The system, according to the latest Social Security trustees report, is running in the red for the first time since the 1980s. If current trends continue, it would have to start paying less than promised benefits in about 15 years.
“Today’s report,” the trustees wrote, “shows that, as a whole, Social Security is fully funded until 2034, and after that it is about three-quarters financed.”
For those advisors fearful that this will lead to means-testing Social Security, Michael Kitces, a CFP with his own firm in Columbia, Md., has a message: It is happening. There is already a means test, he says, “fully included in how Social Security benefits are calculated today.”
He says his assumptions are based on trustee reports that, even without fixes, 70 percent of the promised benefits will still be paid because they don’t depend on the trust fund, but on money now coming into the system through payroll taxes.
“We project Social Security benefits to grow at 1 percent less than the general rate of inflation,” he says, “as a way to slowly temper benefits over time in case some level of future benefits reductions are applied, if only by extending the current means-testing system on benefits.”
Over 30 years, he notes, a 1 percent a year reduction in real benefits “amounts to a 30 percent cumulative haircut over time, and is consistent with the projection that Social Security benefits would have to be reduced by about 30 percent in the future if we do nothing to fix the system.”
Fixes will also be needed over the next few years because not enough people are paying in to support a growing population of recipients.
“The number of retirees is projected to grow faster than the number of workers, due to demographic changes, unless we significantly boost immigration,” according to Stephen J. Entin in a new report on Social Security for the Tax Foundation.
He says the system can be fixed by changes in benefits formulas. However, until reforms are enacted, not enough American workers are entering the system to keep promises made to Social Security recipients.
“The native population fertility rate is well below replacement levels,” Entin writes. “The replacement rate is an average of 2.1 children per woman over her lifetime. The current fertility rate is under 1.9. The Social Security actuaries are hoping and assuming it rises to 2.0 in their best-guess assumption set, but that may be wishful thinking.”