Episode 70
The precarious position of the Social Security Program has been in the news lately, and for good reason. It’s due to run out of money in the next 15 years. Is there anything that can be done to salvage it? More importantly, how will this impact you personally if the program goes away or the benefits are severely reduced? In this episode, we discuss what’s caused the current shortfall in the program and what the potential outcome will be as we look to the future. We’ll also share some thoughts on what you should be doing to prepare.

SHOW NOTES

The Future of Social Security and Disability Insurance

According to the Social Security Trustees
In 2010 the costs of social security started being higher than what is collected every year.
Because of interest on the investments in the fund, Social Security hasn’t started to lose money every year yet, but this year (2019) the fund is expected to start losing more money than it gains through investments and payments into the program, so for the next 15 years the fund will get lower and lower until it’s completely empty in 2034.
Thereafter, payroll taxes are projected to only cover approximately 79% of program obligations.
So, Congress will need to make changes to the scheduled benefits and revenue sources for the program in the future.
Possible solutions are: immediate reduction in benefits of about 13 percent, or an immediate increase in the combined payroll tax rate from 12.4 percent to 14.4 percent, or some combination of these changes, would be sufficient to allow full payment of the scheduled benefits for the next 75 years.

Sustainability of Social Security

The concept of sustainability for the Social Security program has come to have two separate meanings.

The first considers only the simple question of whether currently tax revenue is sufficient to provide scheduled benefits.
The second considers whether the current structure of the program, is viable for the future, without any changes.

According to projections by the trustees of the program, changes in benefits or changes in tax revenue (aka increases) in the future will almost certainly be needed to avoid trust fund exhaustion.

Lower payments and/or higher taxes

Birth rate effect

Birth rates averaged over three children per woman during the baby boom period (1946–1965).
After 1965, however, the total fertility rate shifted to a new level around two children per woman. It is this apparently permanent shift to lower birth rates in the United States that is the principal cause of our changing age distribution between 2010 and 2030 and the resulting shift in the ratio of beneficiaries to workers (dependency ratio).

Dependency Ratio - the ratio of beneficiaries to workers

A major reason for the projected fund exhaustion is due to the change in the dependency ratio, which is due to lower birth rates.

For the past 35 years, there have been about 3.3 workers per beneficiary (consistent with the ratio of 3 beneficiaries per 10 workers).
After 2030, the ratio will be two workers per beneficiary (consistent with 5 beneficiaries per 10 workers).
With the average worker benefit currently at about $1,000 per month, 3.3 workers would need to contribute about $300 each per month to provide a $1,000 benefit.
But after the population age distribution has shifted to have just two workers per beneficiary, each worker would need to contribute $500 to provide the same $1,000 benefit.

Another measure of trust fund financial status is the infinite horizon unfunded obligation, which takes account of all past and future annual balances, even those after the next 75 years. The extension of the time period past 75 years assumes that the current law for the OASDI program and the demographic and economic trends used for the 75‑year projection continue indefinitely.

Table VI.F1 shows that the OASDI open group unfunded obligation over the infinite horizon is $34.3 trillion in present value

https://www.ssa.gov/oact/tr/2018/VI_F_infinite.html

There is no one clear solution to the problem of increased cost for retirees because of fewer workers available to support the retirees, which in turn is caused by lower birth rates. This issue is not specific to Social Security, but also affects Medicare as well as many other private and public retirement income systems.

Like a family budget:

Spending is out of control, so they start borrowing.

First 401(k) loans (Social Security).
Then Home Equity Loan (Civil Service Retirement & Defense Retirement).
Then Line of Credit at the Bank (Borrowing from other countries).
Then High Interest Loans (Other countries jack up their interest rates).
Then runs out of places to borrow, and has to make dramatic changes to the budget, lifestyle, and other spending decisions.

How will all this impact you and your future?

Possible scenarios

Lower benefit payments
Higher taxes
Or both
With a significant number of people having 90 percent of their retirement income solely from Social Security, the future doesn’t look great!
People aren’t saving enough.

RESOURCES

Budgeting and Debt Elimination Tools
Jesus on Money by David Thompson - stewardshippastors.com
Book cover design - vote here: https://www.stewardshippastors.com/jesus-on-money-book-cover.
US National Debt - https://www.usdebtclock.org/

GMR 70: Social Security is in Trouble, Are You? Part 2