Social Security has supplemented retirement planning decisions and incomes for decades, but with Baby Boomers retiring and long-term projections warning of the Trust Fund’s eventual depletion, many fear future retirees won’t receive adequate—if any—benefits.
However, when you look beyond the alarming headlines and consider some overlooked features of Social Security—the future seems far more benign. While it’s impossible for anyone to say exactly what will happen with Social Security in the coming years, its complete collapse is far from certain. So if you’re worried about the idea of retirement planning without Social Security, this is probably good news.
While Social Security’s trustees warn it will be bankrupt by 2033—and third parties caution it could evaporate in less than a decade—these projections are based on extremely limited information. They use only a few factors in determining their projections and assume current trends are constant or permanent. They also assume that Social Security will undergo no administrative changes in the coming years. This means they are strictly using information from the past instead of predicting and implementing possible changes for these long-term forecasts.
But things change! The past is not always indicative of the future and this can have both positive and negative effects on long-term forecasting.
It’s extremely improbable that anyone could precisely forecast the distant future. Too many unimaginable changes will occur between now and the next 10, 20, or 30 years and beyond. Remarkable innovations could cause productivity to soar or we could have another population boom. Improved medical technology could extend lifespans and, therefore, prolong the typical working age by a decade or more. Anything could happen. But long-term forecasts can’t account for any of these circumstances which could change the way we see the world.
This doesn’t mean that we are completely in the dark. It is reasonable to assume that we can make judgement calls on where we might be in the future months or years. What the long-term forecasts are missing, is the chance that things will more than likely change. This means that we should base projections on more diverse options of what that future might entail rather than just the limited factors they are currently using.
Now, if down the line we don’t get some amazing boom in population, Social Security isn’t doomed and can still be reasonable part of your retirement planning. Don’t believe the hype - Social Security isn’t withering
Many believe Social Security is a deep pool of funds stored up over time to fund future retirements, but this isn’t the case. We often see frightening stories about today’s retirees receiving more in benefits than they paid in Federal Insurance Contributions Act (FICA) contributions. But those FICA contributions didn’t go to an account with their name on it, rather it went to folks who were retired at that time.
Today, over 95% of every dollar paid into Social Security gets paid out to current retirees as well as those receiving federal disability insurance. Any spare or unused portion is lent to the government through the purchase of special-issue Treasury bonds. The government receives interest on these bonds and can redeem them, if needed, when they run into depletion issues. A July 2015 press release issued by the Social Security Administration stated at last count, the trust had $2.7 trillion of those bonds on its books.
Many retirement planners are worried largely because Social Security retirement benefits and Disability Insurance trusts have exceeded FICA contributions since 2010. While interest currently covers the shortfall, those (flawed) long-term forecasts propose it won’t cover the gap after 2019. If this happens, the trusts will be required to start pulling from those reserves causing predicted depletions by 2033.
Here’s where those long-term forecasts come in: Revenue projections assume low economic and population growth, and they largely underestimate the contribution from Millennials. Forecasts are low because Millennials haven’t reached anywhere near their peak earnings power, and many are only just entering the workforce. Immigration is another underappreciated factor. Add these components into forecasting and we may see entirely different predictions.
Should population growth not suffice, administrative adjustments can help fill the void. Social Security may be a charged topic in politics, but it isn’t completely untouchable. Congress amended it seven times in the latter half of the 20th century, making minor changes to ensure continuity and even going so far as to raise the retirement age and make benefits taxable. In implementing these changes, they were able to extend Social Security’s viability for decades. Making comparable changes in the current age could result in similar benefits. Just marginal changes to benefits or revenue increases could dramatically prolong full-funding.
One thing to keep in mind though, is that it’s very unlikely that Congress will act on this anytime soon. Because it’s not currently a problem for today’s retirees it will likely be put on the back burner until the problem comes to a head. So theoretically we could have years of studies and talking heads warning that your early retirement planning should exclude Social Security. But these fears should be just as false at that point in time as they are today.