What does the future of Social Security look like? It’s an important question, as Social Security benefits are a large source of retirement income for many Americans. According to the Social Security Administration, 52% of Americans aged 65 and older rely on Social Security for at least half of their retirement income.
One challenge facing Social Security is the question of solvency. To discuss this point, it’s important to note there are actually two trust funds for the program: the Old Age and Survivor Insurance trust fund for retirement benefits, and the Disability Insurance fund for disability-related benefits.
To reinforce, we believe that the baby boomer generation may be able to count on Social Security, but it’s important to know what may be in store. With that said, here’s a review of some outlooks on Social Security’s future.
Outlook from the Social Security Trustees
In July, the Social Security trustees released their annual reports, with rosier projections than others have put forward. Assuming that current public policy stayed in force, the retirement and disability funds, together, would be insolvent by 2034. By that time, the program would no longer have enough revenue coming in to pay retirees all of their promised benefits (a substantial impact on retirement income security.
In fact, Americans would face a 21% haircut to their benefit payments – Social Security would have enough revenue to cover just 79% of the promised benefits. When 2034 rolled around, the federal government would collect enough in payroll taxes to cover 75% of promised benefits until 2090 (actuaries for the Social Security program perform calculations over a 75-year window). The Social Security Administration expects its unfunded obligations will reach $11.4 trillion by 2090.
Keep in mind that Social Security is being paid for with means other than payroll taxes, including income tax collections, interest earnings on trust funds assets, and newly printed monies.
The nonpartisan Congressional Budget Office has a more negative outlook. To project dates of insolvency, the CBO ran over 500 simulations of different outcomes. According to the CBO, 80% of the simulations had negative outcomes between 2026 and 2033. So both funds would likely be exhausted at some point between 2026 and 2033.
Based on its overall findings, the Congressional Budget Office estimates Social Security would be insolvent by 2029.
Still, others take a more extreme view. David Stockman, a former Director of the Office of Management and Budget, estimates Social Security can go bankrupt in just a decade.
His reasoning is due to a variety of factors:
• In terms of cash-flow, the disability and retirement funds spent $859 billion during 2014 but took in just $786 billion in tax revenues – a $73 billion gap
• The trustees reported both funds face a cumulative cash deficit of $1.6 trillion from 2015 to 2026
• In its general budget forecasts, the White House projects general fund outlays (in laymen’s terms, an amount of money spent) will exceed general revenues by $8 trillion over the next twelve years (excluding payroll taxes)
• Therefore, Stockman asserts that more public debt will have to be added to cover the $1.6 trillion gap
• According to Stockman, the remaining figures rely upon unrealistic or unsatisfactory accounting metrics to justify the judgment of solvency until 2034
Stockman notes the 2015 report on the funds projects $1.2 trillion in interest earnings over the next 12 years – which assumes a 3.5% growth rate. Internal analysis from Safe Money Resource shows that bond yields for the 10-Year Treasury Constant Maturity Rate have ranged roughly from 1-3.7%, with a range of 1.78-2.06% in 2016. With bond yields and interest rates in general at such lows, Stockman says the interest earning projections are inflated.
Moreover, the 2015 report projects nominal GDP growth of 5.1% over the next twelve years. Stockman asserts that these growth expectations are unrealistic, given how GPD growth has been slower in recent years. In fact, yearly real GDP growth hasn’t exceeded 3% for a straight decade, as of February 2016.
What’s the Takeaway?
These outlooks for Social Security leave us with two valuable takeaways: We can’t rely upon guaranteed government assistance for income security, and Social Security should be just one component of a retirement income plan. A diverse selection of income sources should be tapped for monthly income needs in retirement, ideally based on a suitable balance of income-generating ability, risk, and protection.
Safe Money Resource specializes in helping retirees and pre-retirees create customized income strategies. We have helped thousands of Americans with their income goals, whether it’s helping create a strategy from the ground-up or offering a second opinion on an existing income strategy.
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