The government is out today with its annual update of Social Security’s sick finances:

–The system is $12.5 trillion under water, up from $11.4 trillion a year ago.

–Absent law changes, checks to retirees will have to be chopped 23% beginning in 2035.

–To fix just the retirement pay program, Congress could kick up the payroll tax by 2.8 percentage points. Fixing Medicare’s disastrous finances would be in addition.

US Treasury Secretary Steven Mnuchin speaks during a press conference on the Social Security and Medicare Boards of Trustees 2017 Annual Reports to Congress at the Treasury Department in Washington, DC, on July 13, 2017.  Photo credit: NICHOLAS KAMM/AFP/Getty Images

–The retirement operation is running an $86 billion annual deficit. That’s the difference between the money coming in from Social Security’s share of payroll taxes (12.4% of covered payroll) and the money going out in monthly checks and in overhead.

Ponzi? That’s too kind an interpretation. A Ponzi scheme has old investors being paid off with money raised from new ones. In this case there isn’t enough cash coming in from new players to pay off the old ones. The $86 billion shortfall is being covered in traditional federal fashion, by drawing on general tax revenues and by printing money.

The trustees of the Social Security system put the grim news in as positive light as they can. They cheerily note that “asset reserves” grew from $2,813 billion at the end of 2015 to $2,848 billion at the end of 2016.

But these “reserves” are not a pile of saved capital in the form of stocks, bonds and mortgages. Rather, they are a bookkeeping entry in which the government borrows money from the government, and the government pretends to have “income” by collecting interest from…the government.

You don’t have to worry about that $12.5 trillion right away. It represents the imaginary sum that ought to be on hand now (in addition to the fake reserves) to in order to cover all benefits over the next 75 years with all payroll taxes over the next 75 years.

Nor do you necessarily have to figure on a 23% chop to your retirement pay beginning in 2035. Congress will put through some kind of fix before then.

But you should worry about what that fix will do to your living standards, while you’re working and when you’re retired.

Here’s a list of possible bad outcomes:

–An increase in the normal retirement age (now 67 for those born after 1959).

–An increase in payroll taxes. Not the full 2.8% needed, but a noticeable amount. This will damage job creation.

–Some way of punishing people who work hard and are frugal. Benefits will be cut for people who have other income, such as from private pensions, part-time jobs and IRA money saved up.

People who are in or near retirement will probably be spared the damage. Younger folk are at risk.

If you’re young, you should be saving at least 20% of your pay (including employer contributions). Also, expect to retire at a later age than your parents did.

Get the 261-page financial report from the Social Security Administration here.

Originally published at Forbes

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