This week’s news that the Social Security system will pay out more in benefits than it receives in payroll tax receipts gave a jolt to some retirees. By contrast, earlier reports from the nonpartisan Congressional Budget Office (CBO) projected that outlays would eclipse tax receipts in 2016.

Although the imbalance isn’t expected to change the benefits levels of current retirees or those nearing retirement, it does bolster long-running fears about the health of the Social Security system. Some analysts say that younger generations of workers could face benefit cuts of 20% to 25% by 2037 if Congress does nothing to reform the system.

The reason? Social Security maintains two trust funds — the Old-Age and Survivors Insurance fund and Disability Insurance fund — which are both running a surplus and expanding. Combined, both trust funds are projected to grow from $2.5 trillion in 2009 to $3.8 trillion in 2020, according to the CBO. What’s more, Social Security’s “primary” deficit — that is, a measure of the program’s revenues excluding interest on those trust funds’ assets — should only last until 2014, when the CBO projects employment to fully recover.

Still, the downturn has taken its toll on Social Security’s revenues. Perpetually high unemployment — plus, a subsequent drop in paychecks to tax — and an increase in the number of seniors applying for benefits earlier than they planned have depleted the program’s revenues.

All told, payroll tax receipts were down 2.5% in 2008 compared to pre-recession estimates for the year, according to calculations from Monique Morrissey, an economist at the Economic Policy Institute, a Washington-based research organization. She expects 2009 receipts may be as much as 8% to 9% below what they projected in 2007, before the recession hit. Fewer tax receipts, combined with the fact that millions of baby boomers are expected to file for benefits at some point in the near future, the CBO estimates that the system’s reserves will be depleted by 2037. (Note that this trust fund depletion date and some estimates may change in a few weeks, as the Social Security Administration’s board of trustees may pose differing numbers when it issues its annual report.)

Morrissey and other retirement analysts contend that Social Security’s trust funds were meant to be drained, as their creation was driven in part by the fact that baby boomers would eventually file for benefits and, of course, stop paying into the system. However, the significance of that 2037 date for younger generations remains. Without a cash cushion to fall back on, the whole system could revert solely to pay-as-you-go, which is a system where today’s payroll taxes support the benefits of today’s retirees. That can be problematic for younger generations, says Pamela Villarreal, a senior policy analyst at the National Center for Policy Analysis. “When today’s workers retire, their benefits will be paid only if the next generation of workers agrees to pay even higher taxes,” she says.

So in 2037, if outlays outpace tax receipts Americans may see a reduction in benefits by roughly 20% if Congress doesn’t do anything, Morrissey says. That could mean raising the retirement age from 67 to 70, or it could translate to an across-the-board cut in benefits, she says. For a dual-income family in 2037 that expects to receives roughly $50,000 in Social Security payments annually, that 20% reduction would reduce their annual payment to $40,000. AARP’s director of economic security, Cristina Martin Firvida, projects that if Congress does nothing, the Social Security system could fund just 75% of benefits by 2037.

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