After the societal shutdown in 2020, the global economy experienced a sharp recession that slashed tax revenues. Included in these taxes is, of course, the Social Security payroll tax. As a result of this decrease, this means Social Security benefits are in more trouble than we thought just a couple of years ago.
For several decades now, Congress has taken some money from Social Security as a part of the greater federal budget. This has resulted in a decreased level of solvency for the program over time.
Combine that with the increasing number of people who are retiring in the Baby Boomer generation and we have a recipe for financial difficulty with Social Security benefits. Especially for future generations of retirees, the time to act is now.
What is the New Danger to Social Security Benefits?
In 2020, the Social Security and Medicare trustees determined Social Security would not be able to meet its payout requirements by 2035. This means that the trustees will have to start dipping into the fund’s principal balance to pay beneficiaries.
Drawing on the principal balance compounds the insolvency problem. At some point, either the benefits will suffer significant cuts by legislative correction (highly unpopular), or Congress will have to raise taxes to make up the difference (also highly unpopular).
But now, the trustees have determined that the COVID shutdown fallout has pushed the date of insolvency up to 2034. That’s only about a dozen years away from today in late 2021.
The projections for Medicare aren’t any better. That trust fund is anticipated to be depleted in 2026, just over four years from now. In 2022, monthly premiums for Medicare Part B will rise to about $158.50 per month.
How Does the Trust Fund Balance Affect Social Security Benefits?
When Social Security’s trust fund is depleted, the government will only be able to pay out about 3/4 of scheduled benefits. Medicare will only be able to manage about 91% of its expected costs.
Interesting (and perhaps concerning) are the changes in assumptions in the report. As Elizabeth Bauer notes in Forbes, the report assumes that the fertility rate will increase to 2.00 by 2036. The report expects the unemployment rate to be 4.5% instead of 5%. In the year 2040, the deficit is projected at 3.7%.
With alternate projections, the picture looks even bleaker. With a fertility rate of 1.69%, a longer average lifespan, and an unemployment rate of 5.5%, the deficit in 2040 becomes 6.47%. By 2080, at that rate, Social Security benefits would only be about 50% payable.
We also need to consider the worker-to-retiree ratio that has continuously decreased for decades. In 2021, there are 2.7 workers for each retiree. But by 2040, that number is likely to be 2.1. In 2080, the projection is 1.5 workers for each retiree.
Ms. Bauer is skeptical of the claim that fertility rates will increase, as that has not been the trend for decades. The fertility rate has been in general decline since 1958. Without more children to replace their parents, there is no way to increase the number of workers. This means less in payroll taxes to make the program more financially stable.
It’s mathematical insanity.
What Can We Do?
As I mentioned before, the math problem comes down to not having enough workers for each retiree. To solve that, the only two solutions that seem reasonably available are to increase the Social Security tax or to cut Social Security benefits. I do not know if there can be another coalition (as there was in the 1980s) to create any sort of serious fix for this inevitable solvency problem.
Because of Congress’s lack of willingness to confront the problem, many people will suffer financially. Instead of taking the inevitable consequences into serious account, the politicians continue to argue over how much to expand these programs rather than ensure long-term fiscal solvency.
In light of this, my admonishment to you, my reader, is to prepare for Social Security benefit cuts. This is not much of an issue for those currently retired, but for those of us who are still working and under age 55 or so, the bigger threat is to our well-being in retirement.
The time is now to get your act together. Don’t wait for Washington D.C. to solve our problems before you start putting in your own work.
Get yourself out of debt as fast as possible. Save up a fully-funded emergency fund of 6-months’ worth of expenses. Aggressively invest in good mutual funds over the rest of your working years. Pay off your house as quickly as possible.
I would run Social Security very differently, but that’s for another discussion. As long as the government runs the program this way, I believe it is imprudent to rely on it for your retirement income.
To protect yourself from Social Security’s inevitable insolvency, start doing the right things today. Schedule your free Discovery Session today to learn how I can guide you in doing the things that will set you on the path to wealth and financial freedom.