Motley Fool Answers co-host Robert Brokamp has been reporting about the status of the Social Security program for a pretty long time, and as he reflects in this "What's Up, Bro?" segment, the more some things change, the more they stay the same.
The 2018 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds came out recently, and the numbers are as troubling as expected. The forecast is for the program's trust funds to run dry in 2034, which is in line with what was predicted back in 1999. But the year when the retirement benefit system is expected to start paying out more than its total income was moved up significantly. Brokamp and co-host Alison Southwick consider the state of the Social Security, why so many people are justifiably more worried than ever about its future, and what the status quo means for today's workers.
A full transcript follows the video.
This video was recorded on July 17, 2018.
Alison Southwick: So, Bro, what's up?
Robert Brokamp: Alison, it's that time of year again -- the time for the "Annual Report of the Board of Trustees of the Federal Old-Age, Survivors, and Disability Insurance Trust Fund" report!
In other words, these are the reports that come out every year from the trustees of the Social Security and Medicare trust fund. In case you're curious, there are supposed to be six trustees. There's the four that are on the report this year -- the Secretary of Treasury, Secretary of Labor, Secretary of Health and Human Services, and the Acting Commissioner of Social Security. There are supposed to be two public trustees with four-year terms. The last trustees, their terms ended in 2015 or 2016, and they haven't been appointed yet. If you look at the report, it has the four people that are part of the cabinet, and then it says, "Vacant Public Trustee, Vacant Public Trustee." There are no public trustees on these reports anymore, which I think is a bit of an issue. Regardless, these are the folks who are in charge of the trustee.
This report comes out every year and unfailingly points out that at some point in the 2030s, the trust funds are going to be depleted, at least the Social Security trust funds. That exact year changes from year to year. This year it is collectively 2034. That's the exact year it was in the first article I ever wrote for The Motley Fool back in 1999.
Southwick: Really? Oh, wow!
Brokamp: Yes. Back in 1999, 2034 seemed like a long way off. Now, not so much. But there is something different about this year's report. That is, for the first time since 1982, the Social Security program's cost will exceed its income and it'll have to dip into the principal of the trust funds to pay the benefits.
This is coming four years sooner than expected. There are all kinds of reasons -- some is, the economy has not performed as well as was projected. Certainly, the Great Recession has had a large effect on the finances of the program. There's the well-known demographic problem. Last year, there were 2.8 workers for every Social Security recipient. In 2007, it was 3.3. So, there are fewer workers to pay into the program.
The Wall Street Journal actually pointed out a couple of other reasons why things are looking a little worse this year. We all know about the tax cuts that were signed into law at the end of last year. Those cut income tax rates. It didn't affect the Social Security taxes that we all pay on our payroll -- except that, because of those tax cuts, the recipients of Social Security, those who are already retired, are not going to be paying as many taxes on their Social Security benefits. It turns out, the taxes that are raised by taxing Social Security benefits actually go straight into the trust fund. But because retirees are going to be paying lower taxes, it actually weakens the trust fund.
Another issue that the Wall Street Journal points out is that the projections from previous years, you always have to assume a certain number of people immigrating to the United States. Now, they're projecting there will be fewer immigrants, because of issues that have been in the news, if you've been paying attention. That actually weakens the Social Security program to a certain extent.
A report from the Center for Retirement Research at Boston College also looked at the results and wondered whether things are a little bit worse than currently projected because, what happens during a recession, and happened in the last recession? Birth rates go down. Economic times are tough, families are like, "Maybe we shouldn't be having kids right now." But, normally, when the economy recovers, people are like, "Yay, let's have kids!" That hasn't happened in this recovery. The birth rate has stayed low.
Southwick: We found better ways to celebrate, I think. A recovering economy. [laughs]
Brokamp: Exactly. So, to the extent that it's something that continues -- the fertility rate is actually what they call it in the report -- that will make the finances look worse, because there will be fewer workers coming into the program to pay the payroll taxes.
The thing about it for me, when I was reading about the report -- it does come out every year -- there are lots of people out there like me who have been pointing out that this year is coming. There's just much more despair in the articles this year. It's coming, it's actually looking a little worse, but there's absolutely no political will to do anything about it. The responsible thing would be to do a mix of raising some taxes as well as changing some benefits, maybe raising the age at which you could get Social Security, maybe making it so that if you have a certain income, a certain number of assets, you wouldn't get quite as much Social Security, some sort of what they would call an intergenerational bargain to make the program solvent. But, given the current political climate, that's just not likely to happen.
So, the bottom line, I think, for everyone, is to pay attention to what the report says, and that is: at some point in the early 2030s, there's only going to be enough money in the program to pay for about three-quarters of estimated benefits. Anyone who is in their 50s or younger should assume that they're only going to get about 75% of what they're currently projected. Hopefully, they'll come up with some solution before that happens, but I certainly think that, at this point, it's responsible to assume that you're only going to get about three-quarters of what you're currently projected.