Retirement, Financial Planning

A Clear Takeaway From The Latest Social Security Projections

6/28/16 8:00 AM

iStock_000013512481_Small-1-1.jpgThe Social Security Administration (SSA) this month released its annual trustees’ report, which sheds light on the current and projected financial situations for the government’s various social programs. Overall, Social Security and Medicare together accounted for 41 percent of Federal expenditures in fiscal year 2015. Both of those programs will experience cost growth substantially in excess of U.S. gross domestic product (GDP) growth through the mid-2030s, according to the report’s authors, due to rapid population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment. As a result, the researchers estimate that the combined trust funds for the Old Age and Survivors Insurance (OASI) and Social Security Disability Insurance (DI) programs will be depleted in 2034, matching the projection from last year's report. Thereafter, the researchers calculate that scheduled tax income should be sufficient to cover only around three-quarters of the scheduled benefits through 2090 (the end of the projection period). Similarly, the trustees estimate that the Medicare Hospital Insurance (HI) trust fund will be depleted in 2028, earlier than projected in the previous year's report.

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One way to interpret all of this is that Millennials can expect Social Security to be there for them when they retire but the benefit that they receive may only be around 75 percent of what retirees are currently awarded. Projections could of course improve if the programs’ income stream increases, and the report’s authors even argued that “Lawmakers have many policy options that would reduce or eliminate the long-term financing shortfalls in Social Security and Medicare. Lawmakers should address these financial challenges as soon as possible.” Regardless of what Congress decides to do, the uncertainty surrounding the long-term sustainability of Social Security and similar programs should provide yet another reason for Americans to strive to reduce their old-age, government-related financial dependency. One of the best ways to do this is through habitual participation in a 401(k) retirement plan. For example, a joint study by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) found that almost one in four (23.5 percent) consistent 401(k) participants had an account balance greater than $200,000 by the end of the sample period, compared to only 10.0 percent for less-consistent participants. Moreover, the average 401(k) account balance of the consistent participant group was roughly twice that of the broader group ($148,399 vs. $72,383), and the median was more than four times as high ($75,359 vs. $18,433).

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Sources: Social Security Administration, Bloomberg, EBRI/ICI

Post author: Charles Couch