If you pay Social Security tax or FICA tax as a U.S. employee or employer, you’ve probably asked questions about why Social Security is running out and if Social Security retirement benefits will be there when you retire in the future. Set up a free My Social Security Account to verify the accuracy of your Social Security earnings record.
According to Social Security Administration (SSA) mid-year 2016 report, more than 60 million Americans receive Social Security benefits. About two-thirds of Social Security beneficiaries receive Social Security retirement benefits. The average retired worker receives an average benefit of about USD 1348 each month. According to many financial experts and the financial press, Social Security faces both current and future challenges to its mission of providing financial stability to older workers and their survivors.
Social Security Challenges
The Wall Street Journal says that Social Security’s long-term ability to stay solvent is shaky. Social Security pays millions of retirees, survivors, and disabled persons each month through the OASDI Trust. On its current course, Social Security will run out by 2034. Although OASDI has about USD 2.8 T in available resources now, the 2016 report says these resources will disappear in just 18 years.
SSA’s Trustee report also says that OASDI will begin to spend more than it takes in by 2020.
If changes aren’t made to existing OASDI by 2034, retirees and others will see their benefits cut by about 21 percent.
If you’re counting on Social Security to fund at least half of your financial requirements in retirement or you’ve got very little saved for a future retirement today, it’s important to consider SSA’s current forecast.
In essence, SSA’s problems stem from an overall financial imbalance. According to SSA, there are four separate but inter-related issues it must grapple with over the next 18 years, including a declining worker-beneficiary ratio, increased life expectancy, low interest rates (low yield environment), and Congress’s present stalemate.
SSA Worker-Beneficiary Ratio
OASDI counts on current workers to fund retirement for older Social Security retirement beneficiaries. The demographic bulge of Baby Boomer retirees between the years of 2010 to 2030 will stress Social Security’s ability to pay out the current level of benefits. It’s predicted that 70 million or more U.S. workers will retire in these years.
The “who pays – who benefits” equation is a big challenge. New workers aren’t entering the work force in enough size to replace the numbers of Baby Boom generation retirees. That’s why SSA reports the declining worker-beneficiary ratio—from about 2.8:1 to 2.1:1—is so important. Fewer new workers won’t pay Social Security tax revenues to support the increasing number of Baby Boomer retirement beneficiaries to maintain OASDI cash reserves.
Increased Life Expectancy
People are living longer in retirement. Increased life expectancy means that current retirees will probably receive more money after retirement than they did in the past:
Grandparents of today’s retirees had an average adult life expectancy of about 70 years. The standard retirement age of 65 meant that the average retiree lived just five years afterwards.
Today’s Social Security retirement beneficiaries have a higher life expectancy of about 79 years.
Increased life expectancy today is attributed to better health care access, education, and targeted pharmaceutical treatments.
Social Security’s original design didn’t plan for a mass increase in life expectancy, nor did it imagine the impact of today’s low interest rate/low bond yield environment. Use the Life Expectancy calculator at SSA.gov.
Low Interest Rates
Social Security receipts are safely invested to grow assets under management (AUM). Today’s ultra-low yield environment means that Social Security can’t invest money at a previously available rate of return.
Low interest rates have benefited many businesses and consumers. Businesses have borrowed money to expand operations and hire more workers. Low mortgage rates help more U.S. citizens to own a home or refinance an existing mortgage loan.
However, Social Security and bond investors have struggled with low interest rates:
OASDI can’t invest in the stock market. Instead, it must invest in certain bond issues specifically earmarked for Trust funds.
When certificates of indebtedness or bond issues in the OASDI Trust mature, they’re replaced with lower special issue bond yields.
Although inflation is considered low, today’s low interest rates don’t allow OASDI to protect beneficiaries’ assets against the impact of inflation.
The Federal Reserve’s decision to keep low interest rates is designed to help businesses and consumers recover from the Great Recession of 2008. However, the longer low interest rates remain in place, the worse for the OASDI Trust’s return. A lower investment return means that Social Security must dip into cash reserves and, in doing so, depletes cash on hand at a fast rate.
Congress must address the known future cash imbalance problem faced by Social Security:
It has the ability to raise Social Security revenues by increasing Social Security tax or reduce beneficiaries’ benefits.
No one can predict Congress’s eventual course but it’s clear that changes will be made to Social Security.
Future beneficiaries can also help by deferring retirement benefits. By making the decision to wait to claim benefits at Full Retirement Age (FRA) or later, retirees’ receive more Social Security retirement benefits and help conserve OASDI funds.
Of course, younger workers should invest more money for retirement today by taking advantage of existing tax-deferred or advanced retirement plans.