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Latest Social Security Trust Fund Report Is Not Good News for Retirees

Each year, Social Security's trustees report on the current and projected financial status of the Social Security trust fund. Their 2018 annual report is worrisome. In a nutshell, the trustees conclude that the Social Security trust fund faces insolvency and resultant benefit cuts by 2034 if changes are not soon made to the program.

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Background
Social Security actually has two trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement benefits and survivors benefits; and the Disability Insurance (DI) Trust Fund, which pays disability benefits. These are separate entities, but the trustees have historically treated them as a combined fund (OASDI) for purposes of assessing their short- and long-term financial condition.

The Trustees' Trust Fund Projections
In their 2018 report, The trustees project that the combined OASDI funds will be depleted by 2034, which is the same projection they made in their 2017 report. However, for the first time since 1982, the trustees predict that the total 2018 cost of the combined programs will exceed their total 2018 income (including interest) and, without changes, this situation is likely to continue through a 75-year projection period.

The picture differs somewhat when the DI and OASI funds are considered separately. In their 2017 report, the trustees predicted that the DI fund would be depleted in 2028 and the OASI fund would be depleted in 2035. However, in their 2018 report, the trustees predict that the DI fund will be depleted in 2032, and the OASI fund will be depleted in 2034. Thus, over the course of a year, the projected depletion date of the DI fund improved by four years, while the projected depletion date of the OASI fund declined by one year. The trustees attribute the improved outlook for the DI fund to lower projected disability applications and approvals, and lower projected average disability benefit levels. However, the trustees assume these factors are temporary and that, by 2027, disability applications and awards will return to the levels projected in their 2017 report.

Big Picture
So, what are the implications of the trustees' projections? First off, without legislative changes to the DI and OASI programs, in 2032, DI income will cover only 96% of DI benefits; in 2034, OASI income will cover only 77% of OASI benefits! When the two funds are combined, their income is sufficient to pay only 79% of scheduled benefits in 2034 and 74% of scheduled benefits in 2092. In other words, without changes to the DI and OASI programs, the combined OASDI trust fund will become insolvent in 2034, at which time benefits WILL be reduced.

HOWEVER, the trustees predict that if any ONE of the following changes are made IMMEDIATELY, the combined OASDI trust fund could remain solvent for the next 75 years:

* Increase the payroll tax used to fund the combined OASDI trust funds from 12.4% to 15.18%

* Reduce benefits scheduled to be paid to all current and future beneficiaries by 17%

* Reduce benefits scheduled to be paid to anyone who becomes eligible for benefits in 2018 or later by 21% [No adjustment to the benefits of current beneficiaries.]

Of course, with mid-term elections on the horizon, most politicians are not even TALKING about making changes to the Social Security programs. Therefore, if action is delayed until 2034 (the year the combined OASDI trust fund is scheduled to be depleted), the trustees predict that either one of the following changes would ensure the solvency of the fund for the subsequent 75-year period.

* Increase the payroll tax from 12.4% to 16.27%

* Reduce benefits paid to all beneficiaries by 23%

Naturally, these are not the only proposals for shoring up the OASDI trust fund. In all likelihood, any solution will entail a combination of increased payroll taxes and changes to how and when benefits are calculated and paid. In any event, the current drop-dead date for doing SOMETHING is 2034.

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