Tuesday, June 19, 2018

Wake Up Millennials: What the Latest Social Security Trustees Report is Telling You

On June 5th, the Social Security Trustees released their annual Trustees Report summarizing the financial status of the system.   In the press release announcing the new report, the Acting Press Officer of the Social Security Administration noted that the expected year of depletion of the system’s trust fund assets (under best estimate assumptions) remained at 2034, the same projected year of depletion as in the previous year’s report.   So, another year goes by and most of us simply shrug at this news and go about our business.

We believe it is a mistake for Millennials (or members of other generations) to simply ignore this report and its implications in their financial planning.  Like it or not, Social Security is too important for most Americans to simply ignore when it comes to possible (or likely) future benefit reductions.  In this post, we will discuss what you can glean from one figure in this year’s report and what the current implications of this figure are in terms of your financial planning.

The full Trustees Report contains 261 pages, mostly filled with lots of numbers that would bore even an actuary.  There is one figure, however, on page 13, that fairly succinctly summarizes the system’s long-term financing problem.  This figure (Figure II.D.2—OASDI Income, Cost, and Expenditures as Percentages of Taxable Payroll [under Intermediate Assumptions]) is shown below. 

(click to enlarge)

In addition to showing the expected year of depletion of assets (2034), this figure shows the expected future system cost for scheduled benefits and expected future non-interest income measured as a percentage of System taxable payroll.  Note that there is nothing particularly new about this 2018 picture compared with the same figure presented in many years of past Trustees Reports.

So, what does this Figure tell us?

  • Based on best estimate assumptions, we have approximately a 4% of taxable payroll long-term funding shortfall (gap) in our nation’s retirement plan.  This is not an insignificant shortfall and is larger than the so-called “75-year actuarial balance” measure. 
  • If Congress takes no action to close this gap prior to 2034, system benefits will effectively be reduced by 21%, across-the-board at that time. 
  • To put the program back in long-term balance prior to 2034 will require something like a 22% across-the-board decrease in benefits or a 28% increase in the payroll tax or some combination of changes that accomplish the necessary closing of the gap between expected future cost and expected future income.  
  • If system benefits are not reduced by the same percentage for some or all individuals already in retirement or for some or all individuals who are close to retirement at the time of enactment of system reform changes, benefits for “non-grandfathered” workers will need to be reduced by even larger percentages than the 21%- 22% reductions discussed above. 
What is the Unspoken Message to Millennials Hidden in Plain Sight in the Trustees Report?

Answer:  You should increase your current savings rate. 

In the past, Congress has closed funding gaps in Social Security through a combination of tax increases and benefits reductions.  We expect that the next round of Social Security reform will once again involve a combination of tax increases, benefit reductions and some level of “grandfathering” of workers who are already retired or who are close to retirement.   Until reform is enacted, however, we strongly encourage Millennials to plan on something in the neighborhood of a 25% reduction in their future Social Security benefit and adjust their current savings rate accordingly.  Our Actuarial Budget Calculator workbooks can be used to estimate the additional annual savings that may be required to make up for this anticipated benefit reduction. As discussed in our post of December 15, 2016, we estimated that Congressmen Sam Johnson’s proposal to “permanently save Social Security” would have required Millennials to save an additional 4% of pay (subject to Social Security taxes), on average. 

Of course, future Social Security reform may be accomplished by increasing the tax rate for Millennials (and other workers) or may rely on increased income from other sources.   We don’t know what will be enacted.   However, we believe prudent action is to plan on future benefit reductions and increase current savings accordingly.  You can always decrease your savings rate in the future if reform solutions involve increasing your Social Security taxes and do not involve the benefit reductions you assumed.

We encourage you to be pro-active in this matter.  The sooner you start increasing your savings rate to replace likely future Social Security benefit decreases, the less you will need to save when actual reform provisions are enacted (or system trust fund assets are depleted).