Last week, a new bill was introduced to congress which is being called the Social Security Reform Act of 2016. The proposed legislation includes a number of elements designed to ‘save’ Social Security. Who knows if this legislation will actually pass, this forum is not intended to be a platform for political predictions. We can probably all agree, however, that there are problems with Social Security that need to be addressed. There’s a lot of misinformation about the true state of Social Security and I would like to address some of it here.
I’ve heard countless people over the past several years talking about the fact that they don’t expect to receive any Social Security benefits in retirement. Social Security is broken and there’s nothing we can do about it. Is that true? Should we be worried?
Well, maybe. But let’s not spread rumors, let’s look at the cold hard facts.
It may help to start from the beginning. Social Security is ‘Old-Age, Survivors, and Disability Insurance’ or OASDI. Recognize that acronym from your pay stub? The Social Security Act was signed by President Roosevelt in August of 1935. Social Security was designed as a kind of ‘social insurance’ to supplement the retirements of older Americans. The first monthly recipient of Social Security was Ida May Fuller. Toward the tail end of her career, she paid $24.75 of her paychecks into Social Security and by her 100th birthday had collected benefits of almost $23,000.
According to the Social Security Administration’s website, in 1940 there were 159.4 covered workers contributing for every 1 person receiving benefits. As of 2013 there are only 2.8 covered workers contributing for every 1 person receiving benefits. Just this statistic alone tells you that there is significantly more strain on the system now than there was then. But why such a dramatic change?
According to the CDC, in 1935 life expectancy at birth for a person born in the United States was 61.7 years. In fact if you go back as far as the data, to 1900, average life expectancy at birth then was 47.3 years. So, life expectancy at birth for those retiring in the 30’s 40’s 50’s etc. was not very old. In either case, a person who retired at the traditional age of 65 was already past their life expectancy and on average, the amount of time for which people received benefits was very short.
Fast forward to today, on average, our life expectancy is 78.8 years! Many Americans are retiring at or before 65 so unlike the early years of Social Security, people need Social Security to help them fund a decade or in some cases much more than that in retirement.
As you can see, the fundamental assumptions that the Social Security system was based upon have changed significantly. Now let’s look at the numbers to get a more clear sense of what we’re facing in the future. These figures come directly from the annual report of the Social Security Board of Trustees. The most recent report is dated June 22, 2016. Here are the facts:
After all the benefit payments went out last year, the system had a surplus, just like it had the year before and just like it will have in 2016. The good news is that we are still experiencing surpluses but unfortunately, there’s more to it than that. We are right at the outset of a 19 year period of time in which 10,000 baby boomers will be retiring every day. Over this period of time, the ratio of those paying into Social Security vs. those collecting benefits will continue to decline.
Current projections show that in 2020, OASDI benefits paid out will for the first time, exceed revenues into the system. This doesn’t mean there is no more money to be paid out. Don’t forget, there is an almost $3 Trillion trust fund in place that will be used to make up the deficit. Also, don’t forget that at first, nearly all of the benefits to be paid out are still accounted for by revenues. Nearly all. But as you might have guessed, since the revenues don’t quite cover the expenditures, it will be necessary to dip into the trust fund at an ever increasing rate. Every year. And that is the beginning of the real problem.
The current projection is that the trust fund will be exhausted from these annual shortages in the year 2034. Again, this doesn’t mean there is zero left to be paid out. Don’t forget, even though the trust fund will have been exhausted, the revenues are still significant and can pay a large portion of the expenditures. The most recent projection by the Social Security Board of Trustees is that 79% of expected benefits can be paid.
So, if congress does absolutely nothing, the best case scenario is that benefit checks will be abruptly reduced to around 79% of the previous year in 2034. The projections also show that that a further reduction to 74% of benefits may be required and that will allow for system solvency out to 2090. There are two ways to interpret this information. First, it’s not good news. Many who rely on Social Security for the majority of their income will be devastated by this reduction. Even for those who will be able to get by, this is still akin to a breach of contract. On the other hand, my experience shows me that many, many people of all ages believe they will be receiving zero benefits. These facts may serve as reassurance that they may, after all, be able to claim a significant portion of their promised benefits.
We certainly have a looming problem with Social Security but it’s a far cry from the belief that there will be zero future benefits. The good news is that we still have time to fix it! Maybe this new legislation will be the beginning of the solution, maybe not. Somewhere down the line one of a few things will have to happen. Revenues (taxes) paid into the system will have to increase, benefits will have to be reduced or full retirement age will have to be increased.
So, what can you do? Two things:
- You can plan accordingly. Work with a financial advisor to do a financial plan or a retirement income plan. Plan for Social Security to be one component of your retirement income, but plan conservatively.
- You can contact your elected representatives and let them know they need to take action to fix Social Security while there’s still time. Remind them that you have been paying into OASDI and you expect to receive your benefits. (By the way, if you’re interested, you can see the estimated amount of money you and your employer(s) have paid in over your career on your Social Security statement.)
I hope this gave you a little more clarity on the state of Social Security. You should now be aware that if nothing changes, your future benefits may be impacted. I hope you can now also disregard a lot of the rampant misinformation that is presented to you on a daily basis.
If you’d like to learn more or to talk about which Social Security claiming strategy is right for you, click here to get started.