I’m going to tell you why the forecast on the much discussed “social security insolvency date” may be wrong. Benefit cuts could come sooner than expected or maybe even not at all. Keep reading to find out more.
Forecasting the Future
We’ve all heard that, in the year 2034, Social Security benefits will be cut unless reforms are made. I’ve spent a lot of time on this channel covering these reforms. We’ve talked about the Social Security 2100 Act, Bernie Sanders plan, the plan to increase full retirement age and a few other things. All of these plans are based on the premise that the SS trust fund is running out of money. When it does, the incoming payroll taxes will only be enough to cover about 75% of the amount needed to fulfill expected benefit payments.
If the trust fund does run out of money, and no reforms are made, benefit checks will be cut because the law prohibits the SSA from borrowing money to make benefit payments. But how do we know when this will happen? The talked about date is 2034, but where did that forecast come from and is it possible that they are wrong?
If you pull out your 2018 Social Security Trustees report…all 270 pages of it, you’ll see that they make a series of assumptions that lead them to this projected date.
Broadly speaking, the assumptions fit into three categories: Demographic Assumptions, Economic Assumptions, and Program Specific Assumptions.
There are a lot of different assumptions under these categories but really only a few that are contributory to the longevity of the trust fund. Within each of these narrowed down assumptions, the trustees look at three scenarios.
High Cost Scenario
The first scenario is the high cost scenario, evaluating what if this specific category doesn’t contribute as much as expected to the trust fund, or takes more from the trust fund than expected.
Low Cost Scenario
The low cost scenario is where the category adds to the trust fund or doesn’t take as much as expected from the trust fund. For example, the first demographic assumption is on fertility rates. If fertility rates increase, there will be more individuals to pay into the trust fund. So an increased child per woman rate would move the needle towards the low cost.
If women start having fewer babies than projected, it would mean that fewer future taxes are coming in and would move the needle to the higher cost assumption.
So, let’s take just a minute and look at the other sub categories that contribute the most. Still under the demographic category, we have mortality rates. If people live longer, checks have to be paid out longer, thus moving this toward the higher cost. If life expectancies go down, it would move towards the lower cost side.
Then there’s immigration. If the rate of immigrants increases, there will be more workers paying payroll taxes and move the needle toward the low cost scenario. If the immigration rate decreases, there will be less taxes paid in.
One of the most important categories is the economic assumptions. I won’t take the time to go through all of these but I’ll highlight two.
There are a number of ways that inflation could affect the economy, but the most direct impact to Social Security (“SS”) is through the Cost of Living Amount (“COLA”) adjustments. The SS COLA is based on Consumer Price Index for Urban Wage Earners and Clerical Workers (“CPI-W”), which is tied directly to inflation.
If inflation increases, the COLA on benefits will be more than anticipated driving the cost up.
If inflation is lower than expected, more money can stay in the trust fund…thus a low-cost scenario.
Obviously, if fewer people are employed, there are a number of impacts but one that’s clear is less revenue coming into the trust fund in the form of payroll taxes.
If more people are working, there will be more revenue in payroll taxes.
Now this is one that we could hear more about in the short term. Here’s why: the trustees’ report currently have the high cost scenario at 6.5% unemployment, the intermediate cost is 5.5% and the low cost is 4.5%. But when you look at the actual numbers, we are at 4% unemployment right now and have been for over a year. Now the trustees want an average so one year isn’t enough for them to change their assumptions, but if it continues to stay low, it will bode well for the trust funds longevity.
Longterm Effect of Disability Benefits
Under the program specific assumptions there are a whole slew of sub categories, but really only one that has a lot of impact and that is the incidence of disability awards. Because a disability benefit is equal to a full retirement age benefit, and is usually paid out for a lot longer than a retirement benefit, the cost will increase substantially if disability awards increase. The trustees are actually predicting that disability benefit awards will increase by around 20% over the next few years. If it’s more than that the cost will be higher, and the inverse will be true if its lower than projected.
The Moving Variables
If any of these swing in the low cost direction, it will lengthen the life of the trust fund. If several swing in the low cost direction…it’s possible that it could last forever. However, I’m not endorsing for people to plan for a best case scenario, we need to plan for the worst and go from there.
I still think reform is going to be needed. The point I’m trying to make is that nothing is certain and right now no one really knows when the trust fund will be empty.
It’s Your Retirement!
I want to thank you for taking the time to get informed. So many people rely on hope that everything will work out. Sometimes it does, but sometimes a lack of planning can ruin what should be your best years. This is your retirement! Please continue to stay informed!
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