Are you going to rely on Social Security to retire?
The news in the most recent Social Security Trustees’ annual report released wasn’t good—the Trustees now project that the old age and disability trust funds combined will be unable to pay full benefits in 2033, three years sooner than projected in last year’s report. That’s in 21 years, the shortest period to trust fund “exhaustion” since before the last fix to Social Security’s finances in 1983. The grimmer outlook is due largely to changes in the Trustees’ economic assumptions–for example, they’re now projecting lower wage growth and higher unemployment–as well as a higher than predicted 3.6% cost of living increase for beneficiaries in 2012.
So will Social Security suddenly stop appearing in recipients’ bank accounts come 2033?
Will Social Security Stop?
(I can’t answer whether “the check will stop arriving in the mail?” since the Social Security Administration plans to phase out all paper checks by March 1, 2013 and as for the U.S. Postal Service come 2033, who knows?) Nope. As Social Security Commissioner Michael Astrue pointed out at a press briefing when the report was released in April, “exhaustion is an actuarial term of art and it does not mean there will be no money left to pay any benefits. Come 2033, if Congress does nothing, there will be sufficient assets to pay 75% of the benefits.’’ In other words, while the money the country has supposedly been squirreling away in imaginary trust funds will have run out, the taxes coming in should still be enough to pay 75% of promised retirement benefits. To pay 100% of benefits, the combined employer-employee tax rate would have to be raised in 2033 from 12.4% to 16.7%. If the tax were raised now, an increase to 15.1% would fund Social Security’s promises for the next 75 years.
In truth, the taxes coming in aren’t quite covering benefits now, even if you ignore the 2% temporary cut in the employee payroll tax. (In Washington’s magical accounting, the money that isn’t going into the trust funds because of the payroll tax cut is being replaced from Uncle Sam’s deep-in-the-red general fund.) Without the 2% payroll cut, Social Security tax revenue in 2011 came to $691 billion, which was $45 billion shy of Social Security’s expenses of $736 billion. But when you count $111 billion in interest earnings that are imputed to the Social Security trust funds, the program is still operating in the black and the combined trust funds are still growing.
Okay, enough make believe accounting.
Political Accounting – Taxes
The real question is whether that 25% shortfall would translate into a 25% benefit cut for everyone? Highly unlikely. As public trustee Charles Blauhous pointed out, politicians on both sides of the aisle have shown no stomach for cutting Social Security for the already retired or for the low income elderly. (Blauhous, who was appointed by President Barack Obama to fill the Republican trustee seat, is a senior research economist at the free market Mercatus Center at George Mason University. But his point here is hardly controversial. Heck, even House Budget Committee Chairman Paul Ryan, R-Wis, is careful in his benefit-cutting proposals to tip-toe around those already retired or nearing retirement age.) The sooner the politicians act, Blauhous argued, the greater the chance of fixing the shortfall in “a way that the public believes is fair.”
Put another way, the longer the politicians wait to address the shortfall, the sharper the cuts will be for younger folks and probably the better off too. And what if—lighting strikes—and they don’t wait? The burden will still fall most heavily on the young and better off, but those nearing or in retirement now would likely carry at least some of the load.
For today’s version of a “bi-partisan” solution, you can look to the proposals on Social Security reform contained in the December 2010 report of President Obama’s deficit reduction panel, popularly known as the Bowles-Simpson commission, after its Democratic and Republican co-chairs. The commission proposed closing about half the gap by gradually increasing the amount of wages subject to tax; under its proposal, the Social Security tax would be imposed on the first $190,000 of wages in 2020, versus about $168,000 under current law. (This year, the tax is imposed on the fist $110,100 of income from wages or self-employment.)
The rest of the shortfall would be made up with a gradual increase in the “full” or “normal” retirement age” for Social Security;
Will you be able to Retire?
less generous benefits for the highly paid; and shaving the annual cost of living increase for the already retired by about 0.3 percentage points a year, with an upward adjustment after a beneficiary had been on Social Security for 20 years, to soften the cumulative effects. The retirement age increases would start with those born after 1960. That’s not only because of the politicians’ fear of older voters—it’s also where already legislated retirement age increases end. The 1983 Social Security fix raised the full retirement age for those born from 1943 through 1954 to 66, boosting it another two months per year after that to 67 for those born in 1960 or later.
Note that a higher “full” retirement age amounts to a benefits cut no matter what age you claim Social Security. That’s because with a higher full retirement age, those who retire early take a bigger cut and those who wait until 70 to claim their Social Security checks get a smaller bonus for working longer. (There’s no benefit increase after you hit 70.) So, for example, someone whose full retirement age is 66 currently takes a 25% cut if he retires at 62; someone whose full retirement age is 67, takes a 30% hit. If your full retirement age is 66, you get a 32% bigger check for waiting until 70; if it’s 67, you get only 24% more.
The well off already get back less (relative to what they’ve paid in) than low income workers and the deficit commission would increase that disparity. Combined with a higher retirement age, the National Academy of Social Insurance calculated the commission’s proposals would lead to 30% lower benefits for a high earner born in 1975 than one born in 1945. Something else for poor Generation X to worry about, along with negative home equity and the rising cost of college.
So, what do you do???
You can create residual income!
Well, most people bury their head in the sand and hope the politicians will fix it!
I personally, am not going that route! There are many great opportunities available to you, quit relying on someone else to fix it. Fix it yourself!!!