Tag Archives: Social Security

Is Social Security Worth Its Cost? by Kevin Dayaratna, Rachel Greszler and Patrick Tyrrell

In sometimes excrutiating detail this Heritage Foundation report demonstrates why, for many Americans, Social Security will be worth nowhere near what it costs them. From Kevin Dayaratna, Rachel Greszler and Patrick Tyrrell at heritage.org:

SUMMARY

Americans would be better off keeping their payroll tax contributions and saving them in private retirement accounts than having to contribute to the government’s broken Social Security system. Social Security’s design has, over the decades, presumed that many Americans are too incompetent to make informed decisions for themselves, but few Americans believe that the government knows better than they do what is best for them and their families. Moreover, Social Security’s financial structure effectively guarantees that workers will receive extremely low—or even negative returns—on their payroll taxes.

KEY TAKEAWAYS

This report compares what Social Security can provide and what workers could receive if they had ownership of their Social Security payroll taxes.

This information can help individuals of all ages understand what they can expect to receive from Social Security or from private savings.

Virtually all Americans would be better off keeping their payroll taxes and saving them in private retirement accounts.

Select a Section 1/0

Social Security began as an anti-poverty insurance program, aimed at preventing workers from outliving their savings when they were no longer physically able to work. As such, Social Security was limited in nature, beginning as only a 2 percent payroll tax—and promising to never take more than 6 percent of workers’ pay. Today, Social Security’s Old Age and Survivors Insurance (OASI) retirement program takes 10.6 percent of workers’ pay, and its Disability Insurance (DI) program takes another 1.8 percent, for a combined total of 12.4 percent. This is more than most Americans pay in income taxes.

As Social Security has grown in size and scope, it has become more than just an insurance and poverty prevention program—and with millions of seniors living below the federal poverty line, it is not doing a great job even at that. Having reduced the incentive to save for retirement, Social Security now represents a significant portion of most workers’ retirement savings. Despite the fact that Social Security was intended to be an insurance program, providing a secure retirement income, individuals have no legal claim to their scheduled Social Security benefits, as the program can only pay out as much money as it has on hand and Congress can change benefit levels if it wants. Not surprisingly, more than 60 percent of workers under the age of 50 do not think Social Security will be able to pay them a benefit when they retire.

To continue reading: Is Social Security Worth Its Cost?

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Opinion: The next bear market in stocks will spark a retirement crisis, by Howard Gold

A bear market in stocks would substantially reduce the Baby Boomers’ already inadequate savings. From Howard Gold at marketwatch.com:

A recession could decimate even substantial retirement portfolios, and Social Security and Medicare are facing shortfalls
AFP/Getty Images

Almost lost amid the torrent of recent news was a sobering item that will surely have far-reaching consequences.

The U.S. government announced that for the first time since 1982, it is tapping into Social Security trust funds to pay current benefits to recipients and it is dipping into Medicare’s reserves to cover the costs of that program.

The trustees also projected that the trust fund will run out of money by 2034 and that Medicare’s fund for paying costly hospital bills will be depleted by 2026.

That may ultimately force a cowardly Congress to cut benefits, raise taxes, increase the eligibility age, or some combination of the three. For the 52% of Americans who rely on Social Security for more than half their retirement income and the 25% of retirees who get more than 90% of their income from the program, that would be a disaster.

Read: Fixing Social Security starts with us, the voters

But the 10,000 baby boomers who will turn 65 every single day from now until 2029 face an even broader retirement crisis that could cause big social and political fallout.

Over the next few years, we will almost surely confront a bear market and recession that could decimate even substantial retirement portfolios, not to mention financially dicey state and local pension plans and the federal government itself. And those governments will have few tools to fight it. Consider:

• We are in the 10th year of an economic recovery and bull market in stocks. The S&P 500 index SPX, -0.86%   has more than quadrupled from its March 2009 bottom, for a compound annual growth rate of 17.5% during that time. Since the S&P 500 has averaged a 10% annual gain over the past 89 years, at some point there has to be a reversion to the mean.

It’s official: Medicare trust fund will run out of money in 8 years, by Simon Black

Don’t worry, the soon to be broke Medicare and Social Security funds will be backstopped by an insolvent government. From Simon Black at sovereignman.com:

Two days ago the respective Boards of Trustees for Medicare and Social Security released their annual reports for 2018.

As usual, the numbers are pretty gruesome… and the reports plainly stated what we’ve been talking about for years: the trust funds for both Social Security and Medicare are going to run out of money.

Soon.

In the case of Medicare, the Trustees project that its largest trust fund will be fully depleted in 2026, just eight years away. In the context of retirement, that’s right around the corner.

For Social Security, the Trustee report stated that the program will spend more money on benefits in 2018 than it will generate in income and tax revenue.

