In Just 11 Years, Social Security's Trust Funds Could Be Out Of Money. The Reason May Surprise Retirees.

Social Security is undeniably one of our government's most essential functions. The roughly $1.4 trillion in benefits the Social Security Administration (SSA) pays out each year is a lifeline to millions of retired Americans, making up a significant part of post-retirement income for most. For others, it's nearly all they have.

When the program was conceived, it was intended to be a part of a "three-legged stool" along with pensions and personal investments. Of course, most Americans no longer have access to pensions and now must rely on Social Security and disciplined investing throughout their lives. Many earners at the lower end of the income spectrum can't afford to put away money in a 401(K) and end up completely reliant on the program.

Social Security is on rocky financial footing

Unfortunately, the SSA is on track to become unable to meet its benefit obligations within the next 11 years. The latest report from the SSA expects the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds -- technically separate but often combined for simplicity in projections -- to be depleted by the end of 2035. Before we look at why this is happening and what might be done, let's get a better understanding of how Social Security works.

You might think the government takes money from your check each month as you work and sets it aside for later. In reality, Social Security is pay-as-you-go. The money collected each year in payroll tax immediately funds the benefits paid out to current retirees. Essentially, today's workers pay for today's retirees. In years past, the SSA ran a surplus; workers paid more into it than it paid out to recipients. The OASDI Trust represents a reserve of funds from previous years of plenty.

That changed in 2010, the first year since the 80s in which tax revenue fell short of expenditures. Luckily, the interest the OASDI trust earned bridged the gap. Since 2021, however, that's fallen short too. Now, the trust is shrinking and by the end of 2035, it's projected to be empty. What happens then?

To be clear, when the OASDI trust is depleted, the SSA is not bankrupt. The program does not shut down. Instead, the SSA can only pay out what it brings in. Benefits will be reduced to match the payroll tax revenue generated each year. In 2036, that will mean a 17% cut.

One reason stands out as the cause of Social Security's shortfalls

So, why is there a shortfall? What is driving the deficit? While the answer is multifaceted -- this is a complex problem -- at the end of the day it's because the delicate balance between the healthy workers paying into the system and the retirees drawing from the system has been thrown off.

Most people point to advances in medicine and increases in lifespans. While this will certainly have an effect, it's really not the main driver. The real culprit is the falling national birth rate.

People are having fewer children. It began with the Baby Boomer generation -- a generation so named because the birthrates that created it were sky-high -- which had significantly fewer kids that their parents did. The trend continued, and each successive generation has followed suit. Now that baby boomers are leaving the workforce and entering retirement, there is an increase in retirees without enough workers to match; the ratio of worker to retiree is shrinking.

Interestingly, the SSA's report assumes that there will be a slight uptick in birth rates in the coming years. Unfortunately, it won't be enough to fundamentally change this imbalance in the future. Thankfully, there are other factors at play here, though. Immigration is a net positive for the SSA as immigrants tend to be young and productive workers. Despite the SSA's assumption that there will be a net growth of immigrants to the U.S. in the future, it still won't be enough to fully bridge the gap according to its estimates.

Of course, these projections are not infallible -- they are based on a series of best guesses about the future -- but it's unlikely they will be too far off. Unfortunately, the only way out is to pass significant legislation. Congress has done so in the past; hopefully, it can do so again.

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