How Secure Is Social Security?

For many if not the majority of those who are approaching retirement, it is difficult to overstate the importance of this question. With the diminishing of defined benefit pension plans and inadequate retirement plan savings, many American seniors and disabled absolutely depend on Social Security for income.

A study from the University of Pennsylvania’s Penn Wharton Budget Model (PWBM), “Social Security’s Worsening Financial Condition,” paints an ugly picture. Below is a summary of their findings:

• Since the major Social Security reforms were passed in 1983, Social Security Trustees have slowly reduced their projected Social Security trust fund exhaustion date from at least 2058 to 2034. Yet, Trustees’ estimates don’t incorporate how the nation’s growing debt erodes the size of the future tax base.
• Using a model that incorporates future macro-economic forces, PWBM projects that the Social Security trust fund depletes in 2032. More importantly, we project much larger future annual cash-flow shortfalls. Relative to the payroll tax base, we project a cash-flow shortfall in 2032 that is 36 percent larger than the Trustees’ estimate for that year. By 2048, our projected cash-flow shortfall is 77 percent larger.
• If Social Security shortfalls continue to contribute to the federal government’s unified deficits, consistent with no changes in taxes or benefits, we project that the federal debt-to-GDP ratio will exceed 200 percent by 2048, a path that is not sustainable.

Just to clarify, since Social Security is always collecting revenue via payroll taxes, the exhaustion of the trust fund does not mean that benefits will be totally wiped out. The most recent projection from the Social Security Administration indicates that taxes would cover about 75% of benefit payments after 2034. Until recently, Social Security collected more revenues than it paid out in benefits, but today’s demographic reality (the retiring of the baby boomers) results in the opposite.

Regarding whether the trust fund itself is a fiction because it only holds specially-issued U.S. Treasury bonds, we will leave that for another time. However, even if the trust fund held shares of S&P 500 companies, we would still be facing the same problem. In other words, “It’s the demographics, stupid.” Specifically, we will have an ever-increasing percentage of the population that is retired and demanding goods and services, especially healthcare that will be provided by an ever-decreasing percentage of the population that is working. It is important to remember that retirement assets (including promised incomes) are ultimately claims on future goods and services, and scarcity of those goods and services would lead to higher prices and diminished quality of life. The ratio of workers to retirees is shrinking and approaching an unsustainable 2-to-1. Concerning health care, Medicare Part A (hospital insurance) is in even worse shape than Social Security.

Japan, with its low fertility rate, affords us a glimpse into this senior-dominated future. Rather than taking in large numbers of immigrants, Japan appears to have chosen to weather the demographic storm and is now a leader in robotics research geared to providing services for seniors.

Since it appears that Washington has no will address this problem (regardless of who is in power), how should you prepare for a potential significant cut to your anticipated Social Security income? As trite as it may sound, you will simply have to save more. If you would like to learn more about the importance of a retirement savings plan, please call us at 800-345-4635 or email us at info@clarityca.com.