It’s Time to Find Solutions to Pending Crisis in Retirement Plans

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It’s hard to follow the news without seeing almost daily discussion of Social Security and Medicare, and how viable these bedrocks of retirement planning will be in the future. The challenges are obvious.  Relatively fewer working people every year are paying into the funds that support a steadily growing number of retirees. The math is clear: sooner or later there won’t be enough money.

Not so obvious: just how serious this problem is, and what’s the best way to solve it.

In April 2019, the trustees of the Social Security and Medicare trust funds issued a report on the current status, likely prospects, and potential changes to these all-important programs.

The short-term news is that in 2020 the cost of paying Social Security benefits – to retirees, survivors and the disabled – will exceed the amount of money coming in from taxes. That annual deficit will continue, and grow, for at least the next 75 years. But that doesn’t mean Social Security is “running out of money.” Not yet, anyway.

What it does mean is that the government will have to start drawing on the trust fund’s reserves. It’s something like how a family with expenses exceeding its income may have to draw on its savings. But like a savings account, the trust fund isn’t infinite. Eventually, it will be used up. Unless Congress makes changes in how taxes or benefits work, that will happen in 2035. Because of recent improvement in the economy, that happens to be a year later than what the trustees predicted in their 2018 report.

The worst-case scenario – again assuming nothing changes – is that payroll taxes will be enough to cover only 80 percent of benefits in 2035, then gradually dwindling to 75 percent by 2093.

One important technicality is that Social Security actually has two trust funds, one for retirement and one for disability. If the disability “pot” is considered separately, it would not be empty until 2052. That date is a full two decades later than the trustees predicted just a year ago, based on a decline in the number of disabled workers drawing benefits or applying for new benefits. After 2052, payroll taxes should be sufficient to pay 91 percent of the government’s disability obligations.

Medicare, which provides health coverage for retirees and some people with disabilities, has been teetering back and forth between deficit and surplus for a number of years. Medicare paid out more than it took in from 2008 through 2015, ran surpluses in 2016 and 2017, but was back in the red in 2018, a trend that’s expected to continue. Medicare’s main trust fund is expected to be used up by 2026, after which tax revenue would cover 89 percent of benefit costs, diminishing to 78 percent by 2043 but then rising again to 83 percent by 2092.

The curve in that chart is far less reliable than the projections for Social Security. As everybody who pays for medical care knows, costs have been rising steadily, and Medicare is certainly not immune to those pressures. That’s why Medicare’s trustees caution that their projections “are highly uncertain.”

Clearly, something will have to be done, and should be done soon. But what? A badly divided Congress has shown little appetite for tackling this tricky problem, which has been called “the third rail of politics.” Referring to the high-voltage power source for subway trains, the label means “you touch it and you die,” politically at least.

But our lawmakers understand that if they don’t touch these retirement benefits, actual people – their retired constituents – may literally die, or at least find themselves hurting financially and medically.

Some of the proposed solutions, as the trustees’ reports summarize, are:

  • Raising the Social Security payroll tax rate. It’s now 12.4 percent. An immediate increase to 15.1 percent, the trustees project, would solve the long-term revenue shortfall. It’s important to note that while that’s just 2.7 percentage points on the rate, it amounts to a tax increase of almost 22 percent. If Social Security taxes aren’t raised until 2035, just as the trust funds run dry, the rate would have to go up to 16.5 percent.
  • Eliminating the income cap for Social Security taxes. As it stands now, income over $132,900 a year isn’t subject to Social Security taxation. Taxing higher incomes would put more money back into the “pot.”
  • Raising the normal retirement age – now 67 for full benefits – for younger workers, those born after 1960. Advocates for this note that when Social Security began in the late 1930s, the standard retirement age of 65 was older than Americans’ average life expectancy! But now people are living much longer, drawing benefits much longer, and often able to continue working productively well into the 60s and beyond. Opponents point out that for people in physically demanding occupations, continuing to work after 40 or more years in the labor force is often difficult, if not impossible.
  • Reducing benefits. If nothing else is done to stave off running out of money, everybody’s retirement benefits would have to be cut by 17 percent, starting immediately. Or alternatively, if current recipients were to be protected from benefit cuts, all new Social Security recipients would see their benefits 20 percent lower than what’s promised now!
  • Various technical fixes. These would change the formulas by which benefits, and annual cost-of-living increases are calculated. But even if hidden behind arcane formulas, this would still mean that benefits would be reduced, or grow more slowly.

So, what does this mean as a practical matter for people who are now retired, or contemplating retirement?

Two broad points should be made. First is that you should let your representatives in Congress know your thoughts about how Social Security should work. You may favor one or another of the possible solutions, or a combination. Whatever you think is the best approach, write to your representative and your senators. A broad consensus about both the problems and the solutions is essential. Achieving that consensus requires that Congress hears from citizens.

The second point is that it’s vital to have other resources, in addition to Social Security, to ensure a comfortable and worry-free retirement. Whether a corporate pension, tax-sheltered retirement plans like IRAs and 401-Ks, or other investment vehicles, anybody who is earning income should be putting a significant portion of it away for the future.

To be sure you have made adequate provisions for your retirement, and that your own pensions and investments are sufficient to support you beyond what Social Security provides, it’s always a good idea to consult with a qualified financial planner. The investment experts at Old North State Trust can help you evaluate your retirement goals and investments, and structure a plan that ensures your future comfort and peace of mind.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely.