BFI Capital Group
U.S. Social Security Trust Funds Projected to Run Out Sooner than Expected
According to a recent U.S. government report, the Social Security trust fund that Americans contribute to and are relying on to help fund their retirement will run out of money by 2033, one year sooner than originally expected. Social Security in the US has long faced the issue of baby boomers retiring at a greater rate than younger people entering the workforce. Now, the Covid pandemic, and the recession caused by it, have only hastened the decline.
On August 31st, in the U.S. government’s annual Social Security and Medicare Trustees Report, the U.S. Treasury Department stated that the Covid pandemic and its recession led to a drop in payroll tax revenue in the US. That, in turn, has greatly increased the rate at which Social Security funds are being depleted.
The report stated that employment, interest rates, earnings and GDP had all dropped substantially in Q2, 2020, with assumed worker productivity and GDP levels permanently lowered by 1% even if pre-pandemic trajectories resumed. The U.S. continues to face the ever-growing issue of life expectancy increasing while birth rates continue to decline and the cost of paying retirees exceeding what is received from workers. Now, the long-term effects of the pandemic have only added to the uncertainty.
In their message to the public, the Old-Age and Survivors Insurance (OASI) Trust Fund, one of two Social Security funds overseen by the U.S. Treasury Department which pays retirement and survivors benefits, will be able to pay scheduled benefits on a timely basis until 2033, one year earlier than reported last year. At that time, the fund's reserves will become depleted and continuing tax income will be sufficient to pay 76 percent of scheduled benefits.
It went on to say that the Disability Insurance Trust Fund, which pays disability benefits in the US, will pay scheduled benefits until 2057, 8 years earlier than in the past year’s report.
Americans, having assumed for decades that the programs would be there for them later in life, had Treasury Secretary, Janet Yellen, striking a serious tone: “Having strong Social Security and Medicare programs is essential in order to ensure a secure retirement for all Americans, especially for our most vulnerable populations.” She continued: “The Biden-Harris Administration is committed to safeguarding these programs and ensuring they continue to deliver economic security and health care to older Americans.”
While Social Security insolvency will mean any cushion the trust fund has will be exhausted, it doesn’t mean the system will stop paying benefits. It does mean action will be needed to bring things back to equilibrium. If the US Congress does not act by 2033, Social Security law would need to cut benefit payments by 20%, potentially throwing many retirees into poverty.
This is certainly not a US problem alone, and many other countries will have to face similar difficult decisions. Social Security was never intended to cover all retirement needs, which is why investors need to continually look for ways, even outside of the box, to buttress retirement savings.