social securityFor the past several years, Social Security's Trustees have been reporting on the accelerating depletion of that program's Trust Fund. As recently as 2008, the Trust Fund's doomsday was projected to be as far away as 2041. But over the past several years that collapse date has inched forward and now sits at 2033.

Unfortunately, even that projection looks like it's a bit too optimistic. It turns out that there's a very real risk that next year's report will move that date even closer.

What Happened?

Since the Trustee's Report was written in April, some news has emerged about the investments in the Trust Fund putting a drag on the returns.

Every year, Social Security rolls over its maturing long-term Treasury bond holdings, picking up new ones to replace the ones that are expiring. Because of exceptionally low interest rates, Social Security is earning less interest on its new bonds than it did on its old ones.

That lower interest, along with the fact that the program now takes in less in taxes than it spends in benefits, means the Trust Fund is on even shakier footing.

What's a Few Billion Among Friends?

Take a look at the scary trend line that shows the annual interest lost when the old long-term bonds matured or were sold versus the annual interest on the new long-term bonds:

social security

Every year since 2010, the new long-term bonds being bought by Social Security pay substantially less interest than the old long-term bonds that are maturing. That red line is getting deeper, and the 2012 total is nearly $5.4 billion in annual interest foregone because the new bonds pay that much less than the old ones.

That amounts to $5.4 billion less available for paying benefits or for reinvestment. That's a $5.4 billion deeper hole the program faces next year than it would have if rates had stayed steady.
And that's just from one year.

So What?

Since 2010, the total annual income foregone due to lower interest rates has exceeded $10.5 billion. Since this only counts the long-term bonds that Social Security is using -- not the short-term certificates that get traded much more frequently -- those numbers add up to create a whole world of pain.

It's a huge deal, because Social Security is already paying out more in benefits than it takes in as taxes. The only reason the Trust Fund is still growing at all is because of the interest it generates on the Treasury bonds it holds.

With interest rates so low and net interest received dropping as a those old bonds mature, that "net interest" kicker is rapidly losing steam. The sooner it runs out of gas, the sooner the Trust Fund starts actively shrinking, starting something of a death spiral as the stockpile depletes.

From the perspective of a potential recipient, this hastens the need for you to prepare for the Trust Fund's collapse. Every downward revision in the year the Trust Fund will expire hurts your chances to get ready in two ways. For one, the closer date gives you that much less time to prepare. For another, if you aren't already preparing, then you've already lost the time that had passed since the last revision.

In other words, assume for the sake of discussion that the 2013 Trustees' Report moves the Trust Fund's anticipated run-dry date a year closer -- to 2032 rather than today's expected 2033. If you did nothing to prepare in 2012 because you had 21 years before the issue struck, imagine waking up when the next report is published to find that you've lost not one year, but two.

What Will You Do About It?

Think it can't happen? Take a look at the table in this article along with the graph above in the one you're reading now. Ask yourself what's more likely: that the ugly trend that has already established itself will continue, or that these very serious issues will somehow, almost magically, solve themselves.

With around two decades left, you still have time to prepare. But your chance to let time and the magic of compounding work for you to cover for Social Security's shortfall is rapidly running out. So get moving now, or prepare for a really scary income gap when you are looking to retire.

Click here for The Motley Fool's free report on one tactic that could increase your Social Security payment by as much as 76%.


Increase your money and finance knowledge from home

Managing your Portfolio

Keeping your portfolio and financial life fit!

View Course »

How to Avoid Financial Scams

Avoid getting duped by financial scams.

View Course »

Add a Comment

*0 / 3000 Character Maximum

858 Comments

Filter by:
GeorgeT

Total social security taxes to the SS trust fund have vastly exceeded payments to retirees. The difference exceeds a $trillion. This huge ammount of money has gone to the general fund, and been spent for purposes other than benefits for retirees. Of course we cannot get that money back because its already been spent. To make up for it either taxes would have to be raised or cuts made in other government expenditures. however, I think tax payments to the SS trust fund, even with the recent cut, will exceed payments to retirees for more than 20 years.

