Financial Planning, Retirement

Takeaways From This Year’s Social Security Projections

6/13/18 8:00 AM

iStock-119520974.jpgThe Social Security Administration (SSA) this month released its annual trustees’ report, which sheds light on the current and projected financial health of the government’s various social programs. Overall, Social Security and Medicare together accounted for 42 percent of all Federal expenditures in fiscal year 2017, and both of these programs will experience cost increases substantially in excess of U.S. gross domestic product (GDP) growth through the mid-2030s, according to the SSA analysis. The report’s authors attribute 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.

The researchers estimate that the Medicare Part A trust fund will be depleted in 2026, three years earlier than projected in the 2017 report. The combined trust funds for the Old Age and Survivors Insurance (OASI) and Social Security Disability Insurance (DI) programs, though, are forecast to last until 2034. That is in line with the projection in last year's report but still implies that after 2034 tax income should be sufficient to cover only around three-quarters of the scheduled benefits through 2092 (end of 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 be smaller than 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 argue that lawmakers have a “broad continuum of policy options that would close or reduce Social Security's long-term financing shortfall.” However, the researchers also stress that lawmakers must act “in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them,” adding that “much larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted.” For example, maintaining long-term solvency with changes that do not begin until 2034 could require a permanent 3.87 percentage point payroll tax rate increase, a permanent 23 percent reduction in all benefits, or some combination of these approaches, according to the report.

More importantly, all of the uncertainty still surrounding the sustainability of the Social Security and Medicare programs should provide yet another reason for Americans to strive to reduce their old-age, government-related financial dependency. Some of best ways to do this are to set aside as much money for retirement as possible, and to work with a professional advisor to set up a long-term financial plan. Utilizing tax-advantaged savings vehicles like 401(k)s and IRAs can provide additional help, and the sooner one can start the better because compound interest and other investment returns over long time horizons can be a very powerful tool for ensuring a comfortable and financially secure retirement.



Sources: U.S. Social Security Administration

Post author: Charles Couch