Recently the Social Security Trustees released the 2018 Trust Fund Report. As has been the case over the past several years, the outlook for the Trust Fund is not good. As of 2018, the projection is that by the year 2034, the Trust Fund will be exhausted, and future benefit payments will have to be made solely from current tax receipts. If this is the case and no changes are made to the Social Security system, future benefits will have to be reduced by 23% going forward.
Please note that this article is only addressing the OASI (Old-Age and Survivors Insurance) Trust Fund, not the DI (Disability Insurance) Trust Fund. DI Fund is actually in better shape than the OASI Fund.
As usual, this report was met with a common response – one tweet effectively said “Name one annuity company that has published that they will cut payments by 25% on their annuities in 16 years?” Much drama to be found…
Of course, that rhetorical question was misguided and had the facts wrong, but it’s indicative of the kind of angst such reports cause. So let’s look at the facts. There are two types of fact that apply here – mathematical and policy. Let’s look at the math first.
The tweet mentioned above was made in defense of a strategy to take benefits as early as possible. The historical result for early filers is often less than optimal. The system is designed to deliver more-or-less equal benefits over your lifetime regardless of when you file, if you live to the average age. But, just between you and me, we know you’re above average – oddly enough, so am I. Because of that, you and I can expect to live longer than the projected approximation of ages 82-84. And when we live longer than that, we will be mathematically “in the black” if we delay Social Security benefits as long as possible.
I know that no argument in the world is likely to change the mind of someone who is dead set on filing for Social Security benefits early. By all means, go ahead if it makes you feel better. In the end, the more that choose to file early, the better off the Trust Fund will be, because you’re leaving money in the system by short-changing yourself and your family. More for the rest of us! :-)
Keep in mind, this is not to say that there are not compelling circumstances in which early filing may be necessary. If you have no other (or not enough other) resources, or if you have ill health or an expectation that your lifetime would be shorter than the actuarial estimate, early filing may be your best option.
Facts from the Social Security 2018 Trust Fund Report
I mentioned previously that if no changes are made, the projection is that in 2034 benefits may have to be reduced by up to 23%. First of all, this is an improvement from recent years’ projections: as recently as 2013, the projected Trust Fund depletion was a year earlier (2033), and the required projected reduction thereafter was steeper at 25%. (This is likely where the Tweeter mentioned above got his information from.) So, although it’s not great news, the projections have actually improved in these intervening five years.
At the same time, the projected shortfall is based on nothing changing about the Social Security program. That’s extremely unlikely. But don’t expect any changes in the short term. Congress has a long, proud history of waiting until the last moment to avert crises.
To illustrate, here’s an excerpt from the 1980 Trust Fund Report (VIII. Conclusion):
Over the short term the OASI trust fund will face financial strains requiring policy actions. Without such actions, the OASI fund would be depleted in late 1981 or early 1982, depending on the course of the economy.
At that time, we were facing a depletion of the Trust Fund within one to two years! And guess what? Congress (promptly?) acted a little more than 2 years later (early 1983) by passing landmark legislation altering the Social Security program. This legislation augmented the input sources and outflows to produce a projection that in the 1984 Trust Fund Report (VII. Conclusion) indicated virtually no shortfall of trust fund amounts for the forseeable 75 year period. Of course, at that time no one could predict the kind of economy we’ve been seeing in the first two decades of the new millenium, which have (at least partly) been the blame for the accelerated projected exhaustion of the trust fund.
Something will be done, and of course it won’t be painless – but there will be action and the future of the Social Security program will be viable once again, at least for a while. There have been many efforts put forth as potential policy changes that could resolve this impending crisis – increase the wage base, means test the benefit payouts, and the like. Whatever it is, expect the changes to be unpopular, but effective to the extent that the program will continue paying benefits as promised.
Sterling Raskie, MSFS, CFP®, ChFC®
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First, thanks for your ongoing educational blog, which I have followed and promoted extensively. I have never commented before, but this particular article compelled a response.
I feel a blanket admonishment to avoid early benefit claims does your readers a disservice. While I agree that early claims are disadvantageous for many, if not most, there are situations where early claims are justified. Many claimants may have no choice, as forced retirement and insufficient funds necessitate an early claim. Putting food on the table takes precedence over theoretically ideal outcomes. Making those individuals feel worse, by stating “More for the rest of us! :-)” is at best thoughtless and at worst intentionally unkind. Another valid reason for taking benefits early, is poor personal health, especially when combined with a family history of poor longevity. None of us knows our individual longevity, but we certainly should factor the odds when making important decisions. I doubt you would advise a 61-year-old client with pancreatic cancer to delay their benefit claim (recent statistics show a 14% 5-year survival rate for stage 1a pancreatic cancer, which is the earliest, highest survival rate stage).
On the issue of the trust fund financial outlook, I agree with your comments and feel that this situation should not impact benefit claiming age. That said, I do feel that retirees who anticipate a six-figure or more retirement AGI should consider the potential impact in their plans. There are countless ways our government could “solve” the shortfall, but I personally believe whatever the solution, it will involve means testing, which means higher income retirees should plan for the potential impact.
Thanks again for keeping your readership informed.
I appreciate your input. Upon review, I have added a paragraph to address your concern – didn’t consider that point of view when writing the article because I was reacting to the far more common argument for filing early (from the tweet), which is an emotional response and no other factors were considered.