Social Security Illness Now on The Horizon
If you pay out more than you take in, eventually your funds will run out. While governments normally don’t work that way, certain things can, including Social Security.
The fact that Social Security is in serious trouble longer-term is no secret, and is in fact well known to just about everyone. We have been talking about this for years now, because we can indeed project this forward and make some pretty good estimates about how Social Security will stand the test of time, and the numbers just don’t end up computing.
This presumes that we will continue to fund and pay out from this program the way we do now, but that’s the most important perspective, as it allows us to better understand what sort of adjustments need to be made to steer it on a different course should we choose.
Without having an idea of this though, and just treating this like a monster we’ll meet at some point in the future, without knowing when, leads to people assuming that they just won’t be able to collect it, and not account for the degree of benefits they may indeed receive in their retirement.
About half of all non-retired Americans do not believe that they will receive Social Security benefits at all when they retire, and if we take out the ones that are retiring sooner and look at the people whose retirement is far enough away that they should even be worrying about this, their number is much higher.
Planning for retirement is challenging enough, especially with this being such a big issue, without having to deal with more uncertainty than we have to, or to have to figure this all out without accounting for Social Security benefits when they probably will receive them. This can lead to feelings of hopelessness or people just putting the idea of retirement and how they will make out off to the side, resulting in a whole lot less attention to this critical financial matter.
This Will Not Be A Death or Collapse
If we think of this as a bank account, even if we don’t prepare for this as the day where we’ll be no longer able to maintain benefits in their current amounts, and just wait for the point we break the water, we’ll still be taking in lots of money for this, just not quite enough.
This gap, therefore, starts out very small, and while it grows over time, this event will be nothing like the falling off of a cliff that many assume, the collapse and failure of Social Security in other words. Rather, this will be like going off the edge into a hill, one that slopes downward so little that you can barely notice it, but also one that does not have an end.
The first years, therefore, will be rather gentle instead of abrupt, but since we are declining, we either need to take in more or pay out less, and there are no other possibilities. Both have their issues, as more that people pay into Social Security, the less they have in their pockets, and this has economic as well as personal consequences.
If you cut people’s benefits though, that will affect the quality of life of a lot of seniors who rely on this income to enough of a degree to be affected. Seniors do vote, and we’re going to have quite a few more of them when this time comes, which is part of the problem in fact. They will no doubt be seeking a different solution than this.
The Trust Fund Going Broke Doesn’t Mean Social Security is Broke
Social Security gets its money in two ways, from taxation and from the trust fund that is set up to cover shortfalls. When people speak of Social Security going broke, they are speaking of the trust fund, which is different from saying that Social Security cannot pay out anything anymore.
The trust fund is set to run out in 2034, 15 years away, if nothing changes, meaning that we don’t cut benefits or increase taxes during this time. This is the first question that we need to answer when looking at what we may expect.
The second question concerns the impact of this, how much we may expect that our benefits are going to need to be reduced when the trust fund can no longer kick in funds. The current estimate is that we’ll still see three-quarters funding, with 25% being lost.
This is the 25% we’ll need to address, meaning how much of this if any will be made up for through higher taxes, and how much retirees will have to get by without. It’s hard to imagine us not increasing taxes at least somewhat, and the degree that we do will define the amount of the benefit reduction.
How much do we need to put up Social Security taxes to fix this problem? The trustees of the Social Security program tell us that we’re looking at 1% of GDP, which works out to an overall tax increase of 10%.
Some think that this is pretty realistic, and tell us things like fully funding the trust fund would be pretty much in line with rates of increase with some other government programs, it’s an entirely different matter to have the government just borrow more money, compared to hard cash that needs to be collected from people’s pockets.
Raising taxes this much, which would cash out to raising Social Security rates a lot, just isn’t something that Americans will probably be prepared to stomach, not to mention what this redistribution would do to the economy. Less money in people’s pockets means less money on the street stimulating the economy, which stashing it in a government account does not do.
We could probably get by with raising this somewhat though, and as time goes on and the appointed hour draws nearer, we may see this at least look to extend the deadline. It will come though, and while we need to be prepared, we also need to be informed.
Editor, MarketReview.com
Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.
Contact Robert: robert@marketreview.com
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