Baby Boomers and Impact on Social Security – 6/27/14

Over the next decade roughly 250,000 people will reach retirement age each month – that’s about 30 million people in the next ten years alone.  With close to 8,000 baby boomers (those born between 1946 and 1964) reaching retirement age daily, many wonder how Social Security will be able to continue to sustain itself.  Approximately 17 percent of baby boomers are now retired – an increase from the 10 percent reported in 2010, and the number is expected to increase to 20 percent in the next few years.  Current estimates suggest that the Social Security Fund will be depleted between 2033 and 2041, which could then lead to a reduction in benefits for many recipients.   While many boomers are working longer than previously, life expectancies are expected to continue to increase (leading to further strain on retiree benefits).  The average life expectancy for those who reach the age of 65 is approximately an additional 20 years for women and 18 years for men. 

The current structure for which Social Security is funded is a topic which those in Washington must address.  The earnings cap that employees pay 6.2 percent towards Social Security continues to increase annually (up to $117,000 in 2014 from $113,700 in 2013).   However there may come a time that the Social Security portion of FICA needs to be imposed on higher levels of income, or possibly remove the payroll tax cap on earned income outright similar to the Medicare tax.  During the recent recession the employee’s payroll tax rate was reduced to 4.2% for 2011 and 2012, before returning again to 6.2% in 2013.  Ironically, many experts believe that the rate must be increased at a time when short term economic factors dictate the opposite.  Over time, the normal retirement age for retirees to begin collecting benefits will continue to increase.   Some proposals to increase longevity of the current fund include further delaying the normal retirement age as well as changing the earliest you can collect benefits from 62 to a later age.   According to the Social Security Administration website, a hypothetical scenario for a possible “step up” in the early retirement age would involve increasing from age 62 to age 65 at a rate of 2 months per year between 2017 and 2034.  Additionally some have proposed reducing benefits for higher earners and recalculating the cost of living adjustments (COLAs).  Ideas continue to be proposed, however little has been accomplished as political agendas get first consideration.  

While the picture could be better, the U.S. is not alone with the problem it faces.  In fact, the U.S. is actually in a better position than most developed nations when it comes to its social retirement plan and average age of its work force.  The percentage of the American population over the age of 65 is about 14.5 percent, lower than most developed nations (Japan is currently close to 26 percent).   By 2030, when all of the baby boomers are 65 or older,  it is estimated that roughly one in five Americans will be over the age of 65.  This represents a significant challenge on the economy as so many will be dependent on government based benefits.  Two decades later in 2050 the number is projected to remain the same for U.S., whereas areas in Europe will face about 30 percent of population over the age of 65 and Japan encounters 40 percent.

Additionally, the projections for the U.S. indicate that by the time the last of the boomers are retired their children (often referred to as Millenials) will be entering their prime income years.   This is anticipated to aid in resupplying the fund until the cycle repeats again with the following generation.  

Effect on Financial Planning

The effect of the uncertain future of Social Security on financial and retirement planning is tremendous and should be taken into account by everyone, regardless of age. Based on the projections outlined by the Social Security Board of Trustees, there is a marked difference in the uncertainty this will have on different generations.

For those already in retirement, while it is possible that benefits could be changed, it is highly unlikely that changes would be made for anyone already retired. With benefits still projected to be fully provided through 2033, any potential benefit shortfalls are relatively unlikely to affect individuals that are already retired. With a high likelihood that Social Security will be changed to solve funding shortfall problems, it is reasonable to rely on this income source for the rest of your life.

Individuals near retirement have less certainty about the future of social security, as the projected future shortfall in the Social Securityfund in 2033 will likely be within your planning time frame. The high likelihood that some Social Security regulations will change in the near future will make it likely that this projection will change for the better.

For people who are far from retirement, any future changes to the structure of social security will alter the projections for the viability of future benefits. This uncertainty means that a contingency plan to cover cash flow shortfalls should be in place, thus increasing the importance of personal savings and utilizing retirement vehicles such as IRAs and 401(k)’s.  

This publication is provided as a service to our clients and associates of PFA solely for their own use and information.  The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified.  The content in this publication is for general information only and not intended to serve as individual investment advice.  You should seek independent advice from a professional based on your individual circumstances.