The Social Security Administration (SSA) recently 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 almost half of all Federal expenditures in fiscal year 2016, and both of these programs will experience cost growth substantially in excess of U.S. gross domestic product (GDP) growth through the mid-2030s, according to the SSA analysis.
The report’s authors have attributed this in part to rapid population aging, caused by the large baby-boom generation (beneficiaries) entering retirement at a faster pace than can be replaced by 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 by 2034, in line with the projection in 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 2091 (the end of the projection period).
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 economic growth accelerates or the social programs undergo certain changes. For the latter, the report’s authors argued that lawmakers have a “broad continuum of policy options that would close or reduce Social Security's long-term financing shortfall.” Such options include raising the payroll tax rate and reducing the scheduled benefit for Americans. However, the report’s authors stressed that “much larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted in 2034.”
All of this uncertainty surrounding the long-term sustainability of Social Security 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 uninterrupted participation in a 401(k) retirement plan. In fact, an EBRI study found that roughly a quarter (26.9 percent) of consistent 401(k) participants had already amassed an account balance greater than $200,000, compared to only 10.7 percent for less-persistent participants. Moreover, the average 401(k) account balance for consistent participants was more than twice that of the broader participant group ($170,290 vs. $76,293), and the median was more than four times as high ($87,418 vs. $18,127).
Sources: U.S. Social Security Administration, Employee Benefit Research Institute, Investment Company InstitutePost author: Charles Couch