Social Security Is Late Again -- Should You Worry?

Source: 401kcalculator.org via Flickr. 

By law, the Social Security trustees are supposed to issue their annual report on the state of Social Security by April 1 of every year. April 1 has come and gone, and the Trustees' report for 2015 has not yet been published.

With the program's Trust Funds projected to run out of money within the next couple of decades, it's only natural to worry whether that delay is a sign that the news may go from bad to worse. On that front, fortunately, there's little to worry about. Looking back over the past decade or so of Trustee reports, there hasn't been a real link between the delay in any report and the estimated date when Social Security's Trust Funds run dry. Still, those Trustee Reports should give you reason to worry.

The alarming trend from the Social Security Trustee Reports
The reason you should be concerned, delay in reporting or not, has to do with the direction of the key projection made in each year's Trustee Report -- when the program's Trust Funds will empty. As the table below shows, that run-dry date keeps getting closer for two reasons. First, the normal passage of time brings that future ever closer. Second, and at least as worryingly, the projected date gets revised closer far more frequently than it gets revised farther away.

Source: Social Security. 

Indeed, in 2004, the Trustees were projecting Social Security would be adequately funded until 2042. In 2014, just a decade later, the expected run dry date got moved up nearly a decade, to 2033. If you didn't do anything in 2004, thinking you had nearly 40 years to correct for it, imagine the shock of discovering that your buffer of time was really evaporating nearly twice as fast as you thought.

Why this matters to you
The shifts in both the calendar and the projections make it clear: Social Security's funding problem is no longer a long-term issue. Instead, it's a present-day problem that affects nearly all Americans -- even current retirees.

Based on the most recent published Trustee report, Social Security's trust funds will run out of money in 2033, slashing benefits by around 23% just 18 years from now. You can take your Social Security retirement benefit as early as age 62. According to Social Security's actuarial table, a typical 62-year-old male is expected to live another 19.81 years, and a typical 62-year-old female is expected to live another 20.57 years.

That means unless something changes with the program or its projections, even some current retirees are likely to see their Social Security benefits cut within their lifetimes. If you think it's hard to cut costs to save money when you're working, just imagine how hard it will be when you're well into your retirement and relying on that Social Security check to cover your costs.

What you can do about it
If there's a bright spot to this problem, it's this: You still have time to prepare yourself to cover for that gap. Regardless of when it gets published, the odds are that the 2015 Social Security Trustees Report will project that the Trust Funds will empty in about 18 years, plus or minus two or so. That's enough time to invest to make up the gap, but the buffer isn't what it used to be. The longer you wait -- or the closer future Trustees Reports move that date forward -- the tougher it will be for you to cover it.

The typical retiree received $1,331 in Social Security benefits in February 2015. If the Trust Funds do empty, and benefits get cut by the 23% the Trustees are projecting, that's a gap of about $306 per month in today's dollars that a typical retiree would have to cover. Assuming 3% annual inflation over the next 18 years, that gap will grow to about $521 per month, or $6,252 per year. 

There's a guideline in retirement planning called the 4% rule for withdrawals. Based on that rule, if you have a well-diversified portfolio:

• You can withdraw 4% of your portfolio's starting balance in your first year of retirement.
• You can increase your withdrawals by inflation every year.
• You have a very good chance of not running out of money in your retirement.

Using that rule as a guide, you'd need to have $156,300 saved within the next 18 years to cover the typical gap in Social Security payments. At 8% annualized returns -- slightly below the stock market's long-run historical average -- you'd need to save about $326 per month between now and then to cover that gap. If you wait until there's only 12 years left, that monthly amount you'd need to save jumps to about $650 -- just about doubling, despite you only losing about a third of the available time. 

What are you waiting for?
Don't wait for Social Security to publish its delayed Trustee Report to get started. No matter what it says or when it actually gets published, the general message will be the same. The Trust Funds are on track to run out of cash, which would force a substantial benefit cut. The sooner you get started preparing for that projected future, the easier and cheaper it will be for you should it actually come to pass. So, get started now, and your future self will almost certainly thank you for it.