Society problems


Last week, the Treasury Department’s Social Security Board released its annual report in a classic case of good news and bad news.

The good news, of sorts, was that the date that Social Security would be able to pay the planned benefits had to be 2034 – and while that’s not very far off, it was a year later than the report from the previous year had indicated it. The bad news, of course, is that without some sort of adjustment, the program won’t be able to pay those scheduled benefits beyond 2034.[1]

Now, that’s not the same as “going bankrupt” or running out of money – but, as things stand – assuming no adjustments are made – one possible outcome would be that the benefits provided paid would be only about three quarters of the “expected benefit”. .”[2]

What’s weird is that it’s hard to find anyone who seems to think the problem won’t be fixed at some point – although definitions of “fixed” vary – and no one is willing to guess who will intervene, let alone when or how.

The “how”

Of course, the how is relatively simple. Years ago, when the future crisis was no less real, but a little less important, I had the opportunity to hear former Federal Reserve Chairman Alan Greenspan speak on the subject of social security repair. Greenspan, who had headed a commission in the early 1980s tasked with solving what was then a much more immediate crisis of the program (believe it or not), described the two essential elements of any serious attempt to solve the funding shortfall. :

1. increase funding (usually either by increasing the withholding rates or the level of compensation to which they apply, or both); and
2. Reduce benefits, either by increasing the age of application — or what is euphemistically called “means testing,” which effectively reduces benefits to higher-income recipients.

So the answer to the problem is, as actuaries remind us, “just math,” and we don’t need to choose one solution or the other; rather, some combination – as was the case in 1983 – is the approach that seems the most likely outcome. That said, if there’s one aspect of this that’s as widely known as the fact that there’s an impending financial shortfall, it’s that the longer we delay taking action to do so, the worse it will be difficult – more expensive – it will be.

Regardless of the historical successes of this system and the dependence of the country’s pensioners on its benefits, I think most of my generation – and certainly those of my children – have doubts about its viability. long-term financial. Adjustments have been made over time to address these potential shortcomings: the retirement age has been raised, the taxes withheld from current wages to fund this system have been increased, the benefits paid by this system have been subject to to tax (thereby reducing benefits, especially since these limits have not been adjusted for inflation) – and most honest people (even politicians) will agree that these same kinds of changes will be again needed to avoid the future funding crisis.

To get an idea of ​​how endemic Social Security is to retirement planning, simply try to find a projection of retirement income needs that doesn’t have Social Security benefits as its baseline. Or consider that an emerging strategy for making up for shortfalls in retirement savings is to use those savings to defer demand for Social Security to maximize those benefits. Indeed, given the number of Americans who rely on Social Security as their sole or at least primary source of retirement income, one would think that addressing the impending shortfall would be a priority for policymakers. But for the most part, that seems to be left to “someone else, another time.”

Without a doubt, Social Security is most certainly the biggest retirement assumption – by individuals, retirement planners and legislators. At a time when we strive to broaden the coverage, expand the impact of automatic plan design features and the reach of state-run IRA programs, we know that, as valuable, if not essential, as Be these steps to broaden and deepen the success of the private pension system – they will not be “enough” if we do not solidify the basic foundation upon which the nation’s retirement security currently rests.

The “calculations” in the admins report suggest we just took an “extra” year to fix the problem. Let’s not waste it.


[1] Let’s not forget that the Medicare program is in (even) worse shape. But that’s an article for another day.

[2] Not that potential recipients have a solid understanding of how the program works, even under the best of circumstances – see Many Near-Retirees in the Dark on How Social Security Works.