Social Security finances worsen as reliance on the program increases

You’ve heard of good news/bad news stories. This one is a bad news/worse news version.

Two new reports from the University of Pennsylvania’s Wharton School of Business document an increase in American retirees’ reliance on Social Security income over the past 25 years as the program’s long-term finances deteriorate at a faster pace than officially projected by the Social Security Administration.

The reports are based on simulations generated by the Penn Wharton Budget Model, a nonpartisan research initiative that provides economic analysis of the fiscal impact of public policies.

First, the bad news.

The Social Security program was introduced in the 1930s during the throes of the Great Depression to protect those who could no longer work due to old age from slipping into poverty. Over the past 80-plus years, Social Security has evolved into a core pillar of retirement security, providing benefits to retirees and disabled workers, their dependent spouses, children and survivors.

But Social Security was never designed to be the sole source of retirement income. Retirees were expected to supplement their benefits with pension income and personal savings. Unfortunately, that plan hasn’t worked out for many Americans. Today’s retirees are more dependent on Social Security benefits than retirees 25 years ago, according to the report, Americans’ Dependency on Social Security. The report is based on an analysis of the Federal Reserve’s Survey of Consumer Finances from 1992, 2004 and 2013, which gather economic data for the previous years.

The share of retirees who depended on Social Security for more than 90% of their income increased from 43.7% in 1991 to 46.6% by 2012, and the share of retirees depending on Social Security benefits for half or more of their income increased from 69% to 71% during the same period.

Not surprisingly, dependency on Social Security is the highest among low-income retirees. Almost 90% of retirement income comes from Social Security for retiree families in the lowest total income quartile. In contrast, those in the highest quartile receive only about 10% of their income from Social Security benefits.

Near retirees are in even worse shape. Most families with at least one adult between the ages of 55 and 61 appear to be far from prepared for retirement, according to the report.

The researchers based that calculation on an average combined Social Security benefit of $2,060 for a married couple with a joint life expectancy of 22.5 years. To supplement their benefits with additional income equal to 25% of their Social Security benefit — $500 per month — they would need a nest egg of $108,000. Only 26% of married pre-retiree families have net wealth sufficient to achieve this additional income target. Even fewer younger married families have sufficient assets for this goal.

The retirement preparedness of single households is much poorer, according to the report. Between 2% and 11% of such families have sufficient net assets to add $300 per month — the equivalent of 25% of their average Social Security benefits of $1,182 for single women and $1,500 for single men during their post-retirement years. Life expectancy at age 65 is 21.1 for single women and 18.8 years for single men.

Now for the worse news.

Since major Social Security reforms were passed in 1983, the Social Security Trustees have slowly reduced their projected Social Security trust fund exhaustion date from 2058 to 2034 in the most recent report. The main reason for the changing projection was faster-than-expected increases in American life expectancy and reduced fertility rates that have resulted in fewer workers to support an increasing number of retirees.

But the trustees’ estimates don’t include some key economic variables, such as the nation’s growing debt. Using a model that incorporates such future macro-economic forces, a separate Penn Wharton report, Social Security’s Worsening Financial Condition, projects that the Social Security trust fund will be depleted in 2032 — two years earlier than the latest official projection from the Social Security trustees.

The 2018 trustees’ report projected that there would be sufficient payroll taxes to pay 79% of promised benefits when the trust fund runs dry in 2034 unless Congress acts before then. The Penn Wharton model not only forecasts a faster depletion date, but larger future annual cash flow shortfalls, too.

“An increase in debt reduces the capital stock, which leads to lower gross domestic product and a shrinking tax base, both for Social Security and general federal revenues,” said Kimberly Burham, the Penn Wharton model’s managing director of legislation and special projects. “Basically, with less investment there is less output and therefore less work and less wages to tax.”

The two reports combined present an ominous picture of the future of retirement security for many Americans.

“Lawmakers will have to adjust the program’s eligibility, benefit and tax laws to bring the program’s projected expenditures and revenues closer into balance and ensure the program’s continued solvency for future generations,” the report on Americans’ Dependency on Social Security concluded. “Such high and growing dependency on the program exposes older Americans to the political risk that future taxpaying generations may overwhelmingly vote to cut benefits.”

The sooner Congress tackles the issue of Social Security solvency, the better.