Social Security Uncertainty Threatens Retirement Hopes

Reforms could aid the program’s long-term solvency, ease workers’ fears

Stephen Miller, CEBS By Stephen Miller, CEBS April 26, 2019
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The Social Security trust funds for retirees and people with disabilities—the $2.9 trillion that the government uses to pay millions of beneficiaries each month—will start to have annual costs in 2020 that exceed payroll taxes collected from current workers. By 2035, if Congress does not enact reforms, the trust funds' combined obligations will leave them depleted and unable to fully pay vested benefits, according to an April 22 report by the trustees of Social Security and Medicare.

The Social Security Agency paid out nearly $989 billion in benefits to retirees last year, the government reported, with 63 million beneficiaries at year-end. During 2018, an estimated 176 million people's earnings were subject to Social Security payroll taxes.

Uncertainty about the program's future solvency, however, is causing anxiety among workers who will rely on Social Security income as one of three pools of retirement funds, along with employer-sponsored retirement plans and personal savings.

Red Ink Ahead

Social Security comprises two funds: old-age and survivors insurance (OASI) and disability insurance (DI). According to the trustees' report, the OASI trust fund is projected to be depleted in 2034, with 77 percent of benefits payable at that time. The DI trust fund is estimated to be depleted in 2052, with 91 percent of benefits payable. Combining both trust funds' reserves results in the projected 2035 depletion date that's been widely reported.

"The trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them," said Nancy Berryhill, acting commissioner of Social Security.

Currently, Social Security retiree benefits are financed by a 12.4 percent payroll tax on wages up to the taxable earnings cap, with half (6.2 percent) paid by workers and the other half paid by employers. This year, the maximum earnings subject to the Social Security payroll tax is $132,900.

"Fortunately, most of the options to fix Social Security's finances are well-known and could be enacted and implemented with political will," according to the nonprofit Committee for a Responsible Federal Budget (CRFB), which advocates against excessive government debt. These proposals include raising the taxable earnings cap, increasing the age for receiving full benefits from 67 to 69 and then indexing it longer lifespans, and tying the annual cost-of-living adjustment to a slower-rising inflation measure.

"Policymakers cannot afford to wait much longer to enact thoughtful fixes to the Social Security program," the CRFB advised. Democrats and Republicans, however, have been unable to agree on which Social Security fixes are acceptable.

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

A Shared Responsibility

"Retirement security is a shared responsibility between individuals and government," said Chatrane Birbal, director for policy engagement at the Society for Human Resource Management. "Individuals have a primary responsibility to evaluate their retirement needs, including health care expenses, and to plan and save accordingly. Government has the responsibility to provide Social Security benefits and keep the trust fund solvent as a safety net of basic, guaranteed income to ensure financial stability and peace of mind in retirement years."

Anxious Workers

A report released in 2019 by the nonprofit Employee Benefit Research Institute (EBRI) estimates that 40.6 percent of all U.S. households in which the head of the household is between ages 35 and 64 are projected to run short of money in retirement. EBRI estimates that the aggregate "retirement deficit" these households face, taking into account current Social Security retirement benefits, is $3.83 trillion. If future Social Security payouts are lowered, the savings shortfall facing U.S. households could rise considerably.

Given a widespread lack of adequate savings, it's not surprising that a majority of employees are worried about their retirement prospects, a report by the nonprofit Transamerica Center for Retirement Studies (TCRS) showed. The findings from a January survey of 2,000 adults revealed that:

  • 77 percent of workers are concerned that Social Security will not be available to them when they retire. Generation X (84 percent) and Millennials (80 percent) are more likely to agree with this sentiment than Baby Boomers (65 percent).
  • Baby Boomers (42 percent) are significantly more likely to expect Social Security to be their primary source of retirement income than Generation X (28 percent) and Millennials (19 percent).
  • Younger workers are more likely to expect their primary income in retirement to be self-funded savings, including 401(k)s or other investments. This view is most commonly cited by Millennials (53 percent) and Generation X (49 percent), and less often by Baby Boomers (39 percent).
  • 76 percent of workers believe that people in their generation will have a much harder time achieving financial security in retirement compared with their parents' generation, a sentiment shared by Generation X (81 percent) and Millennials (79 percent), and to a lesser extent by Baby Boomers (69 percent).

Promoting Financial Fitness

These concerns present an opportunity for employers to provide savings tools and education, since 67 percent of workers admit they don't know as much as they should about retirement investing and two-thirds are looking to their company for more information and advice on how to reach their goals, according to TCRS.

Employers can increase participation in 401(k) or similar plans by adding features such as automatic enrollment and automatic escalation, the report suggests. Letting part-time workers participate in retirement plans could also help improve more peoples' retirement outcomes.

"In addition to preparing for longer lives and more time spent in retirement, workers are increasingly expected to self-fund a greater portion of their retirement income," said Catherine Collinson, CEO and president of TCRS.

"Despite the all-too-real challenge of saving, many workers are overlooking opportunities that could help improve their long-term financial situation," she pointed out. "Small steps, such as using a retirement calculator to estimate savings needs, engaging in financial planning, creating a budget, formulating a retirement strategy and learning about retirement investing, can make a big difference in the long run"—especially if Social Security payouts end up being lower than expected.

Related SHRM Article:

Benefit Mix Can Help Financially Stressed Generation X, SHRM Online, April 2019

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