Everybody knows the social security system is under duress, yet it is inconceivable that it will go away. Unless the public is prepared to see a large portion of the elderly living in poverty, we will find a way to fund social security. William J Bernstein, in his book If You Can, wrote the following:
Rest assured that you will get Social Security; its imbalances are relatively minor and fixable, and even if nothing is done, which is highly unlikely in view of the program’s popularity, you’ll still get around three-quarters of your promised benefit.
Though we feel certain that the payments will continue, the structure will change for at least those with retirement more than ten years off. Rob Arnott of Research Affiliates once said means testing will affect taxes on social security payments by 2020. He said “means testing” “means” if you have one dollar, you will be taxed (as opposed to taxing on the basis of the means you have to pay).
The comment seems extreme, but is indicative of the stress the system is under. Current employed individuals pay, via payroll taxes, the retirement benefits of the retired. Per the 2012 Trustees Report on Social Security, these social security taxes alone cover 75% of the payments due. The number working has exceeded those retired with the excess payments deposited in the trust fund. With retired baby boomers soon outnumbering workers, the system will be as currently structured. Retirement age will have to continue to increase, payroll taxes will have to increase, and benefits reduced.
Which demonstrates another problem….
Laurence J. Kotlikoff and Scott Burns, in their book The Coming Generational Storm, wrote about the disparity between baby boomer and the younger generations’ net benefits. Sen. Dan Coats, R-Ind. askedm “Why isn’t there more outrage … about being robbed of the opportunity to achieve the American dream? Robbed, frankly, by the older generation that I’m a part of?” However, it is hard for me to imagine the younger generations ever organizing enough to push for changes.
In summary, we think for those in, or close to retirement, social security can be depended on. If you are younger, though we are confident of its continued existence, who knows what the system will look like. Given the long term that we expect you to receive Social Security, decisions on enrollment can be critical. We can run projections under different scenarios to help inform planning decisions.