This article, about the current state of Social Security, should serve as a severe warning.
And I am writing it, not so much for the current seniors who read my blog but for today’s caregivers who will eventually be tomorrow’s seniors, like me.
The article I am referencing, “This Scary Social Security Trend Can’t Be Ignored Any Longer“, written by the Motley Fool, is a warning in multiple respects about the state of Social Security currently, the public’s understanding of how the program really works, and how the Board of Trustees, in all likelihood, in glancing over the problem and not disclosing all of the information about the state of the problem.
Note: the sad part is that this article in the Motley Fool just focuses on Social Security. Medicare, the health program for seniors over 65, is actually in far worse shape. How bad? Read this article from Forbes and this Yahoo! Finance article to get some sense of exactly how massive the problem is.
Let’s start with the first glaring fact about Social Security, and that is why it is running out of cash…
Based on the latest estimates from the Board of Trustees, Social Security’s Old-Age, Survivors and Disability Trust (OASDI) is slated to burn through its excess cash reserves by 2034. Should this happen, a benefit cut of up to 21% could be needed to sustain the program for an additional 55 years.
This part seems pretty obvious to me. I have been reading about the topic of our demographics and how all of the entitlement programs, such as Social Security, Medicare and the State Pension systems, are all going bankrupt as more people retire and put more of a financial strain on the systems. In each of the three instances, more people will be beneficiaries of the programs while there will be fewer workers to finance the programs.
But it is the explanation about as to why this is happening that was most interesting to me…
Why’s this happening? It likely boils down to two demographic shifts and a lack of education on the part of consumers
Now, the demographic shifts should be obvious to everyone, but very few people are really aware of how it works, hence the lack of education and one of the reasons I am highlighting this article.
The two demographic shifts were…
- Baby boomers are leaving the workforce in increasing numbers and joining the 40 million strong retired workers currently receiving Social Security benefits. As more and more boomers leave the workforce, the worker-to-beneficiary ratio is expected to fall from 2.8-to-1 in 2015 to 2.1-to-1 by 2035
- Secondly, we’re living longer than ever. The Centers for Disease Control and Prevention’s most recent data shows that the average American is living to be nearly 79 years old. Comparatively, in the mid-1960s the average American was only living to age 70
Again, many people talk of these shifts, but I want to focus on the educational aspects here…
Lastly, consumers have shown time and again that they don’t have a very good grasp of the Social Security system. A MassMutual Financial Group survey conducted last year that asked 1,513 consumers 10 pretty basic questions on Social Security found that only 28% received a passing grade (seven questions right or higher), with just a single participant getting all 10 questions right. If Americans don’t understand the program, they’ll have a hard time getting the most out of it. This could be why we see such a strong tendency for retirees to claim benefits as soon as possible at age 62. If a lot of retirees file for benefits early, it can further strain the program.
Note: when I took the quiz I got 8 out of 10, and I have spent the last 4 years studying this stuff!
But the reason I am writing about this here is because of the title of the Motley Fool article…the Social Security trend that cannot be ignored any longer.
What is the trend? As the article states…
The prospect of lawmakers potentially cutting benefits by 2034 is extremely worrisome with nearly 6-in-10 current seniors heavily reliant on Social Security income and more than a third of pre-retirees expected to lean on Social Security heavily during their own retirements. But the grim reality is that the clock may be ticking at an even quicker pace than the Board of Trustees is letting on.
This is because over the last 10 years the date of Social Security’s insolvency keeps getting pushed up…
Now, if you are Polyannic you will only look at 2014 and 2015 and see that the expected date went from 2033 to 2034. But if you look at all of the estimates from the Social Security Board of Trustees you will see that since 2007 almost a decade has been cut off the program’s depletion date. And these dates are likely to be reduced even further in the further…
Although the 2015 report did bring the first “positive” change in years, we’ve witnessed seven years lopped off the expected depletion of the OASDI’s cash reserves in less than a decade. This means there’s a very real possibility that the 18 years remaining before the cash reserves are depleted in the OASDI could wind up being even less than expected. This may mean benefit cuts even sooner for current or soon-to-be retirees.
We also have to remember that the Board of Trustees is merely estimating how much longer the OASDI reserves will last based on existing GDP growth trends, as well as life expectancy. If people live longer than expected, it can be a drag on cash reserves. Similarly, if interest rates drag near historic lows as they’ve done since 2009, the low yield could hurt interest income potential on excess OASDI reserves, causing the Trust to deplete its remaining cash at a faster rate than initially expected.
And the one thing that the article does not mention is if people continue to take Social Security early, this could be a further drain on the program’s resources, reducing those dates further.
What does all this mean?
For seniors retiring now who are counting on Social Security there is a good chance that if they live into their 80’s, which is highly likely, the program will be insolvent for them and they will face some form of cut in the their benefits.
And if you are a caregiver who will be retiring in the 20 years or so, don’t plan on getting anything close to what Social Security is projecting. Please don’t shoot the messenger.