My brother Ron and wife Michelle joined me for a delightful soup and sandwich at Panera bread. Social security was the topic my brother and I briefly debated over dinner. The social security system was devised to tax the active work force and provide minimal income to retired and disabled Americans. Ron mentioned that the funds are expected to last at least 35 years. I was under the impression that benefits would be strained much sooner, and decided to go directly to the source when we got home. A quick web search revealed the official 2010 trustee report to the public on the status of social security funds. The following is an excerpt which captures the immediacy of social security reform (stress mine) while painting a long duration outlook.
The financial outlook for Social Security is little changed from last year. The short term outlook is worsened by a deeper recession than was projected last year, but the overall 75-year outlook is nevertheless somewhat improved primarily because a provision of the ACA is expected to cause a higher share of labor compensation to be paid in the form of wages that are subject to the Social Security payroll tax than would occur in the absence of the legislation. The Disability Insurance (DI) Trust Fund, however, is now projected to become exhausted in 2018, two years earlier than in last year’s report. Thus, changes to improve the financial status of the DI program are needed soon.
Social Security expenditures are expected to exceed tax receipts this year for the first time since 1983. The projected deficit of $41 billion this year (excluding interest income) is attributable to the recession and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink substantially for 2011 and to return to small surpluses for years 2012-2014 due to the improving economy. After 2014 deficits are expected to grow rapidly as the baby boom generation’s retirement causes the number of beneficiaries to grow substantially more rapidly than the number of covered workers. The annual deficits will be made up by redeeming trust fund assets in amounts less than interest earnings through 2024, and then by redeeming trust fund assets until reserves are exhausted in 2037, at which point tax income would be sufficient to pay about 75 percent of scheduled benefits through 2084. The projected exhaustion date for the combined OASI and DI Trust Funds is unchanged from last year’s report.
The long-run financial challenges facing Social Security and those that remain for Medicare should be addressed soon. If action is taken sooner rather than later, more options will be available and more time will be available to phase in changes so that those affected have adequate time to prepare.
There are couple of important takeaways from the report. The disability insurance fund lost two years of longevity, which is a rapid drop. Much like large insurance funds, social security funds are subject to a heavy dose of speculation. The report authors expect the economy to recover in 2012-2014, which is both optimistic and fairly uncertain. Many more baby boomers are expected to retire and begin collecting benefits, which highly probable. If there's one thing I've learned observing economic shifts is that its anything but predictable beyond today. As much as folks try to project national and global markets onto systematic processes, highly volatile periods reveal the unpredictable nature of large financial systems (see complex adaptive systems). Since accurately modeling the future is damn near impossible, I humbly suggest falling back on the old proverb for retirement preparation, hope for the best, but prepare for the worst.