Social Security's grim prognosis

Social Security's board of trustees last week released its annual report on the long-term financial health of the system's trust fund. And once again, the outlook is bleak. The trustees now project that the combined asset reserves for Old-Age and Survivors Insurance and Disability Insurance Trust Funds will be depleted in just 17 years.

These funds receive, hold and invest the Social Security taxes workers and employers pay. The funds are also used to make retirement, survivor and disability payments to approximately 61 million Americans.   

In their report to Congress, the trustees said assets totaled approximately $2.85 trillion in 2016, an increase of $35 billion from the prior year. Although the funds are expected to grow for the next few years, beginning in 2022 the trustees foresee annual benefits paid out will exceed the Social Security taxes workers and employers pay. If Congress doesn't act before 2034, trust fund assets will be depleted, and the taxes workers and employers pay would be enough to cover only about 77 percent of scheduled benefits.

The reason is demographics: a rapidly growing number of baby boomer retirees, increases in life expectancy and lower birth rates. When Social Security was first established in 1935, a retiree aged 65 would live to age 77 on average. Today, that 65-year-old will live to at least 85. In 1950, 16 workers paid Social Security taxes for every person collecting benefits. Today, that ratio has shrunk to 3.3 to one, and by 2034, it's projected to be as little as two to one.

To head off the coming day of reckoning, Congress will need to consider several potential solutions. They could include increasing the payroll tax workers and their employers pay into Social Security, cutting benefits to younger workers who have more time to plan for retirement and increasing the amount of Social Security benefits that are taxable for higher-income retirees. 

Chances are that any solution would include some combination of all three.

While it remains to be seen if Congress will actually act, workers can do several things now to soften the impact of a future that's likely to have less in the way of Social Security benefits.

Review your Social Security statement of benefits, which you can find at my Social Security. It includes a record of the earnings on which you've paid Social Security taxes, how much in taxes you and your employer have paid and the estimated benefits you could receive in retirement. You should be sure to review the statement for accuracy and incorporate it into your financial planning. 

You should also calculate your retirement income and savings needs. Only about a third of individuals report having figured out how much money they'll need to save by the time they retire. Many retirement calculators are available online that can provide a well-rounded estimate of what your retirement needs are and what your sources of retirement income could be.

Younger workers today may have to wait until age 70 or older to collect Social Security benefits, which means they'll need to save more for retirement. That makes it even more important for them to make the most of contributing to tax-advantaged retirement savings accounts, including 401(k) plans, IRAs and health savings accounts.