This post is a follow-up to our post of October 14, 2024 entitled, “Social Security Financing---When You’re in a Hole, Stop Digging.” In this post, we will look at the retirement plan of a hypothetical couple with approximately the same underfunded status as Social Security. We employ this analogy to try to give readers a better sense of the system’s current financial predicament and the need for sooner, rather than later, action to address it.
Background—Social Security Financing Facts
Based on information provided in the 2024 OASDI Trustees report under the Trustees’ Intermediate Assumptions,
- Social Security’s Funded Status (Assets/Liabilities) as of January 1, 2024 was 79.8% (long-term actuarial deficit of 3.5% of taxable payroll).
- The OASDI Trust Fund assets as of January 1, 2024 were about 2.4% of the present value of total System liabilities for the next 75 years,
- The present value of system revenue (from payroll taxes and taxation of benefits) was about 77.4% of the present value of total system liabilities, and
- The trust fund was expected to be depleted in 2035.
While not addressed in the Trustees’ report, we estimate that OASDI’s Funded Status will be approximately 75% in 2034 (long-term actuarial deficit of about 4% of taxable payroll), even if all assumptions about the future between now and then are realized (and not changed). This expected deterioration in the system’s Funded Status is due to recognition of previously unrecognized deficits in years subsequent to the moving 75-year projection period used to measure the system’s assets and liabilities. These expected “actuarial losses” result from what the actuaries at the Social Security Administration refer to as the annual change in “valuation period” and are highlighted in Actuarial Note 2024.8, but not projected (or discussed) in the annual Trustees’ Reports.
Hypothetical Couple’s Funded Status
Let’s compare Social Security’s funded status with the funded status of Bill and Susie, who are recent retirees. Bill is age 67 with a Social Security benefit of $23,000 per annum and Susie is age 65 with a Social Security benefit of $19,200 per annum. They only have accumulated savings of $50,000 invested in non-risky assets and no other significant assets like a home. They estimate their annual essential spending at $54,000 per year in real dollars with no other spending anticipated.
Based on default assumptions for the Actuarial Financial Planner for Retired Couples,
- Their Funded Status is 79.8% (PV Assets of $1,000,539 / PV Spending Liabilities of $1,254,427)
- Their portfolio assets of $50,000 represents about 4% of the present value of their spending liability
- The present value of their Social Security benefits (their only source of income other than earnings on their accumulated savings) is about 76% of the present value of their spending liability, and
- If they spend exactly their spending budget of $54,000 in today’s dollars each year and all of the AFP default assumptions are realized, their accumulated savings is expected to be depleted in about five years.
While Bill and Susie’s financial situation is not exactly the same as Social Security’s, it is comparable, and not particularly rosy. To balance their assets and spending liabilities over their planned lifetimes, they will either have to increase their sources of income, decrease their planned spending or some combination of the two.
Bill and Susie did not save enough during their working years to adequately fund their desired level of spending throughout their entire planned retirement. They have several options at this time to address their financial situation: increase their assets, decrease their liabilities or some combination of the two. Their options also involve the timing for when to take the chosen actions (now, when their accumulated savings run out or some time in between).
Options--increasing assets
They can:
- Go back to work in order to accumulate sufficient assets
- Rent out one or more of the rooms in their apartment or their garage space
- Rely on their children, the government or rich relatives to support their spending needs
- Invest their assets more aggressively and/or buy lottery tickets
Options--decreasing liabilities
They can:
- Reduce their planned spending
- Use more optimistic planning assumptions
The prudent course of action would be for Bill and Susie to take corrective action in the near future. However, instead of taking action now to address their inadequate funding situation, they decide to wait until their portfolio assets have been exhausted.
As noted above, Bill and Susie’s financial situation is not exactly the same as Social Security’s. However, there are some similarities. The system has been out of long-range actuarial balance for over 30 years-- long ago indicating the need to reduce system benefits or increase system revenues. Therefore, it can be argued that, like Bill and Susie, many of today’s system beneficiaries failed to sufficiently fund their full retirement benefits. Also, rather than having their benefits reduced, many current beneficiaries are content to have their children, the government, more wealthy taxpayers or just someone else support continuation of their current benefits.
Summary
The example of Bill and Susie’s financial situation is intended to serve as an analogy to explain the current Social Security funding problem. The prudent course of action for Social Security is to address the system’s financial situation sooner rather than later. The American Academy of Actuaries released an excellent Issue Brief entitled “Reforming Social Security Sooner Rather than Later.” It makes several good points why it doesn’t make sense to wait until the system’s trust fund is exhausted to take remedial actions. Readers may also find my Advisor Perspectives article, Social Security’s Deterioration and Implications for Future Reform to be of interest.
How bad is Social Security’s financial condition? Despite having sufficient assets to cover benefits for the next 10 years under Intermediate Assumptions, the system’s long-term funded status is poor and is expected to worsen over the next 10 years without corrective action. In addition, there have been recent proposals to increase system benefits or decrease system revenue--actions which will only make the system’s long-range financial condition even worse.
