From Retirement Now Newsletter September 16th 2021

The Social Security and Medicare Trustees have put out the 2021 report on the current, as well as projected, status of the programs.

There’s lots of info in even the summary, which I’ll put the highlights below.

It is a projection, and projections are notorious for not coming true.

I remember way back when I was in the banking industry working as a credit underwriter, we’d sometimes do projections on a potential borrower’s business. We never went back years later to see how accurate the projections I have a feeling they were probably not very accurate. Too many variables that are simply not predictable.

So what’s the difference in Social Security projections?

The projection includes an element that is largely predictable… demographics.

A demographic will typically live out its lives. An entire demographic doesn’t just disappear. And projections can be made assuming what will happen: they will age and under current law become eligible for benefits like Social Security and Medicare.

But there are still aspects of the Social Security projection that are still unknowable.

Such as, the appearance of COVID, the reaction of the governors in most of the states to reduce economic activity through lockdowns, and consequently the reduced taxes that were paid from workers who were now unemployed, which caused the Social Security trust fund to be tapped more heavily, which caused the year of the trust fund’s depletion to be moved up by one year compared to last year’s projection.

All unknowable before it occurred.

That’s just one example.

Here are the two most important highlights from the Trustees projection report, as it relates to just the Social Security program:

-The Social Security program will be able to pay full benefits until the trust fund is depleted in 2033, at which time current tax revenues collected will be able to cover 76% of projected benefits.

-Last year the projected year of the fund’s depletion was 2034.

Here is something not listed in the report:

Social Security is a politically popular government program, and if reductions to people currently receiving benefits occurred would likely cause an apocalyptic political reaction to whichever party (or maybe both) allowed the reduction to happen.

One quote from the report that is very helpful to keep in mind is:

“Lawmakers have many policy options that would reduce or eliminate the long-term financing shortfalls in Social Security and Medicare.”

My thoughts?

I think lawmakers will do something to amend the program at some point. I believe the political fallout from reducing benefits for current beneficiaries would be too great to risk.

I can’t see the future and I never called Miss Cleo in the 90’s, but here are some options I think politicians might pursue to adequately fund the program in the future:

-Increase the FICA tax rate on wages.

-Increase the amount of wages that are subject to Social Security taxation, currently it is capped at $142,800 in 2021.

-Change current law to allow general tax revenues be used to fund Social Security benefits, instead of restricting it to earmarked FICA taxes and trust fund withdrawals. Medicare Part B and D allows for general tax revenues be used to fund those benefits, hence the report says “adequately financed into the indefinite future” for those two programs. This seems like an obvious solution.

-Alter the Full Retirement Age again, like they did back in 1983, raising it from 65 to 67 over time, so that following generations won’t have as generous benefits.

And there’s probably lots of other little tricks an army of bureaucrats will come up with.

I do think that for the foreseeable future, Social Security will continue to be the foundation for retirees to build their retirement income replacement plan.  

Conclusion: No one can predict the future perfectly. But they can take action today to develop an income replacement plan for their retirement, where they invest their portfolio in such a way to have it generate income for the rest of their retirement.

And if you are worried that Social Security won’t be around as the foundation to the income replacement plan, it’s all the more reason to start taking action today.

If you need help with this, or simply want to chat with me about your current challenges, hop on my calendar for a no obligation 20-minute phone call with me.