November 13 2012 at 1:48 PM Report abuse rate up rate down Reply
luweegee3

The only one who can save Social Security is Mitt,,Obama has already hit Medicare funds by taking $750,000,000,or 3/4 trillion of our dollars out of Medicare and gave it to Obamacare.No one will be able to stop Obama from taking our social security monies either.We cant trust Obama with our hard earned Medicare monies or our hard earned social security monies.The choice here Folks is an easy one.Its Romney/Ryan Ticket.STOP OBAMA NOW B 4 HE CLEANS US OUT

October 06 2012 at 6:09 PM Report abuse rate up rate down Reply
Heaven Bound

?????? Social Security????? Well, your President said Wednesday night the Social Security was SECURE. Oh! but I guess you fans did not want to catch that statment. According to this article, it does not appear so secure. Of course, if they would quit using the funds for other things, there would be enough.

October 05 2012 at 8:12 PM Report abuse rate up rate down Reply
1 reply to Heaven Bound's comment
bobcuz1959

I feel the fund cant be all things to all men. I have urged my congressman to amend supplimental security income (SSI) payments and slash any benefits to disability claimants. Meaning, social security should be retirement only. No other use and the entitlement would be secure. Ask your congressman to tell you how many people in your district are getting SSI payments. Dont let them refer you to any other govt. dept. Ask them what they know about payments in their district. This will prove my point. Wall ST types are not the only con-men taking savings. If we do not act, SS will be gone and the kids cant earn enough to keep it afloat. And when we go into hyper inflation, how much will any treasury bond yield?

October 06 2012 at 5:08 PM Report abuse rate up rate down Reply
cbstinc

why

October 03 2012 at 7:12 PM Report abuse rate up rate down Reply
Madeleine

There is no need for graphs and trumped up solutions, all the Gvoernmnet has to do is stop giving American tax dollars to every country in the middle east billions of dollars a year , we even give money ot afghanistan and other countires that burn our flag and kill our boys. The Government has als been taking half of our Social security moneyu to use as they see fit. We have brought hundreds of housands of unemployable middle eastern men here thanks ot obama, we have them living on welfare and social security disability and they have never even worked here, please show me a chart on that. This is a clear and obvious slap in our faces, and believe me , if Paul Ryan wins, which I doubrtr, if he does it will be because the powerful elite helped him win, if he does win we will be in big trouble and I see a class action suit with more than half of America in on it. Th eseniors are getting it from all sides, suddenly the GOP can't stand ot have unions of any kind around, I knew it wasn't just pulbic Unions, they lied about that , its all Unions and they don't want them ot be able to give money ot campaigns, probably because no union will back them, but that would also mean an end ot lobbiests, no one , big business or anyone else will be able to give either if the Unions can'r, I see a big mess ocming on.

October 03 2012 at 4:46 AM Report abuse rate up rate down Reply
snsndse

My opinion on SS funds is that the govenment has been taking out of the fund for years and they need to return it now. This has been going on forever and no one, not the politions in Washington or the President even mentions what the treasury owes SS.

October 03 2012 at 4:15 AM Report abuse rate up rate down Reply
richardkenosha

SS = The new welfare.

October 03 2012 at 2:36 AM Report abuse -2 rate up rate down Reply
jtw1960iv

Maybe they ought to get rid of the payroll tax cut for starters. 2% employee+2% employer = 4% defunding of a program that was already in trouble. Raise the cap on SS contributions to = medicare which is on 100% of income.

October 03 2012 at 2:35 AM Report abuse +1 rate up rate down Reply
Rod

Did anyone think that reducing the premium by 25% wouldn't afftect the plans payout ability?

October 03 2012 at 1:48 AM Report abuse rate up rate down Reply
Rod

Did anyone think that reducing the premium by 25% wouldn't afftect the plans payout ability?

October 03 2012 at 1:45 AM Report abuse rate up rate down Reply