So this year will be the first time Social Security has run a deficit since 1982.

But it gets worse. Because according to the Trustees’ projections, the program will continue running larger and larger deficits until it too becomes fully depleted in 2034.

After that, recipients can expect at least a 25% cut in the benefits that they were promised and worked their entire lives to receive.

Again, these numbers come directly from the Trustees of Social Security and Medicare (which includes the US Treasury Secretary).

The reports were so dire that mainstream publications picked them up almost immediately.

Curiously, though, a number of newspapers tried to play down the bad news, dismissively telling their readers that Social Security and Medicare are just fine, and that those sobering projections don’t matter.

These are common refrains. They’ll state, for example, that there’s nothing to worry about because the government will step in and bail out the programs.

Is that so? Well, who is going to bail out the government?

According to the Treasury Department’s annual financial report, Uncle Sam is already insolvent to the tune of $20.4 trillion.

And those numbers are only getting worse too. Treasury’s own projections show annual budget deficits in excess of $1 trillion starting in 2020.

Simply put, a short-term fix of Social Security and Medicare would cost trillions of dollars. And that would just be a down payment on the long-term costs of fixing the programs.

The federal government simply doesn’t have that kind of money. Not even close.

To continue reading: It’s official: Medicare trust fund will run out of money in 8 years

Why Social Security Must Fail, by Bill Bonner

Social Security will fail because for the next few decades at least, it will have more going out than coming in. That’s a recipe for failure. From Bill Bonner at bonnerandpartners.com:

POITOU, FRANCE – Uh oh.

The “social welfare” systems that are responsible for 40% of federal spending are going broke. A headline from The Wall Street Journal:

Social Security Expected to Dip Into Its Reserves This Year.

What reserves? Ah… the “Trust Fund.” But what’s in the trust fund?

What else? U.S. Treasuries.

In other words, the people’s favorite pension plan will depend on U.S. Treasury bonds… IOUs from the deepest debt hole in the world… the same IOUs that the world’s biggest central bank – the Fed – is unloading through “quantitative tightening.”

And these are the same IOUs that the federal government is selling, too – in record number. Deficits must be covered by borrowing (selling bonds). And in fiscal year 2019, the feds are going to need to sell $1.2 trillion worth of them.

Dangerous Ratio

Meanwhile, corporate America has some $7 trillion worth of bonds maturing over the next seven years. It will have to roll them over… by issuing new debt.

Who’s going to buy all this debt? At what price?

We’ll come back to those questions another day.

Meanwhile, Medicare is looking a little peaked, too. Its “trust fund” is expected to be depleted by 2026 – three years sooner than the last estimate.

And here’s the important number, says The Fiscal Times: 2.2.

That’s the ratio of workers to Social Security beneficiaries. In 1968, when America really was great, there were about five workers for every one beneficiary. By 2035, that ratio will have fallen to 2.2.

We know what you’re thinking: 2035 is a long time from now. Heck, many of us reading this (or writing it!) will not see it.

And that gives Congress and the administration plenty of time to correct any problems, right?

The U.S. government now consumes about a quarter of our national output… and directs, controls, or strongly influences another quarter. How does it make its decisions about when to spend… and when to cut back?

If it works the way they teach you in Civics class, we have nothing to worry about.

If their finances begin to go bad, our elected representatives – paragons of virtue and intelligence, every one of them – will take action to set things straight.

They’re smart people. Many of them have law degrees. Some have even been in business. In a pinch, they’ll sharpen their pencils, tighten spending, raise taxes, and put their house in order.

But this isn’t Civics class.

To continue reading: Why Social Security Must Fail

Medicare Will Be Insolvent In 2026, Sooner Than Expected; Social Security To Follow In 2034, by Tyler Durden

There it is in black and white—when the two big government pension and medical funds will go broke—and like most such estimates before, these are probably optimistic. At least when they go broke it won’t come as a surprise. From Tyler Durden at zerohedge.com:

Medicare’s trust fund has just eight more years of solvency until 2026, and Social Security will be exhausted in 2034, according to Thursday projections by the trustees for the government programs.

While Social Security’s expected depletion is unchanged from last year’s projection, the date for Medicare’s demise was moved up three years.

Social Security is made up of several funds; the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) are combined for the designation OASDI, while Medicare’s Hospital Insurance trust fund is designated HI.

If allowed to expire, beneficiaries would face an immediate reduction of around 20% in benefits.

The costs of Medicare and Social Security will increase substantially as a percentage of GDP through 2035 due to a sharp rise in beneficiaries as baby-boomers retire, and lower birth rates that have persisted since the baby boom resulting in slower growth of the labor force and GDP.

