One of my favorite sources of information on retirement is the Center for Retirement Research at Boston College. Last week, they released their Social Security Financial Outlook summary report of the 2019 Trustees Report. I’ve taken the liberty of extracting what I view to be the primary points of their article to share with you – a summary of a summary if you will. Here’s what I thought you might find useful to know:
How does this year’s report compare to last year?
Contrary to media reports, the 2019 Trustees Report contains no real news. The program continues to run a 75-year deficit between 2 and 3 percent of taxable payrolls, and the trust fund will be exhausted in the early 2030s, after which the program can pay only about three quarters of benefits.
If anything, the 2019 report shows a slight improvement in the program’s 75-year finances: the deficit is projected at 2.78 percent of taxable payrolls in 2019 compared to 2.84 percent in 2018. Similarly, the trust fund is scheduled to run out of money one year later – 2035 rather than 2034, as reported last year. The improvement, after accounting for various offsetting changes, is almost entirely due to a more favorable outlook for the Disability Insurance (DI) program.
What is the current standing of the program’s finances?
The bottom line is that Social Security’s finances remain steady. Social Security’s shortfall over the next 75 years, which has been evident for the last three decades, should be addressed sooner rather than later in order to share the burden more equitably across cohorts, restore confidence in the nation’s major retirement program, and give people time to adjust to needed changes.
When will the “Trust Fund” be depleted and what does this mean for your future benefits if nothing changes?
This shift from annual surplus to deficit means that Social Security has been tapping the interest on trust fund assets to cover benefits sooner than anticipated. And, in 2020, taxes and interest are expected to fall short of annual benefit payments, which requires the government to begin drawing down trust fund assets to meet benefit commitments. The trust fund is then projected to be depleted in 2035, one year later than projected in the last Trustees Report.
The depletion of the trust fund does not mean that Social Security is “bankrupt.” Payroll tax revenues keep rolling in and can cover 80 percent of currently legislated benefits initially, declining to 75 percent by the end of the projection period. (emphasis mine) Relying only on current tax revenues, however, means that the replacement rate – benefits relative to pre-retirement earnings – for the typical age-65 worker would drop from 36 percent to about 27 percent (see Figure 2) – a level not seen since the 1950s. (Note that the replacement rate for those claiming at age 65 is already scheduled to decline from 39 percent today to 36 percent because of the ongoing increase in the Full Retirement Age.)
What would be required to fix the situation for the decades to come?
Moving from cash flows to the 75-year deficit requires calculating the difference between the present discounted value of scheduled benefits and the present discounted value of future taxes plus the assets in the trust fund. This calculation shows that Social Security’s long-run deficit is projected to equal 2.78 percent of covered payroll earnings. That figure means that if payroll taxes were raised immediately by 2.78 percentage points – 1.39 percentage points each for the employee and the employer – the government would be able to pay the current package of benefits for everyone who reaches retirement age through 2093, with a one-year reserve at the end.
If Congress is to fix these issues, they need to act. At some point, I imagine the warning signs and political unrest from the voting portion of America will get loud enough to cause our elected officials to actually do something about this problem.
That being said, even if nothing changes, Social Security doesn’t just “go away” as many people seem to think. Benefits will continue to be paid, albeit, at a reduced level.
Hopefully, we’ll start to see some real discussion about this very important topic at the federal level sometime soon.
Thanks for reading!
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I am a Financial Advisor in Pittsburgh and a CERTIFIED FINANCIAL PLANNER™ professional with Shorebridge Wealth Management. I enjoy helping clients and readers find sensible answers to retirement’s big questions. If I can answer any questions for you, feel free to Contact Me or if you think you might be a fit for our practice, see Who We Serve.