September 14, 2018 — Thanks to one of our regular idea contributors, Jeff H, we have a not so hypothetical problem for you. If, as the Social Security Trustees warn, the retirement portion of Social Security exhausts its reserves in 2034 and is only able to fund 77% of promised benefits starting in that year, what will you do? A similar question could apply to Medicare, which is expected to run out of money even earlier, in just 8 years (2026). Medicare’s case is harder to prepare for: if nothing is done, presumably benefits will be cut or reimbursements to doctors and hospitals reduced, driving even more health care providers out of Medicare.(Note: in our recent newsletter the headline said ‘cut 77%), which was an inadvertent error. The accurate statement is that benefits would be paid at 77%.)
In spite of a steady stream of warnings from Trustees and other experts, legislators have done nothing to address the coming problem. With soaring deficit projections expected in the next few years as a result of the 2018 tax cuts, the problem (and any solutions) is only likely to get worse. There won’t be any money to spare: the nonpartisan Congressional Budget Office estimates the deficit will hit a record $1 trillion in 2020; total U.S. debt will reach $33 trillion by 2028.
As Jeff points out, “Some might argue the cuts will never happen. Nonetheless, it might be interesting to ask this question: So if it became inevitable that no consensus on these two programs could be reached… what actions are you taking now or would you undertake to survive?” He does not pose the question seeking political rants or a discussion of possible solutions, but would simply like know what ideas people might have on how to survive. As he says: “You know the Scout motto: Be Prepared. We are perilously close to D-Day for many people.” Later on in this article we will have some suggestions on possible avenues to take. But first, to help you understand the problem better, we’ll provide some information on what the Trustees are saying.
What the Social Security Trustees Say
In their latest annual report the Trustees were pretty clear about what has to be done to fix the SS part of the problem. Unfortunately they have been issuing the same warnings every year, yet nothing much gets done. The only improvements that have been made were some adjustments in 2015 including “deemed filing”, which plugged some minor holes that people born before 1954 could take advantage of. Unfortunately, these did not significantly address the larger problem.
Here is what the Trustees said in their most recent report: “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. Implementing changes sooner rather than later would allow more generations to share in the needed revenue increases or reductions in scheduled benefits and could preserve more trust fund reserves to help finance future benefits. Social Security will play a critical role in the lives of 62 million beneficiaries and 173 million covered workers and their families in 2017. With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generation.”
The 2034 shortfall – take the money and run?
The looming funding shortfall adds a new dimension to the claiming question that we often discuss in Social Security articles: Claim as soon as you can (at age 62), wait until Full Retirement Age (66-67), or hold out until age 70 and get the maximum benefit. For more on that see “Rethinking the ‘When to Take Social Security Question’?”. The potential 2034 cuts change the claiming question, because if you are only going to get 77% of promised benefits in 2034, maybe taking the money and running is the better idea.
Doing some math
Let’s look at a specific example to see how this might work out in real life. For example, let’s say you turn 62 this year and your Full Retirement Age (FRA) is 66 and 4 months. According to an example provided by the SS Administration, the payment for this hypothetical person at age 62 would be $953, and at their FRA (66 and 4 mo’s.) the benefit would be $1300. If they wait until age 70 to claim, it would increase to $1,681. In 2034, 16 years from now, the person in our example will be 78 years old. Using current mortality projections for someone alive at age 62 (19.4 years for a male and 22.3 for a female), the odds are that the person in our example will experience between 3 and 6 years of reduced benefits. A person who turns 62 in 2034 (they are currently 46) would never get their full benefit.
FYI, this chart shows what happens to this hypothetical person if benefits are trimmed to 77% starting in 2034. If you delay the age when you start claiming you still get a bigger benefit (if you or your spouse are still alive), but the bigger the benefit the larger the $ cut. Your earnings record might be lower or higher than the example used here.
Age Start Collecting
77% Ben. Start 2034
$ Difference Paid
So what will you do?
By now you probably see that the issues are complicated. And we have arrived at the crucial point of this article, your answers to Jeff’s question on how to prepare for bad news in 2034. Here it is again: “What actions are you taking now or would you undertake to survive the potential 2034 cuts to Social Security retirement benefits”?
These are some of your options, undoubtedly you will come up with some more:
– Do nothing and hope for the best
– Work longer and save more
– Claim earlier and get more years in before the cut
– Delay claiming and figure either Congress will fix the problem or you won’t live long enough for it to affect you many years
– Move to a Caribbean country
Please share your personal solution(s) in the Comments section below. Try focus on what YOU are going to do. Political statements will take us in a direction that probably won’t be helpful.