Yes, Social Security is on the brink

Allworth Co-CEO Scott Hanson shares a critical reminder about the state of the Social Security program.

 

The worry about money never ends. (That is… until it does.)

And, once it does, if you arrive at a place where you truly feel at ease about your financial situation, then that’s called “achieving a state of prosperity.” (Which is the ultimate financial goal.)

Now, I don’t like, nor do we at Allworth Financial embrace, an investment management or retirement planning philosophy that motivates by stoking fear.

Life should be fun (well, at least some of the time). Besides, in between parties at the Gatsby’s, being constantly reminded that you’ll run out of money if you don’t save every extra cent can be a drag.

Sometimes, however, we all need to be reminded that some uncertainty is part of the journey.

That said, consistent saving and investing, along with following a well-conceived and personalized financial plan, are, we believe, the best ways to achieve your financial goals. Striving to strike a balance between preparing for tomorrow and living well today, focusing on those things you can control, and steeling yourself (as best you can) against those things you can’t, are all financial planning (and lifetime learning) basics.

Then there’s Social Security.

No one knows for certain what’s going to happen to Social Security. But I’m concerned about the program and what that means for people who have saved well and are either new to, or still a few years away from, retirement.

This concern is primarily directed at those people who are counting on receiving a certain monthly payment amount in the future. Because, unfortunately, when it comes to the current state of Social Security, you should hope for the best but absolutely prepare for the worst.   

Here’s why.

The Social Security trust fund is in big trouble

Financial operations for Social Security are controlled by two federal trust funds: The Old-Age and Survivors Insurance Fund (which pays retirement and survivors benefits) and the Disability Insurance Fund (which pays disability benefits). Although legally separate, most people refer to them collectively as Social Security, into which the payroll taxes and other earmarked monies are deposited (and invested). These funds are then managed by the Department of the Treasury.

And these funds are in trouble.

For many decades, Social Security, the pay-as-you-go program, took in as much or more than it paid out.

Fine.

But a tipping point has been reached, and the opposite is now true. And, due to a massive retirement age population (those darn Boomers), and the fact that fewer and fewer people are paying into the system, the Social Security trust funds are unlikely to venture back into the black again at any point during this lifetime.  

The reality is that we are now draining the reservoir of Social Security funds and there’s not enough rain falling to replace the water that’s being consumed. And that means, that in just 13 years, or so, the reserves for Social Security will all be gone, and the money coming in won’t be enough to pay the full monthly Social Security obligations that are supposed to go out. ¹

Yes, this is really happening.

And the worst part? The Social Security Administration projected all these shortfalls before COVID-19 forced millions more people into early retirements. (Once the smoke clears, it wouldn’t be surprising to see these projections all be bumped up several years.)

The following was lifted directly from the Social Security website:

“The projections and analysis in these reports do not reflect the potential effects of the COVID-19 pandemic on Social Security. Given the uncertainty associated with these impacts, the Trustees believe that it is not possible to adjust their estimates accurately at this time.”

Operating at a deficit

Mentioned above was the shrinking reservoir of funds to pay benefits. We’re all used to politicians screaming about balanced budgets and deficits and the like, but, somehow, things just keep rolling along.

Not this time.

According to the Social Security Administration, the amount of money coming in via payroll taxes, starting no later than the early 2030s, will only be able to cover 76 percent of retiree benefits. And a whopping 24 percent of underfunded obligations by the early 2030s means that “something” must give.²

And that 24 percent shortfall, known here for our purposes as “something,” will probably be you and me.

(Just for the sake of reference, in pure dollar amounts, pre-COVID deficit estimates for the Social Security shortfall range from roughly $40 trillion to over $60 trillion.²)  

Why time is running out

First, it’s important to acknowledge that politicians don’t want to touch Social Security. It’s a hot button issue, there are no winners, and the shortfalls are so staggering that no one wants to deal with them.

But the delays in addressing the issue are only making things worse. That’s because the longer they wait (to do something), the bigger the deficits become, and the more that taxes will have to be increased or benefits cut (or both) to be able to make at least some of the payments that people are expecting.

The other terrible thing about continuing to delay attacking this issue is that the longer we go without any fix (or even a bandage), the more sudden the changes are likely to be.

Sudden changes, if-and-when they happen, are more devastating because, as mentioned earlier, people are counting on the income.

So, looking not all that far ahead, if you retire and Social Security is there for the duration, and in the amounts that you expected?

Great.

But if not?

If not, then I’m sorry to say that achieving a state of prosperity is going to take some additional work and planning. Just make certain that you are addressing the possibility of a future Social Security income shortfall with your advisor right now.  

 

^{1 https://www.fool.com/investing/2020/08/19/4-pieces-of-really-bad-news-about-social-security/}

^{2 https://www.cbpp.org/research/social-security/understanding-the-social-security-trust-funds-0}