Social Security benefits are a considerable portion of any retiree’s budget. That’s why this week’s news from The Center for Retirement Research at Boston College was disconcerting—if not unexpected.
A study entitled Social Security’s Financial Outlook: The 2014 Update in Perspective was released in an August newsletter by Alicia Munnell, Director of the Center for Retirement Research. Among other findings, the program’s 75-year deficit rose to 2.88% of taxable payroll. In plain terms, this means that in order to continue issuing the current level of benefits for the next 75 years to all retirees, payroll taxes must immediately increase by 2.88%.
As unlikely a solution as that may be, the real issue is that it would only solve the problem statistically. As the ratio of retirees to workers continues to rise, the Social Security program is forced to draw from the interest on its trust fund assets to cover benefits. By the year 2020, taxes plus interest will fall short of the required payments, forcing the program to draw from the trust fund itself. Add it all up and at this sustained pace, the trust fund will be completely exhausted by the year 2033.
Luckily, even the exhaustion of the trust fund won’t mean an end to Social Security. Payroll taxes will continue to accumulate, covering about 75% of current benefits. Unfortunately, that does leave 25% uncovered, meaning that benefits as a portion of pre-retirement earnings—known as the replacement rate—will drop from 36% to 27%. That’s the lowest level since the 1950s.
The cost of continuing to keep the program solvent will only continue to rise. The required taxable payroll has grown almost a full percentage point since 1994 (from 2% to almost 3%) and in another 20 years—with baby boomers retired and the trust fund depleted—it will rise another point to almost 4%. And that assumes that life expectancy stays the same over that period.
“The shortfall is manageable,” wrote Dr. Munnell. “But with the deficit rising to about 4 percent in two decades, action should be taken soon to avoid larger tax/benefit changes later.”
In all, the report just reinforces what we’ve known for some time—Social Security is facing a long-term shortfall if we don’t take action—and soon. The actions that are available are in line with the approaches to similar programs, but will the workforce stay strong enough to sustain the program?
Current retirees have few worries when it comes to their own plans. But for their children and grandchildren, the picture is bleaker. Subsequent generations won’t be able to rely on Social Security benefits in retirement—certainly not to the same extent as Baby Boomers. In light of this report, retirees might consider setting aside a portion of savings—leaving a legacy—for family members who may bear the brunt of Social Security’s downfall.