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Retirement, Baseball, and the Real Future of Social Security
Baseball sage Yogi Berra is quoted as saying, “Half the lies they tell about me aren’t true.” You could say the same about Social Security. Some critics seem to only choose statistics that support their notion that Social Security is a government boondoggle facing imminent failure. The truth is, at the venerable age of 79, Social Security is financially sound enough to stay viable in some capacity in perpetuity.
What this means to someone planning for retirement is that Social Security should be here when you need it. Unless some unforeseen disaster befalls the government or the Social Security tax is repealed, benefits are going to continue in one form or another. Some modifications might be needed to keep the program’s existing promises, but chances are good that there will be something there when you retire.
Few people will dispute the popularity of this Depression-era program. A 2013 survey by the National Academy of Social Insurance (NASI) showed that 96 percent of those currently receiving benefits say it is important to their monthly income; 72 percent say that without Social Security they would have to make significant sacrifices.
But 57 percent of those same survey respondents say they are not confident in the system, and 69 percent of those not yet receiving benefits say they are not confident that all of the future benefits they are supposed to receive will be available to them.
I think a few more Yogi-isms would be a great way to guide us as we look at the finances and future of Social Security and why it should be a part of your retirement planning.
“A nickel ain’t worth a dime anymore.”
The Social Security trust fund is intended to cover the benefits promised to those who pay into it. The fund is invested in special U.S. Treasury bonds issued when the trust’s funds are loaned to other parts of the government. The trust fund collects interest on those loans. Since Social Security is a pay-as-you-go program, it can finance its costs through a combination of dedicated revenue and trust fund assets that are a distinct entity within the federal budget and can be considered an independent (off-budget) program.
In the Social Security Administration’s 2013 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, the trustees project that trust fund reserves will continue to increase for the next several years, growing from $2.7 trillion at the beginning of 2013 to $2.9 trillion at the beginning of 2021. By 2021, annual costs will begin to exceed total income, and trust fund reserves will begin to decline. By 2033, the trust fund will be exhausted. At that time income into the program via Social Security taxes would only be sufficient to pay 77 percent of benefits promised, and 72 percent of benefits promised by the end of 2087.
“If you don’t know where you’re going, you might not get there.”
So even if the trust fund were to be depleted and Social Security could only pay out what taxes bring in, retirees would continue to receive significant benefits. And the changes to keep Social Security viable in its current form are much more realistic than generally made known. For example, trustees have calculated that a Social Security tax increase alone, from the traditional 12.4 percent (employers and employees each pay 6.2 percent) to a combined rate of 15.12 percent, would provide the funding necessary to pay projected benefits for the next 75 years.
In addition, there are many small changes that would bring Social Security into actuarial balance, though each change individually resolves only a fraction of the deficit.
|Index full retirement age to longevity||Covers about one-fifth of the actuarial deficit|
|Index cost of living adjustments (COLAs) to the chained consumer price index (which reflects substitutions that consumers make within COLA)||Covers about one-fifth of the actuarial deficit|
|Subject 90 percent of wages to the Social Security tax, which would increase the taxable earnings limit||Covers about one-third of the actuarial deficit|
The most practical changes to present law can be reviewed with a calculator created by the Committee for a Responsible Federal Budget.
“When you come to a fork in the road, take it.”
According to the NASI survey, factual information can change a person’s concerns about the future of Social Security. Just 18 percent of respondents knew that Social Security would still be able to pay a reduced benefit in 2033. After learning that an increase in Social Security taxes would ensure that the program could pay full benefits for 75 years, the number of survey participants who think Social Security financing is in a crisis dropped by half, while those who think it is a manageable problem increased by two-thirds.
Greater education will help people understand that Social Security is sustainable, and is likely to be supported in the voting booths judging by the high percentage of Americans who agree with these statements:
- “I don’t mind paying Social Security taxes because it provides security and stability to millions.” (84 percent)
- “It is critical that we preserve Social Security even if it means increasing the Social Security tax paid by working Americans.” (82 percent)
- “We should consider increasing Social Security benefits.” (75 percent)
- “Do not means-test eligibility for Social Security benefits.” (74 percent)
“It ain’t over till it’s over.”
The best time to secure Social Security is now; trustees say that the sooner changes are enacted the less painful they will be. For example, a combined Social Security tax rate increase to 15.12 percent now would close the actuarial deficit, but the Social Security tax rate increase would have to jump to 16.50 percent if postponed until 2033 and 17.17 percent if postponed to 2087.
The issue may be forced to the forefront by a projected 2016 shortfall in the disability insurance (DI) component of Social Security; Congress will need to reallocate revenue between old-age and survivors insurance (OASI) and DI as it has done 11 times in the past. This may be lawmakers’ next opportunity to address long-term problems and demonstrate that the rumors of Social Security's demise have been greatly exaggerated.
It appears that Social Security will remain a cornerstone of the financial plans of most Americans. That seems perfectly logical since the present value of a couple’s Social Security benefits can be worth well over $1 million and provide an annuity stream that protects against the risk of outliving your money. But Social Security remains one of those things that is beyond your individual control. To achieve your retirement vision, it’s often better to focus your attention on those things that you can control, like living within your means, tax planning, and your investment portfolio.
Yogi had it right when he said, “The future ain’t what it used to be.” But if we can agree that your future will likely include Social Security, then the next thing you need to do is come up with a strategy for when to take it. Check out John Gustavson’s article, The Benefits of Delayed Retirement — Part Two, for some guidance on that question.