The Social Security trust fund is expected to exhaust in 2033, three years sooner than projected last year, according to the latest OASDI Trustees Report issued on Monday. At that time, revenues will be sufficient to pay about 75% of promised benefits, down from the 76% projected last year. The annual cost for the OASDI program will exceed non-interest income in 2012, as it did in 2010 and 2011, and remain higher throughout the remainder of the 75-year long-range period. When interest income is taken into account, trust fund assets will grow from the current $2.7 trillion to $3.1 trillion through 2020. Beginning in 2021 the trust fund will begin to diminish until it is exhausted in 2033.
The trustees’ projections have gradually gotten worse over the years, as shown in the following table from Social Security’s Financial outlook: The 2012 Update in Perspective. Reasons relate to the slow recovery from the recession, rising disability rolls, and a higher-than-expected cost-of-living adjustment in 2012, among other factors.
If lawmakers act now, they could bring the system into actuarial balance by: 1) increasing the combined payroll tax rate 2.61 percentage points, from 12.40% to 15.01% (note: transfers from the general Treasury make up this year’s temporary 2% reduction in the payroll tax); or 2) reducing scheduled benefits by 16.2%. The trustees generally state their reform suggestions as mathematical, actuarial solutions rather than the more comprehensive proposals that have been put forth by various lawmakers.
The trustees this year were a bit more forceful in saying that the system needs to be reformed sooner rather than later: “If lawmakers do not take substantial action for several years, then changes necessary to maintain Social Security solvency will be concentrated on fewer years and fewer generations. Lawmakers will have to make large and sudden changes if they defer action until the combined trust funds become exhausted in 2033.”
SSA Commissioner Michael Astrue warned the media prior to the report’s release about sensationalizing the results. He reminded reporters that the exhaustion of the trust fund does not mean Social Security benefits will stop. Payroll taxes will continue to be collected and will be sufficient to pay 75% of promised benefits. But alas, many in the media didn’t listen. Here’s how some news outlets reported the release of the Trustees Report:
- Social Security Fund: Cash Gone in 2033
- Social Security is Slipping Closer to Insolvency
- Social Security Trust Fund to Run Dry Sooner Than Anticipated
- Social Security’s Financial Health Worsens
- More Bad News on Social Security and Medicare Trust Funds
- Social Security: Time to Panic, No. Time to Act, Yes.
- Is Social Security really “exhausted?” Not at all
I have long maintained that Social Security’s finances should not influence clients’ claiming decisions. The trust fund will remain intact for many more years, and after it’s exhausted, payroll taxes will continue to be collected. Benefits for baby boomers are not in jeopardy.
Given the recent politicization of our government and the paralysis we’ve seen over budget negotiations, expiring tax provisions, and other important items Congress has failed to act on, I’m wondering if we should assume that no action will ever be taken on Social Security reform. Sometimes in financial planning we work with what we have rather than speculate on how tax and other laws might change in the future. I wonder if we should do that here. If so, you can expect full, promised benefits until 2033, but after that, benefits will decline by 25%.
So the question becomes this: When is the best time to claim Social Security if you know your benefits are going to drop by 25% in 2033? Just for fun, I ran this through our Social Security Benefits Calculator for a hypothetical 62-year-old maximum earner who has the option of claiming a reduced benefit of $1,880 now, or a delayed-enhanced benefit with COLAs of $4,127 at age 70. As it turns out, the breakeven age occurs in the year 2028 —when our hypothetical client is 78. After 2028 the later claiming scenario gains a greater edge. So the argument that it’s better to claim early because of Social Security’s deteriorating financial condition doesn’t hold water. Today’s 62-year-olds will be better off delaying benefits to age 70 if they think that they—or their surviving spouses—will live past age 78. That hasn’t changed.
I’ve heard some people say that they plan to claim at 62 in order to be “grandfathered.” While I wouldn’t put anything past Congress, especially if the situation becomes dire due to their extended inaction, I am quite sure any “grandfathering” would be based on age, not on whether or not a person had already started benefits. In the end, a client who claims early benefits based on this kind of speculation is running the risk that he will be stuck with a permanently reduced benefit. It’s our job to keep the discussion rational, to help you understand all options, and to help understand the long-term impact of their Social Security claiming decisions.