For some reason people take great comfort in the possibility that even if Congress does nothing Social Security will continue to pay them 76% of their scheduled retirement benefits.
That cut is the first year. Unfortunately, the gap between payable benefits and schedule benefits grows with every passing year – and that’s even if everything goes according to plan. The trouble is things aren’t going according to plan – specifically fertility rates are falling short.
I recommend a piece written by Paul Brandus, who writes for MarketWatch (“Why the coronavirus could shrink your Social Security years from now”). In that column, the writer theorizes that COVID-19 will exert a downward pressure on fertility. It is a real possibility, and clearly demonstrates that he is thinking about the challenges facing Social Security.
Even if you took the pandemic out of the equation, the pressure on Social Security has been growing for years. With one exception, the U.S. birthrate has fallen every year since 2007, and now stands, the government says, at its lowest level in 35 years.
Fertility is not a current problem.
The babies born today will be 15 when the Trust Fund is exhausted. They are not a part of the near-term solvency problem, or its near-term solution. His concern, however, represents a long-term structural problem for a program with significant long-term problems. The birth dearth this year will affect the solvency of the program in 30 years, or roughly the time when Zennials reach retirement.
Inside The Calculations
To understand the issue, you have to realize that Social Security finances are measured over 75 years, or roughly the upper end of the life expectancy of someone who is able to vote. The forecast captures a 75 year lifecycle of the economy. Inside the math, the expected babies grow into theoretical workers who earn projected wages. The calculations simulate benefits owed workers once they retire.
In terms of the forecast, a person “born” today is expected to contribute for 45 to 50 years, and collect for a total of 8 years. Benefits are capped at 8 years because any benefits that this person collects in his or her 76th year fall outside of the solvency window. Even in a worst case scenario, these people look like statistical cash cows to the programmatic forecast today.
So fewer babies today translates into bigger problems for retirees 20 years out.
What if Brandus is right?
If the expected fertility fails to materialize, benefit cuts will be larger than we are promised today. Brandus illustrates the problem:
The Social Security Trustees are blunt: “continuing tax income will be sufficient to pay 76 percent of scheduled benefits.” A 24% cut.
Benefit reductions start at 24% and continue to grow – forever. Of course, that forecast assumes that fertility follows the assumptions on which the Trustees Report is based. If Brandus is correct, the shortage of babies today will translate into a shortage of continuing tax revenue.
If he is right, the system’s payable benefit will continue to decline for those people who are 40 and younger.
Will you get 76% of your benefits?
People who tell you that you will get 76% of what they were promised are simply wrong. You might get 76% in 2035 if the economy cooperates – but it isn’t. You will not get 76% in 2036 unless fertility improves – and it isn’t. Otherwise, the discount grows forever.