USA Social Security Future Challenges

Copyright Daniel E. Winslow, FSA, CPA    November 8, 2015

As one of my favorite questions goes, do you want to hear the good news or the bad news first?  The good news is that people are living longer.  If you live 20 years longer than you expect, then that is very good news.  The bad news is that someone has to go work to pay for those 20 years of living expenses and medical care, on average about 15 years more of work.


A SUMMARY OF THE 2015 ANNUAL REPORTS by Social Security and Medicare Boards of Trustees:


“After 2019, Treasury will redeem trust fund asset reserves to the extent that program cost exceeds tax revenue and interest earnings until depletion of total trust fund reserves in 2034, one year later than projected in last year’s Trustees Report. Thereafter, tax income is projected to be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2089.”


“Social Security and Medicare together accounted for 42 percent of Federal program expenditures in fiscal year 2014…. Both Social Security and Medicare will experience cost growth substantially in excess of GDP growth through the mid-2030s due to rapid population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment …” 


USA Population in millions

Population    1930       1970        2010     2060

Total               123          203           309       417

Over Age 65      7            20              40        98

Over 65 %      5.4%       9.9%      13.0%    23.6%


So Total USA population is projected to grow by 35% from 2010 to 2060.  And the Over 65 population is projected to grow by 144% over the same period.


In total the Social Security system has financial pressures building but the financial pressures are solvable with some combination of tax increases, benefit reductions and increasing the age of retirement.


What does this mean to you?  For current retirees who do not expect to live more than 10 to 15 years, you can expect to receive your Social Security monthly payments.  The current payroll taxes plus some bearable increase in federal debt will fund these benefits.


For working people who are approaching retirement and can expect to live 20 to 30 years or more, then this a concern.  10 to 15 years in the future the financial pressure on the federal government from all federal pension obligations will rise significantly.   The likely political process will be to raise income taxes on the higher income retirees to reduce their net Social Security benefits combined with some tax increases on the working population.    Current income tax law taxes Social Security income to take back some of the benefit for retirees with more than $20,000 or so of other annual income.


For everyone under age 50 the promised benefits are not sustainable and any payroll tax increase will be on this working population.  A highly appropriate solution is to gradually raise the retirement age to reflect the rising life expectancy.  Ideally the retirement age would be connected to future life expectancy by a formula.  People are best served if they receive 10 to 20 years notice before retirement of what their benefits will be.  If life expectancy is rising by 20 years in this century, then gradually increasing the “normal retirement age” from age 67 to age 82 over a 75 year period fits the solution to the circumstances.