What's $500 billion between friends? Chump change, right? Unfortunately, that's about the difference of opinion between the Social Security Trustees and the Congressional Budget Office when it comes to the Social Security Trust Funds in just over eight years from now.
Last July, the Social Security Trustees published their annual report on the health of the Social Security Trust Funds. Their intermediate projection estimated that the combined Trust Funds would have $2,698.4 billion in 2023. This January, the Congressional Budget Office produced its updated estimate. Combining its estimate for the cumulative shortfall in the Disability trust fund with its estimate for the Retirement trust fund produces a combined balance of $2,171 billion in 2023.
$527,400,000,000 or more reasons to worry
The two estimates are about $527.4 billion apart. The gap gets bigger after you consider that the Congressional Budget Office uses Federal Fiscal Years (ending in September) while the Social Security Trustees use calendar years (ending in December). Because both agree that the Trust Funds will be declining by that point, the Congressional Budget Offices' estimate would likely be even lower if it used the same calendar year end date that Social Security uses.
On one hand, the two organizations use different projection methods, so it's natural that there will be some differences between them. On the other hand, the Congressional Budget Office had access to more updated data than Social Security did when writing its recent report. Also, in the same table where Social Security put its best estimate at that nearly $2.7 trillion level, it indicated that its "high cost" scenario put the Trust Funds' combined balance below $1.7 trillion in 2023.
Either way, while the specifics differ in each projection, they're telling the same general story. The Social Security Trust Funds are on track to run out of cash in the next couple of decades. When they empty, benefits will be cut unless something changes in the law or changes to shore up those Trust Funds. This chart from Social Security's Trustee report says it all:
Source: Social Security's 2014 Trustees Report.
What can you do about it?
First: Don't panic. Even if nothing changes, and the worst of the projections come to pass, Social Security's benefits aren't going to drop to $0. Social Security estimates it will still pay 77% of expected benefits when the Trust Funds empty, with benefits still clocking in at 72% of expected levels as far out as 2088.
Second: Build a solid retirement plan. Even at current benefit levels, Social Security only replaces about 40% of a typical retiree's pre-retirement income. Regardless of whether Social Security gets patched, you need a plan to cover the part of your retirement that Social Security won't. Social Security's shortfall may make it a bit more urgent for you to have a plan in place, but it'd be no less important for you to have a plan even if Social Security were healthy.
Third: Know what you'd change. As long as you have an overall solid plan, making up for Social Security's shortfall should be fairly straightforward. The basic levers at your disposal are working for a few more years, saving a bit more, investing for a higher potential rate of return (within reason), or accepting a lower retirement income. Using any -- or some combination of all -- of those levers can help you adjust an already solid plan for your retirement investments to cover for Social Security's shortfall.
Fourth: Be prepared for the costs of any fix. If history is any guide, lawmakers will likely find a way to patch Social Security to shore it up. Those fixes won't come for free, however, and will likely involve some combination of tax hikes and benefit cuts. Since Social Security is a pay-as-you-go system, that means you'll be paying for any fixes either as a recipient or as a working taxpayer. By building the likely cost of those fixes into your overall plan, you can absorb them more easily when they do hit.
Social Security still provides an important foundation for retirement
Despite its long-term funding challenges and the open question of exactly when its Trust Funds will empty, Social Security still provides an important foundation for most Americans' retirements. Even under the worst-case projections, the majority of that foundation will still be in place if the Trust Funds do empty.
Still, don't expect too much from Social Security, and treat it like the baseline that it is, rather than as if it were full-fledged solution to your retirement needs. By planning for your retirement with your eyes wide open to that reality, you'll be in a much better position to deal with whatever does come down the pike for Social Security.
