Economists have said for some time that the Social Security fund would run out of money sometime between 2035 and 2040. At that point, it won't be able to provide older Americans any safety net at all. This year the fund will take its first step toward the grave as payouts exceed collections, according to the Congressional Budget Office (CBO). The red ink will be $29 billion. That's against total payouts of $7.08 trillion.Chief actuary of the Social Security Administration Stephen C. Goss explained to The New York Times: "Payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program's revenue has fallen sharply, because there are fewer paychecks to tax."
The reasons that the problem will worsen are clear. The American population is aging, unemployment is near 10%, and many economists don't see it dropping below 8% until the end of next year. After that, creating new jobs may be so difficult that persistent high unemployment could last for years. The base for the Social Security tax will simply have fallen too far for the fund to make up the ground to refill its coffers.
Years of Austerity Ahead?
It's much more difficult to forecast what the federal government will do about the problem. The national deficit will remain high for a decade, according to both White House and CBO estimates. The national debt will become so large that interest on it alone will reach $700 billion a year by 2019, so the Treasury won't be a realistic source for money to replenish the Social Security fund.
A number of economists, including prominent Harvard University Professor Kenneth Rogoff, have predicted years of austerity for Americans as they face the need to pay higher taxes to offset budget deficits, combined with lost services that the government can no longer provide.
While no one is suggesting that Social Security will go away altogether, its payments may need to drop for the fund to survive. Americans will face less generous benefits for their retirement years, but that process has already begun in privately funded retirement plans because many Americans who put aside money for their golden years saw much of that cash wiped out by the stock market crash. Adding to the problem, many corporate and government pension programs are underfunded, and the money to rebuild them may not be available as payouts to retirees rise while less money comes in from corporate profits or from taxes at cities and states.
The end game for Social Security may be that future American retirees won't get that social safety net they had counted on, at least compared to what was available in the past.
How much house can I afford
Home buying 101, evaluating one of your most important financial decisions.View Course »