The global demographic crisis expected to play out over the coming years has been a frequent topic of ours (you can read our most recent post on the topic here: "DB Warns 35-Year Economic Super Cycle Is Officially Ending"). The problem, of course, is that baby boomers all over the globe are on the verge of transitioning out of their highest wage earning years and into retirement. That transition brings with it all sort of negative consequences ranging from the detrimental impact on average incomes and GDP to exposing the epic ponzi schemes that workers have heretofore referred to by their more common names of pension plans, social security, medicare and medicaid.
A report from the National Institute on Retirement Security (NIRS) recently pointed out just how ill prepared American's are for retirement. The study by the NIRS found that the average American household has $2,500 saved for their retirement. Even worse, the study found that even people near retirement (aged 55-64) have only set aside $14,500 which should allow them to live very comfortably for about 2-3 months.
Among working households in the U.S., 40% were found to have no savings set aside for retirement at all and nearly 80% had less than enough to cover 1 year of expenses.
Russ Kamp, a pension consultant, recently summarized the issue to the Financial Times saying, “We have a crisis unfolding here... for millions and millions of Americans, the only thing they’ll have is Social Security.” But, Social Security only provides about 35% of a typical household’s pre-retirement income which, given the statistics above, isn't going to be nearly enough to fill the earnings gap that most retirees will face.
That said, even the 35% is generous when taking into account the fact that Social Security is insolvent and will run out of money by 2034 according to their own reports. In fact, the Social Security Board's 2016 annual report points out that the Disability Insurance Trust Fund actually ran out of money in 2016 and has only been able to continue making payments to beneficiaries by borrowing from the "Old Age and Survivors Insurance Trust Fund."
The Bipartisan Budget Act of 2015 was projected to postpone the depletion of Social Security Disability Insurance (DI) Trust Fund by six years, to 2022 from 2016, largely by temporarily reallocating a portion of the payroll tax rate from the Old Age and Survivors Insurance (OASI) Trust Fund to the DI Trust Fund. The effect of updated programmatic, demographic and economic data extends the DI Trust Fund reserve depletion date by an additional year, to the third quarter of 2023, in this year's report. While legislation is needed to address all of Social Security's financial imbalances, the need remains most pressing with respect to the program's disability insurance component.
The OASI and DI trust funds are by law separate entities. However, to summarize overall Social Security finances, the Trustees have traditionally emphasized the financial status of the hypothetical combined trust funds for OASI and DI. The combined funds satisfy the Trustees' test of short-range (ten-year) close actuarial balance. The Trustees project that the combined fund asset reserves at the beginning of each year will exceed that year's projected cost through 2028. However, the funds fail the test of long-range close actuarial balance.
Alas, the report also admits that the games can only go on so long, as all of the Social Security Trust Funds are expected to run out of cash by 2034.
The Trustees project that the combined trust funds will be depleted in 2034, the same year projected in last year's report. The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds is 2.66 percent of taxable payroll, down from 2.68 percent projected in last year's report. This deficit amounts to 1.0 percent of GDP.
But we're sure these problems will just sort themselves out. What we really need to focus on is an all new set of entitlements to payoff outstanding student debt and send kids to college "free of charge."