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Alicia Munnell, Director of Boston College's Center for Retirement Research

Beware the Social Security Income Replacement Cliff: Alicia Munnell

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What You Need to Know

  • Munnell is the director of the Center for Retirement Research at Boston College.
  • She read the latest Social Security trustees report and says the new one looks a lot like the old ones.
  • One thing she noticed about the new report: Unusual items.

Social Security will keep paying retirement benefits in 2035, even if its trust fund empties out, but the cut in the amount would be huge.

That’s the assessment of Alicia Munnell, director of the Center for Retirement Research at Boston College.

Munnell, one of the top academic retirement researchers in the world, says Social Security should receive enough payroll tax revenue to pay 80% of the currently promised benefits from current income in 2035, and about 74% of the promised benefits in 2096.

But the replacement rate, or the percentage of pre-retirement earnings provided by Social Security benefits, would fall off a cliff.

Today, the typical replacement rate is 38%.

In 2035, if Congress fails to act, the replacement rate will plunge to 27%, Munnell warns.

Munnell has included that observation in a new summary of her reactions to the 2022 Social Security trustees report.

What It Means

For Munnell, the key takeaway from the trustees report is that policymakers know that Social Security is running a 75-year deficit equal to about 3.5% of taxable revenue, and that the trustees have known that for about 30 years.

The deficit “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,” Munnell writes.

For advisors and their clients, the income replacement cliff forecast may be a way to convert vague fears about Social Security into an easy-to-measure hole to be filled.

Elastic, Death and Oddities

Here are three other Munnell reactions to the new trustees report.

1. “Retirees Don’t ‘Live on Fixed Incomes.’”

Munnell scoffs at media reports that describe typical retirees as living on fixed incomes.

“The fact of the matter is that Social Security is the major source of retirement income for most Americans, and Social Security provides an automatic cost-of-living adjustment,” Munnell says.

2. Mortality trends are helping.

The Social Security trustees are just starting to wrestle with what COVID-19 might do to Social Security recipient mortality.

But one tailwind supporting the Social Security trust fund is an apparent slowdown in improvements in U.S. life expectancy, Munnell says.

3. Unusual items may be making some trends hard to interpret.

Munnell says one factor helping Social Security solvency forecasts is a decrease in the projected long-range disability incidence rate, to 4.8 per 1,000 thousand workers, from 5 per 1,000 insured workers.

That could be partly because Americans have been less likely to become disabled, but it could also be partly because Social Security changed administrative law judge training programs and tracking tools in 2009, Munnell writes.

She points out that the percentage of Social Security disability insurance applications approved fell to 49% in 2019, from 57% in 2009.

COVID-19 may have further affected the number of Americans getting Social Security disability benefits, without affecting the underlying disability rate, by causing Social Security to close its offices from March 2020 to April of this year.

“At this point, a legitimate concern may be whether those who need the help are getting it,” Munnell says.

Alicia Munnell (Photo: Boston College Center for Retirement Research)