Social Security benefits increasing while program’s long-term viability remains uncertain
Once upon a time, the words security and insurance appropriately described the Social Security system. No longer. Now, uncertainly and risk are more apt descriptions, especially for the system’s long-term viability. For now, Social Security beneficiaries do have the peace of mind their benefits will beprotected from the ravages of inflation. This month, for example, Social Security beneficiaries will see the largest increase in their benefits in seven years. According to the Congressional Research Service, “to compensate for the effects of inflation, Social Security recipients usually receive an annual cost-of-living adjustment (COLA). According to parameters outlined in the Social Security Act, a 2.8% COLA is payable in January 2019. For a retired worker receiving the average monthly benefit amount of $1,422, the COLA will result in a $39 increase in Social Security benefits for a total of $1,461.”
Still, current beneficiaries will be neither better nor worse off than they were at this time last year as the increase is simply an annual cost-of-living adjustment. The Social Security COLA is an automatic adjustment based on one of several Bureau of Labor Statistics (BLS) measuresof inflation known as the consumer price index for urban wage earners and clerical workers (CPI-W). Oddly, the CPI-W is a measure of inflation for working people rather than for retirees and others covered by the Social Security system. Working people have different spending patterns than retired people. Consequently, in 1982, at the direction of Congress, the BLS began compiling the consumer price index for the elderly (CPI-E), a measure of inflation based on spending patterns for consumers 62 years old and older. Over the last 37 years, the CPI-E shows the cost of living has risen slightly more for the elderly than for working people. Thankfully, no acts are required from do-nothing Congresses to keep benefits apace with inflation. A bigger concern for beneficiaries is the likely depletion of the Social Security Trust Fund in just 15 years (see chart).
Why Congress has failed to act
During the mid-1980s, Social Security Trust Fund (SSTF) assets piled-up, growing from $24.9 billion in 1983 to a projected peak of nearly $2.9 in 2019. From here on out, though, it’s going to be a fast, downhill slide. Fortunately, Social Security benefits will not vanish when the trust fund is depleted in 2034. Unfortunately, benefits could be sharply reduced. According to the Congressional Research Service, after depletion of its assets “the [Social Security] program will continue to operate. Incoming receipts are projected to be sufficient to pay about three-fourths of scheduled benefits. Title II of the Social Security Act, which governs the program, does not specify what would happen to the payment of benefits in the event that the trust funds’ asset reserves are depleted and incoming receipts to the trust funds are not sufficient to pay scheduled benefits in full and on time. Two possible scenarios are (1) the payment of full monthly benefits on a delayed basis or (2) the payment of partial monthly benefits on time.”
Simply put, the current law governing Social Security is a sham; future receipts/revenues of the program will not meet the program’s future expenses. Congress has known about this impending shortfall for a long, long time but has failed to act. Why? If Congress passes legislation to increase revenues by raising taxes, then they will likely lose votes from those whose taxes are raised. Alternatively, if Congress reduces Social Security benefits and/or extends the age when retirees can start receiving benefits, then they are also likely to lose votes, especially from the elderly who reliably turn out at the voting booth. Many current members of Congress are also unlikely to be in Congress in 2034, so they are unlikely to risk their current congressional careers to solve a future problem. If there was ever a justification for limits on congressional terms, this is it.
Projected depletion of trust fund creates uncertainty and risk
The likely depletion of the SSTFin 2034 provides current and future beneficiaries with an uncertain and risky financial future. Those who are currently receiving retirement or other benefits need to consider how they will make ends meet if their future benefits fall by 25 percent. Anyone dependent on Social Security benefits to meet their everyday living expenses should give very serious consideration to how they could meet their day-to-day expenses if their benefits are reduced. If you act now, then you might avoid moving in with your friends or family later. Your kids will be forever grateful for your foresight and so will you!
Those currently eligible but not yet collecting retirement benefits face an increasingly risky and confounding decision regarding when to start collecting. The Social Security Administration’s (SSA) publication When to Start Receiving Retirement Benefits asks “Would it be better for you to start getting benefits early with a smaller monthly amount for more years, or wait for a larger monthly payment over a shorter timeframe? The answer is personal and depends on several factors, such as your current cash needs, your current health, and family longevity. You must also study your future financial needs and obligations, and calculate your future Social Security benefit.” Knock, knock, anybody home? In case you, the SSA, have not noticed, it is currently impossible to calculate future benefits with any certainty. So, why wait? For each year you delay collecting, your benefits rise by an inflation-adjusted eight percent. Waiting as long as possible is a no-brainer if you can afford it and if you expect to live beyond the breakeven age of 83. Who would not take a guaranteed eight percent, inflation-protected increase in their annual income? The problem is: the looming shortfall in the SSTF means those increases are no longer guaranteed. Consequently, it might be wiser to file earlier than later. Why file earlier? Congress has done nothing significant to address the projected SSTF shortfall, and it’s increasingly likely nothing will be done going forward. Under the congressional “do-nothing” scenario, that eight percent per year return from delaying filing could turn out to be only six percent due to the SSTF depletion, and, suddenly, waiting to file for benefits does not look so good.
For those who will not be eligible to collect Social Security retirement benefits until after 2034, you should expect retirement benefits will be provided but at a much-reduced level compared with currently scheduled benefits.
Will Congress act so security and insurance rather than uncertainty and risk are again hallmarks of Social Security’s Old Age, Disability, and Survivors Insurance programs ? Don’t count on it.