Social Security is a longstanding part of working and retired Americans’ financial lives. It represents an important stream of retirement income (as well as survivor benefits and disability benefits) for millions of Americans. However, changing demographics, low interest rates, and the wholesale retirement of Baby Boomers have begun to call the program’s long-term viability into question. Much continues to be postulated about Social Security’s challenges.
The Social Security Board of Trustees releases their annual report each spring. Published on April 22, the 2020 report discusses the financial condition of the system and provides updated long-term projections. In most material respects, the tone and the results of this year’s report are similar to last year’s report.
In the 2020 Annual Report to Congress, the Trustees announced:
- The asset reserves of the combined Old-Age and Survivors Insurance and Disability Insurance (OASI and DI) Trust Funds increased by $2.5 billion in 2019 to a total of $2.897 trillion.
- The total annual cost of the program is projected to exceed total annual income, for the first time since 1982, in 2021 and remain higher throughout the 75-year projection period. As a result, asset reserves are expected to decline during 2021. Social Security’s cost has exceeded its non-interest income since 2010.
- The year when the combined trust fund reserves are projected to become depleted, if Congress does not act before then, is 2035 – the same as last year’s projection. At that time, there would be sufficient income coming in to pay 79 percent of scheduled benefits.
What are some ways lawmakers could address the projected shortfall?
- Raise the cap on earnings subject to Social Security
- Raise the payroll tax
- Raise the age to be eligible or stiffen eligibility requirements
- Change the percentage increase each year someone waits to take Social Security
- Invest differently
We should note that this year’s report was prepared before the worst effects of the current recession were felt. It might not accurately reflect the new situation on the ground. In anticipation of that concern, Andrew Saul, Social Security’s Commissioner said when the report was released, “The projections in this year’s report do not reflect the potential effects of the COVID-19 pandemic on the Social Security program. Given the uncertainty associated with these impacts, the Trustees believe it is not possible to adjust estimates accurately at this time. The duration and severity of the pandemic will affect the estimates presented in this year’s report and the financial status of the program, particularly in the short term.”
Indeed, the long-term outlook for the Social Security programs will be affected by the pandemic and the resulting recession. This is sure to happen in many ways. Just one example of the fallout is people choosing or being forced to retire sooner than expected. With the economy turning down, many Americans nearing the age of 60 or in their low 60s might retire at age 62, for example, rather than to wait until full retirement age. Although there is a “breakeven” point based on life expectancy, bigger earlier streams of cash outflows from Social Security could make the projections less optimistic, all else being equal.
The Center for Retirement Research at Boston College said, “Once this crisis subsides, stabilizing Social Security’s finances should be a high priority to restore confidence in our ability to manage our fiscal policy and to assure working Americans that they will receive the income they need in retirement. The long-run deficit can be eliminated only by putting more money into the system or by cutting benefits. There is no silver bullet.”
It is difficult to predict what action Congress might take or when they might take it. From a financial planning standpoint, we remember that Social Security is not intended to be the only, or even the biggest, source of someone’s retirement income. Rather, it should supplement other retirement savings.
The average Social Security retirement benefit was $1,503 per month in January 2020. The maximum possible Social Security retirement benefit for someone who retires at full retirement age is $3,011 in 2020. However, a worker would need to earn the maximum taxable amount, currently $137,700 for 2020, over a 35-year career to get that maximum amount.
Those of us not retired yet can find personalized estimates of our future benefits at ssa.gov/myaccount. Please feel free to reach out if you would like to discuss your Social Security benefits within the context of your overall retirement planning. Social Security is an important topic to all of us, and we will continue to monitor updates as time goes on.