Let’s all take a deep breath.
The “tastes-great, less-filling” nature of the Social Security debate makes it difficult to take seriously, as political pundits of all stripes are quick to seize upon whatever statistic that happens to be released in order to twist it to their agenda. Is the program a utopian/socialist Ponzi scheme designed to denigrate and enslave the average citizen before the altar of almighty government? Conversely, without it, will Grandma and her children be kicked to the curb, forced to wear barrels and eat pet food in a Grapes of Wrath-style migrant dystopia?
The answer, thankfully, is far from either and somewhere in between. The release of the 2014 Social Security Trust Fund Report in July brought a corresponding release of hoots and hollers from Social Security supporters and detractors alike. Yet a sober review of its content will go a long way in cutting through the noise and nonsense that too often cause recipients to make the wrong decisions about claiming strategies and the appropriate age to begin benefits. The tens-of-thousands, if not hundreds-of-thousands, of dollars it potentially costs them has a material impact on the longevity of the retirement portfolio, and hence their affordable quality of life.
Here’s what we know: The report notes that as result of changes to Social Security enacted in 1983, benefits are now expected to be payable “in full on a timely basis until 2037, when the trust fund reserves are projected to become exhausted.”
At that point, taxes collected each year are expected to be enough to pay 76% of the benefit amount. So, yes, in order to avoid a large reduction in benefits later, Congress would need to make an immediate reduction in benefits of about 13%, or an immediate increase in the combined payroll tax rate from 12.4% to 14.4%. To do either, or some combination of both, would be “sufficient to allow full payment of the scheduled benefits for the next 75 years.”
Whether or not the political will is there to attempt these changes (or if it’s even necessary) is yet to be seen, and it might be beside the point. As the Social Security Administration emphasizes, “Since the inception of the Social Security program in 1935, scheduled benefits have always been paid on a timely basis through a series of modifications in the law that will continue.”
Translation—it’s an incredibly popular government program (how often can that be said?) and will therefore continue as close to its current form as possible. Yes, a demographic shift is occurring and we’re all living longer, but we’re not as top-heavy as once thought, with the so-called millennial generation now equal in number to that of the vaunted baby boomers. With the over 50 million people it serves, financed by the payroll taxes from over 150 million workers and their employers, Social Security is not going away any time soon.
So how to respond when someone asks, “Will I get my benefits?”
It all comes down to solvency, which for the Social Security program is defined as “the ability of the trust funds at any point in time to pay the full scheduled benefits in the law on a timely basis.”
First the good news—the 2009 Trustees Report claims the combined assets of the Old-Age and Survivors Insurance (OASI) benefits and for Disability Insurance (DI) Trust Funds will soon peak at over 350% of the annual cost of the program. All else remaining equal, the program would therefore last another 3.5 years at current levels.
Of course, the bad news is that the figure is of little value, as the aforementioned demographic shift will increase the annual cost significantly, eventually causing the trust fund to be completely exhausted by 2037.
Of course, it’s a “guesstimate” that includes such variables as economic growth, employment and ongoing tax revenue. The actual prediction ranges anywhere from the more optimistic projections of 75 years of solvency (with adjustments) to the more pessimistic projection in which the trust fund is exhausted even sooner than 2037.
As the 2014 report notes, “it’s only when the reserves in the trust funds are exhausted that timely payment of full scheduled benefits becomes an issue.” At the time of projected trust fund exhaustion in 2037, continuing tax revenue is expected to be sufficient to cover 76% of the currently scheduled benefits, roughly what someone currently receives if they begin benefits at age 62, and that’s assuming no legislative action between then and now to address the shortfall.
Irrational fears of insolvency, combined with an early-claiming bias inherent in the Social Security system, are causing many recipients to begin benefits prior to their full retirement age, whether or not it’s appropriate for their particular situation.
We believe this is a mistake, and join others who predict that any changes to ensure the ongoing viability of the program are not likely to materially impact anyone over the age of about 55. If you’re age 25, it’s something to watch, but there will be plenty of time to adjust. Grandfather clauses and other cushions will also most certainly soften the blow for older recipients.
No less of an authority than The Center for Retirement Research at Boston College makes clear, “Don’t start [benefits] early because [you think] Social Security has money problems. … You won’t get more if you do.”