is that beginning in 2020, a noticeable source of revenue for the program will begin losing its ability to generate money for the Old Age, Survivors and Disability Insurance (OASDI) Trust. However, before we get to that, let's take a closer look at how Social Security is funded.

The ins and outs of how Social Security is funded

Though the federal government ultimately funds Social Security, the OASDI generates money for the federal government in three ways.

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First, payroll taxes provide the bulk of revenue (86.4% in 2015). Payroll taxes, which are formally known as FICA taxes, pull money out of your paycheck in order to fund Social Security and Medicare. Speaking strictly of Social Security, the payroll tax is 12.4%. While that may sound like a lot, a majority of working Americans only pay half that amount (6.2%), with their employer picking up the other half. Typically it's just the self-employed that get stuck with the full 12.4%.

Payroll taxes also may not tax all of your earned income. Just as there's a maximum monthly benefit of $2,687, there's a maximum taxable earnings amount of $127,200 in 2017, which is adjusted along with the Average Wage Index each year. If you earn more than $127,200, every dollar above and beyond that point is free and clear of Social Security's portion of the payroll tax.

Second, interest earned on the more than $2.8 trillion in spare cash provided 10.1% of revenue generated in 2015. The OASDI's spare cash is primarily invested in special issue bonds, with a considerably smaller portion invested in certificates of indebtedness. These bonds often have maturities in the one- to 10-year time window.

Lastly, the remaining 3.4% of revenue in 2015 came from the taxation of Social Security benefits. The Amendments of 1983 allowed the federal government to tax half of your Social Security benefits at the federal level if you've earned more than $25,000 as an individual, or more than $32,000 as a joint-filer. In 1993, another law passed that added a tier allowing the federal government to tax up to 85% of your Social Security benefits if you earn more than $34,000 as an individual or $44,000 as a couple.

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Here's why you can kiss nearly $100 billion annually goodbye

Now that you understand how Social Security is funded, we can return to the issue at hand: the imminent disappearance of nearly $100 billion in annual revenue.

In 2015, Social Security generated $920.2 billion in revenue, and interest earned from bonds and certificates of indebtedness comprised more than $92 billion of that. As the Federal Reserve continues to tighten its monetary policy, newly issued special bonds could come with more attractive interest rates, lifting what the program nets in interest and perhaps pushing it to $100 billion annually.

The problem is that beginning in 2020 and extending through 2034, the OASDI's spare cash is going to start rapidly dwindling, which means a shrinking base with which the program can earn interest income. By 2034, without any spare cash left, the nearly $100 billion it had been earning annually will have disappeared. Meanwhile, there will tens of millions more retired workers needing a monthly benefit check and not nearly enough new workers to take the place of retired or retiring baby boomers.

That's a big problem.

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Social Security needs a fix

The grim reality is that Social Security needs a solution, but lawmakers on Capitol Hill have been choosing to sweep it under the rug for years. We're nearing a point where soon they'll have no choice but to confront Social Security's cash shortfall.

The biggest question is what path Social Security reform will take. On one side of the aisle are Republican, who'd prefer to see the full retirement age increase to adjust for lengthening life expectancies. On the other side are Democrats, who prefer increasing payroll taxes on the wealthy by upping or removing the payroll tax earnings cap. The issue is that both plans get the job done, so neither side has been willing to back down from their stance that their solution is the right one. But the longer Republicans and Democrats remain at opposite ends of the bargaining table, the closer Social Security comes to a meltdown that could see millions of seniors pushed toward or below the poverty level.

With nearly $100 billion in annual revenue set to disappear completely in 17 years, it's time for Congress to step to the plate and get things done for the American public.

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