Social Security, the social program controlled by the U.S. government that's responsible for providing income to retirees, survivors of deceased workers, and disabled persons, is in trouble.
This probably doesn't come as a huge shock, since we've been hearing about the tribulations of the Social Security program for years.
Social Security's two big problems
Specifically, two demographic shifts have been taking their toll on Social Security.
First, the baby boomers have begun retiring, and they'll continue to do so throughout the remainder of this decade and the next. There simply aren't enough workers to replace these boomers in the workforce while also keeping the worker-to-beneficiary ratio steady. In short, more people than ever will soon be covered by old-age benefits, which will act as a quicker drain on the remaining cash reserves in the Old-Age, Survivors, and Disability Insurance Fund (a combination of the Old-Age and Survivors Trust and the Disability Insurance Trust), or OASDI.
The other shift involves people living longer than ever. Based on data from the Centers for Disease Control and Prevention, the average life expectancy for men and women combined is 78.8 years. Over the past five decades, life expectancies have risen by an average of nearly nine years. People living longer is great news for our friends and family, but it's an added strain on the OASDI Trust.
But, according to two new studies from Harvard University, referring to the Social Security program as "in trouble" may be putting it modestly.
Is Social Security in worse shape than believed?
Per the Harvard Gazette, two recently released studies from Harvard (one of which included the assistance of an assistant professor at Dartmouth as well) concluded that the Social Security Administration's (SSA) current forecasts regarding the health of the OASDI, and the timeline by which it'll burn through its cash reserves, is likely off by billions of dollars.
Typically, the SSA makes a number of long-term forecasts on an annual basis, ranging from one, five, and 10 years, all the way up to 20 and even 75 years. While it's practically impossible to gauge the accuracy of the SSA's forecasts 75 years from now since we really don't have accurate data to go off of, it is possible for researchers to cull SSA estimates from five or 10 years ago and see how accurate the SSA was in its forecasts.
What researchers noted was that while the science of forecasting is inexact, the SSA was a very successful prognosticator until the year 2000. Since then, the studies point out that the health of the OASDI has been misleadingly rosy, and the SSA's forecast models simply aren't keeping up with the changing dynamics of society.
Why these forecasts are potentially so far off
Per Gary King, co-author of the study that appeared in the Journal of Economic Perspectives, the underlying problem is that prior to 2000, the SSA's forecasts were mostly unbiased. Since 2000, that hasn't been the case, with the SSA failing to quickly adapt (if at all) to major policy proposals from Democrats or Republicans.
According to researchers, the problem stems from the fact that SSA actuaries have all of the data used in their forecasting models under lock and key. The government, researchers, and even other SSA employees have absolutely no access to this forecasting data. Thus, if these actuaries are using forecasting tools that haven't changed much in recent years, and are not utilizing the external assistance of researchers, they could be imposing their own biases on their stated OASDI Trust projections.
One of the examples used by King focuses on growing life expectancies. King states that since 2000,
People started living longer than expected, which means people are drawing benefits for longer than expected. But, in trying to hunker down and insulate themselves from the politics, they [the actuaries for the SSA] ended up insulating themselves from the data as well.
He further suggested that while mortality rates are a factor worth addressing in forecast models, there are presumably 200-plus more to consider, and how would one person feasibly keep all 200-plus of those factors in mind when developing a long-term forecast?
King's suggestion for improving the forecast models for the SSA includes opening up the data for researchers, and automating as much as possible so as to bring human intervention and bias down to an absolute minimum.
King went on to note that correcting the forecast models won't save Social Security from heading toward insolvency, but that having more accurate forecasts would spur the right discussions among elected officials to get a permanent fix in place.
How the government can fix Social Security
The other part of the problem, aside from inaccurate forecast models that could lead to a quicker burn of the remaining cash reserves in the OASDI if these aforementioned research studies are correct, is that our lawmakers can't agree on a fix.
There are two primary ways to attack the Social Security dilemma: We can raise revenue for the program, or we can cut costs by reducing benefit payouts.
Cost-cutting is likely to be frowned upon by anyone already in retirement or who are likely within 10 years of their retirement. The prospect of a benefit cut isn't pleasant, especially for low-income workers who will count on Social Security income to be a substantial component to their retirement income. If nothing is done, based on current SSA projections (which may be flawed, mind you), benefits will be cut by 23% in 2033.
A softer method of introducing benefit cuts that we've already witnessed is a bump up in the full retirement age, or FRA. A higher FRA encourages people to work longer, allowing them to potentially save more money for retirement, and collecting additional revenue for the Social Security program from those workers.
The other possibility here is to boost revenue collection, most likely through taxation.
Raising the payroll tax earnings cap has been among the most popular fixes, although it alone can't solve 100% of the current shortfall. In 2015, any wages earned beyond $118,500 aren't taxable by the SSA. Yet, for the average American who makes a little more than $50,000 annually, they'll pay taxes to the SSA on every dollar they earn. In order to make that comparison "fairer," it's been suggested that the earnings cap be hiked to allow upper-income Americans to contribute more to the system.
Other options here might include investing some portion of the cash reserves in the stock market as opposed to fixed-income and low-yielding assets, as well as simply increasing the payroll tax taken out of people's paychecks across the board, regardless of income.
To be clear, many ideas are available, but no compromise has yet been reached by the parties on how to fix the ailing social program.
The important lesson you need to take away from these findings
If there's one lesson to take away from Harvard's latest findings and Social Security's well-publicized woes, it's that you can't count on the government or Social Security income to save you come retirement. The real onus of retirement preparation is up to you -- Social Security income is just icing on the cake.
The key to making the Social Security debate not matter as much to you is going to be saving regularly, investing for the long term, and utilizing tax-advantaged investment vehicles when available so as to minimize or delay your tax liability.