For years, experts have been warning that Social Security's long-term financial outlook is bleak, and the program's most recent Trustees Report, released in April 2020, confirms that.
Specifically, the report projects that Social Security's combined trust funds will run dry in 2035. Once that happens, the program will no longer have the financial means to continue paying benefits as scheduled. Rather, Social Security will be forced to implement benefit cuts that hurt current and future recipients.
Clearly, the idea of reduced benefits in 15 years' time isn't comforting. But some experts are now warning that we could see that time frame moved up. In fact, if current economic conditions persist, we may see Social Security deplete its trust funds prior to 2030, thereby causing untold harm to beneficiaries sooner than expected.
What changed with Social Security?
Social Security gets the bulk of its revenue from payroll taxes -- the ones workers and companies pay in the course of employment. In the coming years, Social Security expects less money from payroll taxes as baby boomers leave the workforce in droves; the program's trustees predict that not enough workers will come in to replace that lost revenue. As such, Social Security will owe more in benefits than it takes in.
The program can dip into its trust funds to make up that difference and avoid a reduction in benefits, but only for so long. Once those cash reserves run dry, benefit cuts may be inevitable.
But the reason that trust fund depletion date has been pushed up so drastically boils down to the impact of COVID-19 and with so many millions of Americans out of work, Social Security's primary revenue stream is taking a major hit. While unemployment benefits are considered taxable income, they're not subject to Social Security taxes, so there won't be any extra money filtering into the program that way.
Making matters worse is the fact that we don't know how long the economy will stay shut down, but we can't discount the possibility of unemployment levels staying high for while. Meanwhile, the prediction of a 2035 trust fund depletion date was made prior to the worst of the COVID-19 crisis, so it's fair to say that if current economic conditions persist well into 2021, Social Security is going to have a major problem on its hands sooner than anyone would like.
Let's also not forget that older workers have not been immune to unemployment. In April, the unemployment rate among workers aged 55 and older was 13.6%, compared to 2.6% in January. As a result, we may see that a large number of near-retirees wind up leaving the workforce sooner than planned. The result? Less revenue for Social Security and a greater obligation on the benefits front.
Will lawmakers really let benefits get slashed?
There's a lot to be lost if Social Security benefits are indeed reduced substantially and millions of seniors are suddenly driven into poverty because of it. Lawmakers are, therefore, heavily invested in avoiding a scenario in which benefits are cut. But despite the various solutions that have been thrown around for years – by raising the full retirement age or increasing or lifting the wage cap for Social Security taxes, for example -- lawmakers have yet to come to an agreement, and each viable suggestion designed to address the problem comes with a very obvious drawback.
The result? There's no saying whether lawmakers will be able to avoid Social Security cuts in spite of their desire to do so. And that could leave current and future beneficiaries in a very precarious financial spot -- perhaps much sooner than expected.
All of this means that it is more important than ever that investors have a well-stocked investment portfolio that can help meet the bulk of their financial goals. The investing that you are doing right now in your 401(k), IRA, or taxable brokerage accounts may be the primary factor in determining whether you have a comfortable retirement or one filled with uncertainty.