Social Security’s annual cost as a percentage of GDP is projected to increase from 4.9 percent in 2018 to about 6.1 percent by 2038, then decline to 5.9 percent by 2052 before generally rising to 6.1 percent of GDP by 2092. Under the intermediate assumptions, Medicare cost rises from 3.7 percent of GDP in 2018 to 5.6 percent of GDP by 2035 due mainly to the growth in the number of beneficiaries, and then increases further to 6.2 percent by 2092. The growth in health care cost per beneficiary becomes the larger factor later in the valuation period, particularly in Part D.

To continue reading: Medicare Will Be Insolvent In 2026, Sooner Than Expected; Social Security To Follow In 2034

America’s long-term challenge #2: the looming retirement crisis, by Simon Black

Many people have saved very little for their retirements, but of course they have nothing to worry about. The government will take care of them. From Simon Black at sovereignman.com:

Last week, the financial services giant Northwestern Mutual released new data showing that 1 in 3 Americans has less than $5,000 in retirement savings.

It’s an unfortunately familiar story. And Northwestern Mutual’s data is entirely aligned with other research we’ve seen in the past, including our own.

The Federal Reserve’s most recent Survey of Consumer Finances, for example, shows that the median bank balance among US consumers is just $2,900.

And Bank of America’s annual report from last year showed that the average balance per HOUSEHOLD (i.e. -not- per person) was $12,870… which was actually LESS than the average account balance that Bank of America reported in 1997!

On average, the typical US household has less savings today than they did 20 years ago… and almost nothing put away for retirement.

In fact 21% of Americans (based on Northwestern Mutual’s data) have absolutely nothing saved for retirement.

And 33% of Baby Boomers, the generation closest to retirement, have between $0 and $25,000 saved for retirement.

That’s hardly enough savings to last more than a few years… and a major reason why most retirees currently rely on Social Security to meet their monthly living expenses.

According to a Gallup poll from last May, 58% of US retirees said that they rely on Social Security as their major source of income. They simply don’t have enough of their own personal savings stashed away.

But as we’ve discussed many times before, Social Security is rapidly running out of money.

The most recent report from Social Security’s Board of Trustees (which includes the US Secretaries of the Treasury, Labor, and Health & Human Services) tells us that the program’s cost has exceeded its tax revenue since 2010.

Last year this shortfall was $59 billion, 11% worse than in 2016.

And in order to make up the difference and cover this deficit, Social Security has to dip into its trust fund, effectively burning through the program’s savings.

The problem with this approach is that, eventually, these annual deficits will burn through ALL of the program’s savings.

The government knows this; the Board of Trustees even state this in their annual report, projecting that the Social Security trust funds will become fully depleted in 2034.

Sixteen years may seem like a long way off. But we’re talking about retirement here. You’re supposed to think long-term about retirement. And the math simply doesn’t add up.

To continue reading: America’s long-term challenge #2: the looming retirement crisis

What Drives Long-Term National Debt Growth? from the Visual Capitalist

The US is in a world of debt trouble. From the Visual Capitalist at visual capitalist.com:

What Drives Long-Term National Debt Growth?

With the current 106% debt-to-GDP ratio, there’s no doubt that today’s government debt is high. The last time the United States reached this mark, it was during the aftermath of WWII in the late 1940s.

But despite nearly historic debt levels, it does not seem that the national debt is a key issue for most citizens and groups. What drives this accumulation of debt in the long run, and at what point does the debt level become so high that it becomes an undeniable and critical issue for the country?

Today’s infographic comes from the Peter G. Peterson Foundation, a NYC-based group that focuses on educating people about the fiscal challenges of growing government debt. The graphic illustrates the main factors driving the debt upwards, as well as the potential impact down the road.

RISING TEMPERATURES

The trouble with debt is that it delays today’s challenges well into the future, making it a tempting short-term solution when other things aren’t working. However, over time, that burden increases steadily, and the situation quickly represents the “frog and boiling water” parable.

So what’s raising the temperature of that water?

Right now, the aging of the Baby Boomers is a key factor, and the amount of people receiving social security benefits will swell from 62 million to 88 million people by 2035. At the same time, Medicare’s hospital trust fund will run out of money by 2029, and the program will only remain solvent until 2034.

Whether it’s the growing enrollment in these programs or the rapidly escalating costs of healthcare itself, more money will be put towards Social Security and healthcare over the coming years.

By about 2045, government spending on major health programs will nearly double in size to greater than 9% of GDP.

BOILING WATER

Today, interest on the debt is equal to about 1.4% of GDP.

However, if the projected pace is maintained, it’s anticipated that interest payments could be equal to 6.2% of GDP by 2047 – this is roughly 2x the average annual amount the federal government spends on education, infrastructure, and R&D combined.

 

To continue reading: What Drives Long-Term National Debt Growth?