Something that caught our eye recently was an article from the New York Times titled “Social Security Is Staring at Its First Real Shortfall in Decades.” In short, the article says that in 2020, Social Security expenses will exceed income and the program will be forced to begin drawing down its assets in order to pay retiree benefits. Which begs the question, “ What assets are in the Social Security trust fund?” The answer is there are no assets in the Social Security trust fund; our friends in Washington spent the money. What is there is what is known as intragovernmental holdings - the portion of the federal debt that is not held by the public. The total federal debt now exceeds 22 trillion dollars and counting. Currently Congress and the administration are engaging in the political game they play occasionally when they are forced to increase the federal debt limit so we do not have to endure another government shutdown. (I’m sorry - I try not to be cynical, but it's hard.)
Unless changes are made to the program, it is projected that Social Security’s trust funds will be depleted within 15 years. If that were to happen, current law would require that benefit checks for retirees be cut by 20% across the board. Such a benefit cut could be a catastrophic surprise for the approximately 50% of retirees who depend on Social Security for the bulk of their retirement income. To make matters worse, a survey the Federal Reserve released in May found that 25% of working Americans had no retirement savings.
Under current law, benefit cuts would start in 2034 or 2035, when the main trust fund is expected to run dry. A retiree with average annual earnings of $52,000 retiring in 2037 at age 67 would expect to receive close to $27,500 per year in social security benefits. However, if the funding shortfall has not been remedied, the same retiree would receive only about $21,700 or 21% less.
The looming problems with funding Social Security benefits are nothing new. We’ve known for years that as more and more baby boomers retire there will not be enough younger workers still paying into the system to support the same level of benefits and, thus far, lawmakers have been unwilling or unable to develop and implement a solution. What has changed, or will change next year, is that we have now reached the tipping point where current outflows from Social Security are greater than inflows into the system and therefore meeting current benefit entitlements will require drawing down the system’s trust funds. Fifteen years, when the trust funds are projected to be depleted, may seem like a long way off. Consider, however, that if this timeline is correct, it means that workers who are currently in their early-to-mid 50’s will receive 20% less in benefits from social security when they retire if the current regulations remain in place. This is a large uncertainty for a group who, on average, are more than halfway through their careers and the wealth accumulation phase of their lives. Reduced Social Security benefits, increasing life expectancy, and increasing health care costs could combine to torpedo the retirement that many of these folks expected.
In my opinion, the unfunded liability facing Social Security is easier to fix than the problems facing Medicare, Medicaid and medical care overall. However, I don't think Washington has the political will to address these problems until circumstances or we force it upon them. Meanwhile, for those who would like to drill deeper, here is a link to the debt clock that contains a wealth of financial data: https://www.usdebtclock.org/
The uncertainty regarding the future of Social Security means that saving for retirement and having an optimal plan for investing those savings is even more critical than many people may realize. As an advisor, we help our clients craft a plan and portfolio that will help them achieve their retirement goals. Let’s talk about your situation.
Until next time, Cheers!
Jim