Social Security provides a valuable source of income for millions of Americans, and millions more are counting on it to deliver a portion of their income at some point in the future. But the program is in financial trouble, with a huge problem lurking just around the corner. According to the 2014 Social Security Trustees Report, the program's Disability Trust Fund is running out of money and is expected to empty in 2016.
Unless lawmakers act, when that Trust Fund empties, Social Security Disability payments will be cut by an estimated 19%. That's a ticking time bomb ready to go off next year, and unfortunately, it will likely have repercussions that go beyond just Social Security Disability to affect Social Security retirement, as well.
Why the issues will likely spread
The reason this problem will likely spread beyond just Social Security Disability is simple -- it has happened before. The last time a similar shortfall happened (around 1994), the government responded by shifting the tax percentage between Social Security's Retirement and Disability plans. That shored up the Disability plan by weakening the Retirement plan's ability to fill its own Trust Fund.
Shifting money again between Social Security Disability and Social Security Retirement won't do much to solve Social Security's longer term problems. As it currently stands, the programs combined Trust Funds are on track to run out of money by 2033, cutting retirees' income as well as those on disability.
The new Congress recently passed rules aimed at forcing a more comprehensive reform than simply shifting money between Disability and Retirement. Whether that holds true or not remains to be seen, but history suggests that any reform likely to pass will contain combination of tax hikes and benefit cuts. In any event, changes of some sort are coming to the overall Social Security program within the next two years, whether by Congressional action or inaction, and you need to be prepared for changes to come.
What you can do about it
First, understand the scope of the issue you're facing. Under current projections, Social Security Disability is expected to cut payments by around 19% by the end of 2016 if nothing changes. When the larger and better funded Social Security Retirement Trust Fund also runs out of cash within the next two decades, overall Social Security still anticipates to be able to pay around 77% of expected benefits.
Second, realize that any fixes from lawmakers will come at a very real cost to you. The three basic levers they have to work with in designing any fix are benefit levels, tax levels, and the certainty that comes from having the program's assets tied up exclusively in US Treasury debt. They all have consequences that will affect you in one way or another:
- Higher taxes will impact you while you're working.
- Lower benefits will impact you while you're collecting.
- A change in investing strategy would mean you'd have to handle more risk in your overall retirement plan to cover the part of retirement that Social Security won't.
Third, start now to adjust what you can while you can in order to best cover the gaps that will be created either when Social Security's Trust Funds empty or when the fixes create ripple effects elsewhere. The sooner you start, the more time you'll have to make the adjustments -- and the easier it will be to make them.
From a disability perspective, consider buying disability insurance. It's often available as a benefit through work, many trade associations also offer it if you happen to belong to one, or you can shop it independently through an insurance broker.
From a retirement perspective, understand that even assuming it were completely healthy, Social Security would only replace about 40% of a typical retiree's pre-retirement earnings. To have a comfortable retirement, you should already be building a nest egg to supplement that payment. If you aren't, then consider this your wake-up call to get started.
If you are already building your nest egg, then covering the gap will be fairly straightforward. The key tools you have at your disposal are:
- Adding a bit to what you're socking away,
- Planning to work a bit longer to let your money compound and reduce the years you'll need it to cover your costs, and
- Adjusting your allocation a bit farther out the risk/potential reward curve to attempt to earn sufficient incremental returns to make up for the shortfall.
With some relatively minor adjustments to those levers in your already solid plan, you can find yourself well positioned to handle the gap or other changes to Social Security.
You can defuse this time bomb
Even if the worst of the official projections come to pass, Social Security is expected to continue to provide an important foundation for both retirement and disability. The anticipated 2016 emptying of the Social Security Disability Trust Fund should serve as a notice to make sure the rest of your plans are in place and able to cover for it. As scary as it may seem on the surface, with a little bit of planning and the head start you have available to you now, you can insulate yourself from the problems to come.