Something about Social Security just isn’t right. While most of us seem to understand that, exactly what that something is, is where the lights start going dim. Can we really count on Social Security? My guess is that the answer to that question is partially. But nowhere near the degree that we are being promised, or that current retirees are now enjoying.
The wholesale retirement of the Baby Boom Generation – talked about and fretted over for decades – is now a reality. The oldest of the generation began turning 65 in 2011. We will soon be adding nearly 4 million fresh retirees to the Social Security roles every year.
But that’s not the worst of it.
The actuarial nightmare that Social Security has always been is already beginning to play out. It is no longer a crisis that is decades in the future. It’s happening now.
The straight dope from the Social Security Administration
According to the Social Security Administration’s recently published A Summary of the 2013 Annual Reports from the Social Security and Medicare Boards of Trustees, the Social Security crisis is already upon us, even though we don’t yet feel it:
“Social Security’s total expenditures have exceeded non-interest income of its combined trust funds since 2010, and the Trustees estimate that Social Security cost will exceed non-interest income throughout the 75-year projection period. The deficit of non-interest income relative to cost was about $49 billion in 2010, $45 billion in 2011, and $55 billion in 2012. The Trustees project that this cash-flow deficit will average about $75 billion between 2013 and 2018 before rising steeply as income growth slows to the sustainable trend rate after the economic recovery is complete and the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers…After 2020, Treasury will redeem trust fund asset reserves to the extent that program cost exceeds tax revenue and interest earnings until depletion of total trust fund reserves in 2033, the same year projected in last year’s Trustees Report. Thereafter, tax income would be sufficient to pay about three-quarters of scheduled benefits through 2087 .” (Emphasis mine)
(Note: This is just a summary of the highlights of the report – the full report is exhaustive, and you can read it at your leisure at the link above.)
If the system is already in deficit, how come Social Security checks continue to go out reliably? The Trustees report addresses that question with this:
“The legislation establishing the payroll tax reduction also provided for transfers from the General Fund to the trust funds in order to “replicate to the extent possible” payments that would have occurred if the payroll tax reduction had not been enacted. Those General Fund reimbursements amounted to about 15 percent of the program’s non-interest income in 2011 and 2012.”
Translation: The Social Security Trust Fund is already being shored up by general government tax revenues (and presumably deficit financing) to pay for current benefits. In fact, in 2012 alone, nearly $100 billion came to the program in this way in order to fund Social Security benefit payments.
But how long can we count on that?
The mystical Social Security “Trust Fund” – is it even real?
Over the years we’ve heard much about the Social Security Trust Fund – the gigantic account that is being funded out of excess FICA payroll taxes. As of the end of 2012, the trust fund is reported to be in excess of $2.6 trillion. That sounds like a lot of money, and under current expenditures, it is sufficient to cover about four years of Social Security benefits, without additional FICA taxes.
So why is everyone worried about Social Security, given that it is backed up by such an enormous trust fund?
The trust fund is mostly an illusion. It is invested entirely in US government treasury securities – that is to say, the government has been investing surplus FICA taxes into itself.
What’s wrong with that?
When the time comes that the Social Security Administration needs cash from the trust fund – and that is already happening right now – they will have to sell treasury securities held in the fund on the general market. That will convert US treasury securities held in the Social Security Trust Fund to general obligations of the federal government. Translation: It will be added to the national debt.
Given that the federal government already has a national debt in excess of $16 trillion, the liquidation of trust fund reserves will increase the size of the national debt. That is on top of the $1 trillion or so that we are already adding to it every year in order to fund general government operations.
The trust fund is, essentially, a cosmetic increase in the Social Security Administration’s resources, with a promise to borrow the money to cover it later.
And later is here now.
This wasn’t supposed to happen until 2030-something
Here’s the really scary part: none this was supposed to happen for at least another 20 years – or at least so we were told. But the reality is that the dynamics of Social Security are changing radically and quickly. Consider the following:
- The economy is growing much more slowly than ever predicted – in fact, it’s mostly just bumping along the bottom.
- The next recession will aggravate the problem, just as the last one did.
- The number of retirees is now growing faster than the workforce, guaranteeing a future of fewer workers for every retiree.
- The steady creation of high paying jobs providing marginally higher tax revenues is not playing out as expected – most of the jobs created in 2013 have been only part-time.
- Expectations for Social Security have increased over the years.
- There is zero political will to make true reforms to the program.
Social Security is already operating in deficit, and the current projections are that the trust fund will run completely dry in 20 years. Does anyone want to bet that it won’t happen sooner?
All that being said, I think that for political reasons Social Security will be there when we all retire. But we should be fully prepared either for greatly reduced benefits, or for the “promised benefits” to be massively watered down by generous waves of inflation. Either way, the benefits won’t have buying power close to what they do now.
What can we do about it?
All of this reads like a financial horror story, which is exactly what it will be for the 53% of married couples and 74% of unmarried persons receiving 50% or more of their income from Social Security. What can we do about it now?
Retirement strategies will have to change to adjust to the new realities of Social Security. Here are suggested strategies – many of them will take years to fully implement, which is why you should get started now.
Build up your own retirement savings. If Social Security benefits will be cut or otherwise watered down, you’ll have to be prepared to rely on your own retirement provisions. Prioritize retirement savings no matter what your age, but especially as you get closer to retirement.
Cut your standard of living. No matter what your standard of living is, begin reducing it now. Not only will this lower your income requirements in retirement, but it will free up income now that can be redirected into your retirement savings.
Have a back-up income source. Plan on having a part-time job, some form of reduced continuation of your current career, or better yet, start your own business, either as a full-time venture, or as a side business. If you need ideas, check out the ones on this post, as well as other thoughts on the topic.
Get out of debt. Culturally, we’ve gotten entirely too comfortable with debt, to such a degree that millions are carrying debt into retirement. But if Social Security will be less generous than we anticipate, then getting out of debt will be a crucial step. Not only will it free up your balance sheet, but it will also lower your cost of living, since loan payments represent a reduction in cash flow. Work out a plan to payoff your mortgage early, to drive a debt-free car, and to retire your credit cards before you do.
Manage your health more actively. Since you probably will be more active in your traditional retirement years than you currently suspect, it is important that you manage your health more aggressively. Exercise regularly, develop better eating habits, quit smoking, lighten up on alcohol, and work on gradually reducing the level of stress in your life. These are pro-active steps that are within our ability to control, and they can have a positive affect on health, especially in the long run. You’re going to need your health a lot longer than you think.
Retire where the living is cheap – but where there’s still an economy. There are some regions of the country where the cost of living is prohibitive even if you’re working, but will be more so in retirement. Start investigating areas that are less expensive, but have a reasonably strong economy. You never know when you’ll need to get a job or start a business after retirement, so make sure that area can support that activity. Traditional retirement communities may not fit the bill.
What are your thoughts on the problems with Social Security? What should we be doing now to prepare for the future?