Just how gloomy does its future look?
Will Social
Security run out of money in the 2030s? For years, Americans have been warned about that
possibility. Those warnings, however,
assume that no action will be taken to address Social Security’s financial
challenges.
Social Security is being strained by a
giant demographic shift. In 2030,
more than 20% of the U.S. population will be 65 or older. In 2010, only 13% of
the nation was that old. In 1970, less than 10% of Americans were in that age
group.1
Demand for Social Security benefits has increased, and the ratio of
retirees to working-age adults has changed. In 2010, the Census Bureau
determined that there were about 21 seniors (people aged 65 or older) for every
100 workers. By 2030, the Bureau projects that there will be 35 seniors for
every 100 workers.1
As payroll taxes fund Social Security, the program faces a major
dilemma. Actually, it faces two.
Social Security maintains two trust
funds. When you read a sentence
stating that “Social Security could run out of money by 2035,” that statement
refers to the projected shortfall of the Old Age, Survivors, and Disability
Insurance (OASDI) Trust. The OASDI is the main reservoir of Social Security
benefits, from which monthly payments are made to seniors. The latest Social
Security Trustees report indeed concludes that the OASDI Trust could be
exhausted by 2035 from years of cash outflows exceeding cash inflows.2,3
Congress just put a patch on Social Security’s other, arguably more
pressing problem. Social Security's Disability Insurance (SSDI) Trust Fund
risked being unable to pay out 100% of scheduled benefits to SSDI recipients
this year, but the Bipartisan Budget Act of 2015 directed a slightly greater
proportion of payroll taxes funding Social Security into the DI trust for the
short term. This should give the DI Trust enough revenue to pay out 100% of
benefits through 2022. Funding it adequately after 2022 remains an issue.4
If the OASDI Trust is exhausted in 2035,
what would happen to retirement benefits? They would decrease. Imagine Social Security payments shrinking 21%. If
Congress does not act to remedy Social Security’s cash flow situation before
then, Social Security Trustees forecast that a 21% cut
may be necessary in 2035 to ensure payment of benefits through 2087.3
No one wants to see that happen, so what
might Congress do to address the crisis?
Three ideas in particular have gathered support.
*Raise the cap on Social Security taxes. Currently, employers and employees each pay a 6.2%
payroll tax to fund Social Security (the self-employed pay 12.4% of their
earnings into the program). The earnings cap on the tax in 2016 is $118,500, so
any earned income above that level is not subject to payroll tax. Lifting (or
even abolishing) that cap would bring Social Security more payroll tax revenue,
specifically from higher-income Americans.3
*Adjust the full retirement age. Should it be raised to 68? How about 70? Some people
see merit in this, as many baby boomers may work and live longer than their
parents did. In theory, it could promote longer careers and shorter
retirements, and thereby lessen demand for Social Security benefits. Healthier
and wealthier baby boomers might find the idea acceptable, but poorer and less
healthy boomers might not.3
*Calculate COLAs differently. Social Security uses the Consumer Price Index for
Urban Wage Workers and Clerical Workers (CPI-W) in figuring cost-of-living
adjustments. Many senior advocates argue that the Consumer Price Index for the
Elderly (CPI-E) should be used instead. The CPI-E often gives more weight to
health care expenses and housing costs than the CPI-W. Not only that, the CPI-E
only considers the cost of living for people 62 and older. That last feature
may also be its biggest drawback. Since it only includes some of the American
population in its calculations, its detractors argue that it may not measure inflation
as well as the broader CPI-W.3
Social Security could still face a
shortfall even if all of these ideas were adopted. The Center for Retirement Research at Boston College
estimates that if all of these “fixes” were put into play today, the OASDI Trust
would still face a revenue shortage in 2035.3
In future decades, Social
Security may not be able to offer retirees what it does now, unless dramatic
moves are made on Capitol Hill. In
the worst-case scenario, monthly benefits would be cut to keep the program
solvent. A depressing thought, but one worth
remembering as you plan for the future.
Upcoming Social Security Seminars: Choice about Social Security affect your retirement. Make sure you look at the big picture before making important decisions.
• Thursday, June 2nd @ 6:00 PM - Milwaukie Branch
• Tuesday, June 7th @ 6:00 PM - Gresham Branch
Click here to register for a seminar
Upcoming Social Security Seminars: Choice about Social Security affect your retirement. Make sure you look at the big picture before making important decisions.
• Thursday, June 2nd @ 6:00 PM - Milwaukie Branch
• Tuesday, June 7th @ 6:00 PM - Gresham Branch
Click here to register for a seminar
This material was prepared by MarketingPro,
Inc., and does not necessarily represent the views of the presenting party, nor
their affiliates. This information has been derived from sources believed to be
accurate. Please note - investing involves risk, and past performance is no
guarantee of future results. The publisher is not engaged in rendering legal,
accounting or other professional services. If assistance is needed, the reader
is advised to engage the services of a competent professional. This information
should not be construed as investment, tax or legal advice and may not be
relied on for the purpose of avoiding any Federal tax penalty. This is neither
a solicitation nor recommendation to purchase or sell any investment or
insurance product or service, and should not be relied upon as such. All
indices are unmanaged and are not illustrative of any particular investment.
03282016-WR-1587
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Citations.
1 - money.usnews.com/money/retirement/articles/2014/06/16/the-youngest-baby-boomers-turn-50
[6/16/14]
2 - fool.com/retirement/general/2016/03/20/the-most-important-social-security-chart-youll-eve.aspx
[3/20/16]
3 -
fool.com/retirement/general/2016/03/19/1-big-problem-with-the-3-most-popular-social-secur.aspx
[3/19/16]
4 - marketwatch.com/story/crisis-in-social-security-disability-insurance-averted-but-not-gone-2015-11-30
[11/30/15]