We know that, as a generation, we have our work cut out for us. We have the most expensive education costs, the most national debt, one of the most unwelcoming job markets in U.S. history, an increasing divide between the top income brackets and the rest of the country, and an aging cohort that needs our support.
Thank goodness that we can rest easy knowing that after we put in 40 some years of work and paying our dues, we will be able to retire at age 65 and have the government take care of us.
Oh wait, what’s this? That won’t happen?
Times are changing, and the many changes are putting pressure on the institution that is supposed to care for us as we grow old: the Social Security Administration. Social Security works as a pay as you go system; this means that a tax on both employers and workers is put into the Social Security Trust Fund, which is responsible for paying out retirees' benefits. Over the course of 70 years, the Trust Fund has taken in $13.8 trillion in taxes and is giving out $11.3 trillion in payments, for a total surplus of $2.7 trillion as of 2009 (Q25 & Q26).
If Social Security is so strong, having incurred yearly deficits only 11 times (4 times between ‘59-'65 and all of ‘75-'81), then why am I worried? What is the problem?
The percentage of the population aged 65+ has steadily grown since Social Security was established, from 6.8% in 1940 to 13% in 2010, and the amount between the ages 45-64 grew from 19.8% to 26.4% over the same span. Life expectancy has slowly, but steadily increased, such that people reaching 65 in 1990 live an average 5 years longer than their 1950 counterparts.
Never before have so few workers supported so many retirees, as compared to right now. And it's getting worse. The Baby Boomers are still retiring, and birthrates still declining, meaning that the ratio of workers to dependents will continue to decrease. In 1950, there were 16.5 workers per retiree, as compared to 2.8 in 2012.
The Social Security Administration intermediate projection suggests that it will decrease to 2:1 workers to retirees, and hover there indefinitely. The high cost estimation suggests it could go as low as 2 retirees for every 3 workers by 2070.
The population distribution (above embedded chart) used to look more like a pyramid, a small peak with a broadening base, but improvements in healthcare and medicine have saved many lives from premature death, a success which inadvertently put a greater burden on the Social Security system. Additionally, elderly people have the most health complications, often requiring both the most expensive and the most frequent medical procedures, while living on a fixed income, in order to stave off death for a few more years.
Social Security has tried to compensate for this shift in population distribution by increasing the Social Security tax. What was a 1% tax on both worker and employer in 1950 has become 7.5% on each party today, totals that went from 2% to 15% of income.
These changes have been absolutely ineffective, a toddler's sandcastle fighting against the incoming ocean tide. The 2013 Annual Report by the Social Security Trustees presented this:
“The combined trust fund reserves are still growing and will continue to do so through 2020. Beginning with 2021, the cost of the program is projected to exceed income.”
This means that the SS tax will cover expenses until 2020 (with the help of increasing the SS tax to 8.5% on both worker and employer), at which point costs will exceed income and the interest earned by investing the surplus. The growing deficit will be filled by spending the surplus reserves, fulfilling all payment obligations until 2033 when the reserves ($2.7 trillion as of '09) run out.
Going forward from 2033, the Social Security tax is expected to cover 75% of Social Security commitments, with no more reserves to call on and legislation in progress to address this issue. The 25% deficit is expected to last through the end of the 75-year projection the SS administration does every year, meaning that with no changes to Social Security, there will be a 25% operating deficit all the way through 2088.
In 2033, when the Trust Reserve runs out, I’ll be 42. By the time I am 65, it will be 2056, and Social Security will have been running a 25% debt for 23 years. At the 2012 budget levels ($786 billion), that's the equivalent of $196,500,000,000 in debt per year for 23 years. Except that the budget will be way higher than $786 billion, and so will the deficit.
So what can we expect to happen?
We will be the first generation to pay the increased tax rates and also the first generation to retire at the new, later age and to receive fewer benefits.
Before we start saving for retirement, there's that whole college degree thing we have to pay off. Americans have approximately $900 billion in outstanding college loans, according to the Federal Reserve bank. Not to mention, it's harder than ever for recent college graduates to get a job. The housing equity collapse of 2009 means we won’t be depending on our house to be a nest egg either.
So for one thing, we can sure as hell plan on not retiring at age 65. That was a stupid idea anyway.
We can expect the retiring age to rise, potentially as high as 70, and for retirement benefits to decrease. This increases the number of years workers will contribute to the SS Fund while also lessening the number of people who will receive benefits.
Not only are tax rates going to increase while we are at our peak earning age/years, but the Social Security taxable income cap of $106,000 is certain to be raised as well.
Frankly, I think these changes are reasonable. I just wish they had been enacted earlier so that the burden of the SS deficit could be spread across more people, lightening the load per person while also making the generation that pushes SS into the deficit could contribute more to the Trust before they retire.
It is also possible that Social Security will be eliminated entirely during our working careers and replaced with a privatized system. The privatization of Social Security is a popular platform, one that Romney campaigned behind. Once fully implemented it would work well, with people receiving benefits from what they payed in, increasing personal responsibility while still providing some government assistance and oversight.
It would work once implemented, but would have to be phased in over very long period in order to minimize the burden. I don't want to be working in that period, because not only would I be saving for my own retirement, but I would additionally be making payments to support the elder generation who did not have private accounts set up for them in their working careers.
What can we do?
Act as if you are the only person planning for your future. Because face it, you might be. Do some research. One of my economics professors told me that his biggest piece of advice is to start saving for retirement right away. Look at the interest rates on your loans! It is likely that the interest rate on your loans are less than those you could earn investing in safe bets such as CDs or U.S. Bonds.
