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Alex Kimani

Alex Kimani

Writer, Divergente Research LLC

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Divergente Research LLC and Safehaven.com. 

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Looming Social Security Crisis Threatens Retirement For Younger Generations

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One of the worst nightmares by younger generations has been the thought of hanging up their boots only to find there are no Social Security benefits waiting for them. It's a pretty unsettling thought that would make almost anyone shudder when contemplating their golden years.

But it’s a fear that could easily become a reality.

For the first time in more than three decades, Social Security costs will outstrip income thus forcing the U.S. government to dip into the system's $3-trillion trust fund to cover retirees' benefits.

This will mark the first time that the system's costs have exceeded its payroll income plus interest since 1982.

As long as the system's costs remain higher than its income, the government will be forced to continuously draw the principal, eventually leading to the main kitty drying up.

Alarming Trajectory

Even more alarming is the fact that the trust fund will be fully depleted in 16 years' time if the current trend continues--at which point it will only be able to pay out about three-quarters of promised old age and disability benefits. That's at least five years earlier than previous projections.

The latest Trustee report collaborates findings from the one a year earlier, which had similarly  warned that Social Security could tap out in less than two decades. This year's program is expected to outstrip total income by $2 billion and non-interest income by a staggering $85 billion--and the shortfall could grow wider as the years roll on.

This has ceased to be a problem for future generations and now becomes a problem for the current crop of workers.

The first benefits cut could come as early as a decade from now if nothing is done to change the current trajectory. The disability fund is likely to tap out in 2028 after which payout will fall to 93 percent of promised benefits.

Medicare Facing Early Insolvency

Medicare beneficiaries look set to have a rough time ahead. Medicare Part A, which covers hospital stays for seniors, will run dry in 2028, forcing beneficiaries to take a seven-percent cut.

That's at least two years before previous projections due to lower-than-expected payroll taxes coupled with a slower-than-expected reduction in in-patient hospital utilization.

Meanwhile, Medicare Part B and D--the part of the fund that helps seniors pay doctor bills and outpatient expenses--will be lucky because the law requires automatic financing for the program.

Possible Solutions

The Social Security program is funded through FICA (Federal Insurance Contributions Act), a dedicated payroll tax. Through the system, both the employee and the employer pay 6.2 percent of the employee's wages to the fund up to a current maximum of $128,700 (base pay keeps changing, usually upwards). Related: Cryptocurrencies Continue To Show Subtle Gains

Self-employed people are supposed to shoulder the entire12.4 percent tax though they can deduct half of it as a business expense.

The current problem is largely one of demographics. Americans are not only living longer but also having fewer children.

Currently, 14 percent of the population is aged 65 and above--that is projected to climb to 23 percent in 2080, or nearly a quarter of the population.

Meanwhile, the working population is set to shrink from 60 percent to 54 percent over the timeframe.

In effect, what this means is that more people will require Social Security benefits as the years advance yet there will be fewer workers contributing to the kitty leading to a shrinking trust fund.

There are a several feasible solutions that can avert a complete disaster—and they are all painful. They include increased taxes and benefit cuts, raising the maximum income cutoff and increasing age at which people start collecting benefits. In short, this is largely a legislative problem that lawmakers will have to grapple with.

President Trump has already ruled out option #2 (cutting Social Security or Medicare) but is yet to offer a long-term rescue plan because in this day and age of populism, painful cuts are … popular.

By Alex Kimani for Safehaven.com

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Leave a comment
  • Elvis on June 09 2018 said:
    Most likely, taxable income caps will be removed first, like those for Medicare. On the expense side, tightening up on fraudulent disability claims and eliminating unfair, unearned benefits (such as extra payments to non-working spouses while their working spouse is still living and collecting benefits) would certainly help extend SS’s solvency.

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