This Scary Social Security Trend Can't Be Ignored Any Longer

Image source: Pixabay.

For retired Americans, there's probably no program more important than Social Security. More than 40 million retired workers were receiving monthly benefit payments as of March 2016, with a recent Gallup poll suggesting that almost 6-in-10 current retirees consider Social Security to be a "major source" of income.

There's no denying how much Social Security has helped provide a financial foundation for seniors over seven-plus decades. But there's also little doubt in the minds of today's retirees and those expected to retire in the coming decades that the program is in trouble.

According to the Board of Trustees' 2015 report concerning the state of Social Security and Medicare, both are on an unsustainable path. Given that seniors receive a payment every month from Social Security, the threat of their tangible money source being affected is a serious concern. Based on the latest estimates from the Board of Trustees, Social Security's Old-Age, Survivors and Disability Trust (OASDI) is slated to burn through its excess cash reserves by 2034. Should this happen, a benefit cut of up to 21% could be needed to sustain the program for an additional 55 years.

Here's what's causing Social Security to burn through its cash reserves
Why's this happening? It likely boils down to two demographic shifts and a lack of education on the part of consumers.

Image source: Flickr user Steven Depolo. 

First, baby boomers are leaving the workforce in increasing numbers and joining the 40 million strong retired workers currently receiving Social Security benefits. As more and more boomers leave the workforce, the worker-to-beneficiary ratio is expected to fall from 2.8-to-1 in 2015 to 2.1-to-1 by 2035. Or, in plainer terms, there simply isn't going to be enough payroll revenue coming in to cover the amount of benefits being paid out beginning in 2020 (including interest).

Secondly, we're living longer than ever. The Centers for Disease Control and Prevention's most recent data shows that the average American is living to be nearly 79 years old. Comparatively, in the mid-1960s the average American was only living to age 70. Further, a 60 year-old today is on pace to live more than 21 more years. While living longer is great news for retirees, it's not the best news for the Social Security program, which is paying out benefits for a longer period of time.

Lastly, consumers have shown time and again that they don't have a very good grasp of the Social Security system. A MassMutual Financial Group survey conducted last year that asked 1,513 consumers 10 pretty basic questions on Social Security found that only 28% received a passing grade (seven questions right or higher), with just a single participant getting all 10 questions right. If Americans don't understand the program, they'll have a hard time getting the most out of it. This could be why we see such a strong tendency for retirees to claim benefits as soon as possible at age 62. If a lot of retirees file for benefits early, it can further strain the program.

A scary trend for Social Security that can't be ignored
The prospect of lawmakers potentially cutting benefits by 2034 is extremely worrisome with nearly 6-in-10 current seniors heavily reliant on Social Security income and more than a third of pre-retirees expected to lean on Social Security heavily during their own retirements. But the grim reality is that the clock may be ticking at an even quicker pace than the Board of Trustees is letting on.

Table by author. Data source: Social Security Board of Trustees' reports, 2007-2015.

Although the 2015 report did bring the first "positive" change in years, we've witnessed seven years lopped off the expected depletion of the OASDI's cash reserves in less than a decade. This means there's a very real possibility that the 18 years remaining before the cash reserves are depleted in the OASDI could wind up being even less than expected. This may mean benefit cuts even sooner for current or soon-to-be retirees.

We also have to remember that the Board of Trustees is merely estimating how much longer the OASDI reserves will last based on existing GDP growth trends, as well as life expectancies. If people live longer than expected, it can be a drag on cash reserves. Similarly, if interest rates drag near historic lows as they've done since 2009, the low yield could hurt interest income potential on excess OASDI reserves, causing the Trust to deplete its remaining cash at a faster rate than initially expected.

Image source: Pixabay.

When you file and how you earn are growing in importance
Ultimately, the prospect of an expedited cash reserve drain in the OASDI means that seniors' choice of when to file for benefits is growing even more important. There may be nothing that can be done to avoid an eventual cut in benefits to preserve the program over the long-term, but there are two steps you can take to ensure that your needs are met in retirement.

First, waiting on claiming benefits is probably going to be a smart choice, depending on your financial situation. For instance, quite a few baby boomers haven't saved nearly enough to comfortably cover their retirement expenses. Optimally, these boomers would benefit from working a few extra years beyond age 62 and using their wages to cover their monthly expenses. All the while, their Social Security benefits would grow at about 8% per year. This beefier payment can help cover your retirement expenses if your nest egg isn't big enough.

But not everyone is able to work into their golden years due to health reasons -- which is why it's also going to be important to attempt to diversify your retirement income stream as much as possible away from Social Security. This means continuing to invest before and well after you retire (remember, the average life span post retirement is nearly two decades). It may also mean ensuring you have a pension, annuity, or other income source in place prior to retiring. Long story short, diversifying your income stream should help reduce your exposure to Social Security's upcoming uncertainties.

What steps are you taking to fortify your nest egg against a possible Social Security benefit cut? Share them in the comments below.