Study: Social Security Is in Worse Shape Than We Thought

Source: 401kcalculator.org via Flickr.

Social Security is in financial trouble. According to its most recent Trustees Report, the trust funds that support Social Security's operations will empty by 2033. If nothing is done to prevent that, benefits will be cut by around 23%. If that news weren't bad enough, there's reason to believe that Social Security's finances may be even worse than the Trustees Report suggests.

Researchers at Harvard and Dartmouth have uncovered what they call "systematic bias" in the Social Security Trustees' projection methods. They conclude that this makes Social Security's predictions overly optimistic about the future of the program.

Harvard and Dartmouth aren't alone
Unfortunately for those of us who depend on Social Security to support us in retirement, that report's conclusions are fairly consistent with other cues on the health of the program. For instance, the Congressional Budget Office projects that by 2023, Social Security's Trust Funds will have about $500 billion less in them than Social Security's own projection indicates.

Additionally, Social Security's own recent track record of projecting its future has been less than stellar. The table below shows how Social Security's own run-dry projection dates have crept ever closer over the past decade:

Source: Social Security. 

It's only to be expected that the projected date will be adjusted from time to time. After all, as the great philosopher Yogi Berra once said, "It's tough to make predictions, especially about the future." However, the fact that the projected date has been gradually moving closer suggests that the Harvard-Dartmouth paper's claims of a systematic bias may be true.

With the 2015 Trustees Report once again delayed, we don't yet know what Social Security's newest prediction will be. Regardless of its next projection -- and regardless of any systematic bias that may be in its projection process -- the reality remains largely the same: Social Security's Trust Funds are steadily running out, and if nothing is done to prevent them from emptying, they will vanish in the not-too-distant future.

What you can do about it
Regardless of what's coming down the pike for Social Security (or exactly when it happens), you need to have a solid retirement plan in place. That way you can much more easily adapt to the reduction in benefits, the increase in taxes, or the combination of both that will likely be implemented to keep Social Security benefits at their current levels. Social Security's struggles simply provide another reason to set your retirement plan in motion if you haven't already done so.

Even at its healthiest, Social Security only replaces about 40% of a typical retiree's pre-retirement income. If its benefits get cut by 23% by emptied Trust Funds, the program's income replacement would drop closer to 30%. If you're expecting Social Security to provide virtually all of your retirement income, then that drop will deal a serious blow to your financial security.

If, on the other hand, you're saving and investing enough that you can get by without Social Security, then the program's impending crisis will be less of an issue. Dropping from 80% to 70% of your pre-retirement income leaves you with much more of a financial buffer than dropping from 40% to 30%. If you start from a point of relative financial strength, you have many more options, including:

• Cutting your costs of living. It's a lot easier to find wiggle room in a budget based on 80% of your preretirement income than it is in a budget based on 40%.
• Working a few more years. Social Security increases your benefits for every year you delay receiving them, up until age 70. In addition, the longer you work, the longer you can allow your nest egg to grow withdrawal-free, and the fewer years it will need to support you.
• Save a bit more. Whether you're an experienced investor or a novice who simply wants to cover Social Security's shortfall, saving more each paycheck will help you build your nest egg faster. Additionally, to the extent any Social Security fixes come in the form of higher taxes, it's easier to cover higher tax rates by reducing your savings rate than it is to cut your daily costs of living. Plus, as a bonus, any money you've already saved at that time will remain yours.

Now is your best chance
The best weapon you have to combat the risks of Social Security is time. The sooner you start investing in your future, the easier and cheaper it will be for you to deal with any curve balls the Social Security Administration, or life in general, throws you. So get started now, and your future self will thank you for it.