We have known for some time now that Social Security’s long-term health is in question, and that the program is in serious need of financial reform to remain a viable source of income for retirees. A new independent report indicates that the problem may be worse than has been reported by Social Security trustees. Conducted by the University of Pennsylvania’s Wharton School of Business, this study highlights the worsening condition of the nation’s Social Security program while the program serves an increasingly higher number of retirees dependent on the program.
Wharton’s study, “Social Security’s Worsening Condition”, highlights problems with the way Social Security’s Trustees have constructed projections concerning Social Security’s long-term health. Since the Social Security reform efforts of 1983 when Trustees projected that revenues would be sufficient to pay benefits through 2058, the projected date for the depletion of Social Security funds has been continuously revised downward. Most recently, Social Security Trustees revised the fund exhaustion date down to 2034 because of a number of contributing factors including longer life expectancies for retirees, and lower birth rates resulting in fewer workers to support an increasing number of retirees.
The Wharton study suggests that Social Security’s Trustees have used static economic and financial assumptions to build their projections. By failing to account for economic factors that have changed, including the nation’s growing debt, the Wharton study suggests the Trustees have presented a rosier picture than reality. Wharton’s study predicts depletion of Social Security funds in 2032, two years earlier than the Trustees’ projections of 2034.
Coupled with the increasingly pessimistic outlook for Social Security, is a report from Wharton indicating that retirees are increasing their dependency on the program; further straining the program’s long-term viability and magnifying the need to correct the current dismal projections. The report indicates that the percentage of retirees who depend on Social Security for 90% or more of their retirement income has increased 6.6% from 1991 to 2012, from 43.7% of retirees to 46.6%. Furthermore, the percentage of retirees who depend on Social Security for 50% or more of their retirement income has grown by 2.9%, from 69% in 1991 to 71% in 2012.
Social Security was designed in the 1930s to provide about one-third of the necessary income for retirees. Pensions and/or personal savings are supposed to cover the rest of the needed income for retirees. The fact that 46.6% of retirees rely on Social Security for 90% or more of their retirement income indicates that the plan is not working as designed. We also know the situation is about to get even more dire for almost 50% of American retirees.
What can be done ?
Politically speaking, our nation needs to make some very tough decisions if Social Security is to be salvaged. The longer it takes to make these decisions, the more difficult and painful it will be to save Social Security as we know it today. But therein lies the problem: few politicians want to address the problem with Social Security because it is politically toxic. There are only so many levers that can be pulled to save Social Security: cut benefits to some or all cohorts, delay benefits to those who have not reached retirement age yet, or raise taxes. All of those options are politically unpopular, and threaten to curtail the political career of any politician who advocates for them in this politically charged and polarized environment. When you stop to think about it, our national politicians do not have a lot to lose by not tackling the issue. By avoiding the matter, they will not alienate any voters, and because they are not reliant on Social Security for their own retirement, these politicians will have a comfortable retirement. So we wait, and nothing changes.
Form a personal perspective, people can do some planning in advance of 2032 or 2034, depending on who is correct: Social Security’s Trustees or Wharton’s scholars. For individuals not yet receiving Social Security, planning for delayed and/or reduced retirement income benefits will better prepare them to find alternate retirement income sources and/or to plan for a more modest retirement lifestyle. For individuals who are currently receiving Social Security income benefits, planning for benefit cuts and no cost-of-living adjustments may be in order. Both cohorts had better prepare for higher taxes too.
Social Security’s problems did not develop overnight, and the solution to Social Security’s funding problems will not be simple or pleasant for most. Nevertheless, we have been warned: the day of reckoning for Social Security arrives in 2032 or 2034. What will you do to prepare for that day?
Sources Wharton School of Business, “Social Security’s Worsening Condition”, InvestmentNews