Saturday, July 13, 2019

The Biggest Retirement Assumption

There have been many different solutions put forth over the years to remedy the nation’s retirement ills, but regardless of your perception of the coming crisis (including those who believe such notions are overblown), there is a constant in every estimation of our retirement future.[1]

Yes, I’m talking about Social Security. Indeed, we rely on the inevitability of those benefits with a certainty generally accorded only to death and taxes (both of which play a significant role in Social Security eligibility and claiming, as it turns out).

And yet, for all its centrality in planning, Social Security faces its own funding crisis, or is projected to, according to the trustees of the program, in a report formally titled, “The 2019 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. ” That the program will run short of funds is no secret, with the only variable being at what exact point in the future will benefits have to be reduced (it changes modestly from year to year, depending on a couple of variables).

Not only is the funding crisis well-known, the aforementioned trustees’ report acknowledges, and routinely outlines a “broad continuum of policy options that would close or reduce Social Security's long-term financing shortfall,” along with cost estimates.

Years back, when the future crisis was no less real, but somewhat less large, I had the opportunity to hear former Federal Reserve Chairman Alan Greenspan speak on the subject of “fixing” Social Security. Greenspan, who had led a commission in the early 1980s charged with solving was then a more immediate crisis of the program (believe it or not), outlined the two core elements of any serious attempt to resolve the funding shortfall:
  • increasing funding (generally either by raising the withholding rates or the compensation level to which they are applied, or both); and
  • reducing benefits (by raising the claiming age) or what’s euphemistically referred to as “means testing,” which effectively reduces the benefits to higher income recipients. 
So, the answer to the problem is, as the actuaries remind us, “just math,” and we needn’t choose one solution or the other; rather, some combination – as it was in 1983 – is the approach that seems the most likely outcome.

Except, of course, the answer isn’t “just” math, it’s money. And fixing it – while not hard to figure out – will cost money that those who would make that call would “rather” spend on other things. It’s also fraught – as it was in the 1980s – with political hot buttons. Social Security has long been considered a “third rail” of American politics, and politicians have been burned for merely suggesting the need for change, much less putting forth specific proposals. 

That said, if there’s any aspect of this that is as widely known as the fact that there is a looming financial shortfall, it’s that the longer we put off taking steps to do so, the more difficult – the more expensive – it will be.

Yes, Social Security is most certainly the biggest retirement assumption – by individuals, retirement planners, and legislators alike. Today as we stand at the brink of the biggest retirement reform legislation in a decade – as we consider a growing number of state retirement savings mandates, and contemplate a federal expansion – we also know that as valuable, even essential, as those steps might be in broadening and deepening the success of the private retirement system – they won’t be “enough” if we don’t shore up the baseline foundation upon which the nation’s retirement security is currently predicated.

It’s time, in short, for an adult conversation about – and some adult action – to make sure that that most fundamental of retirement planning assumptions remains something we can count on.

- Nevin E. Adams, JD
 
Footnote
1. A notable exception is the Employee Benefit Research Institute's Jack VanDerhei, who routinely includes an assessment of the impact of the projected reductions in Social Security benefits if the current funding status remains unchanged. In a March 2019 Issue Brief, he notes that "when pro rata reductions to Social Security retirement benefits are assumed to begin in 2034, the aggregate retirement deficit increases by 6 percent to $4.06 trillion."

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