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Last week, I talked about the debt ceiling. You know what’s going on with that, right? Once again, the federal government has reached its statutorily determined debt limit – now an unbelievable $31.4 trillion. There can be no more spending until that limit is either raised or suspended. If neither happens, the United States will default on its obligations for the first time in history. By many accounts, calamity will ensue as a result.
Republicans say they will not agree to raise the debt ceiling unless Democrats agree to spending cuts. It sounds perfectly prudent. After all, the “bigger picture” look at our fiscal position – beyond the matter of the current debt-ceiling standoff – is that it’s unsustainable. In fact, that’s the exact word used by the Committee for a Responsible Federal Budget to characterize it.[1]
Part of that fiscal unsustainability is attributable to the increasingly poor health of Social Security. You may have heard over the years that Social Security is in trouble and could collapse. It was back in 2010 that the cost of Social Security began to exceed its non-interest income (tax revenue, mostly).[2]
In 2021, Social Security’s cost began exceeding its total income, including the interest generated by trust fund asset reserves. What’s more, the Trustees project that the cost of Social Security will exceed total income every year from now on.[3]
Because of these shortfalls, the Old Age and Survivors Insurance trust fund from which Social Security retirement benefits are paid is on pace to run dry by 2034 – just 11 short years from now.[4]
Let’s get back to those Republicans and their demand for spending cuts as a condition to raise the debt ceiling. It sounds very bold – until you hear the declarations from key Republican figures that neither Social Security nor Medicare are to be considered a source of those spending cuts.[5]
Economist and fiscal watchdog Veronique de Rugy suggests that bypassing Social Security reform in the context of the near-term debt-ceiling fight may not be a big deal. However, she notes, it is concerning to hear Republicans categorically declare that Social Security – currently on a fast-track collision course with insolvency – shouldn’t ever be touched, which is the exact same thing Democrats say.
In a recent article for Reason.com, de Rugy expresses her frustration with Republicans’ abdication of genuine fiscal prudence in the name of political expediency. The article is more than an outlet for venting, however.
It also underscores that the day American seniors are forced to come face-to-face with Social Security’s unviability and potential collapse is fast approaching – perhaps even sooner than many think. And that those earnestly preparing for retirement will want to give significant consideration to what Social Security’s struggles could mean to their own personal financial viability.
If you thought Republicans’ retaking of the House last year ushered in a renewed era of fiscal prudence, Veronique de Rugy says you’re sadly mistaken.
In her Reason.com article titled “Social Security Is on the Brink of Collapse. The GOP Won’t Touch It,” de Rugy opens with a reference to a recent tweet by newly elected Republican Sen. J.D. Vance. In the message, Vance declared his agreement with a pronouncement by former President Trump that “under no circumstances should Republicans vote to cut a single penny from Medicare or Social Security” in the battle over the debt ceiling.[6]
The economist admits that the brief period between now and possible debt default means there isn’t enough time to work out meaningful reforms to Social Security and Medicare anyway. That’s not what has her concerned. Instead, it’s the apparent refusal of Republicans to even consider making meaningful reforms to the programs ever.
I cannot wait to hear the grand plan that the “don’t touch Social Security and Medicare” Republican caucus has to address the $116-trillion-over-30-year-shortfall (that’s 6 percent of U.S. GDP) facing the two programs.[7]
Of course, one option to cover the shortfall is massive tax hikes. De Rugy wonders if that’s something Republicans actually would embrace. She notes that covering the Social Security shortfall at the time the trust fund is fully depleted would require an immediate increase in payroll taxes to the tune of 25%.[8]
But that would be just the beginning. As de Rugy points out, there also would have to be a tax hike to cover Medicare, as well as subsequent tax hikes to cover the additional, accumulating deficiencies.[9]
And make no mistake – those deficiencies will accumulate, based on Social Security’s current outlook. That’s likely to happen for a variety of reasons, including the anticipated significant increase of the 65-and-older population. According to the Social Security Administration, there were about 58 million Americans aged 65 and older last year. By 2035, that number is projected to grow to roughly 76 million – more than 30% greater.[10]
It’s difficult to imagine Republicans supporting massive tax increases, but it once was difficult to envision Republicans abandoning anything resembling the fiscal high road. Yet it appears they’ve done just that.
For one thing, notes de Rugy, Republicans long ago walked away from engaging in honest and forthright discussions about Social Security’s weakening state. The economist suggests that if the GOP had been willing to do the heavy lifting required to maintain an ongoing narrative about fiscal and economic risks to the program, that might have made it easier for the public to understand – and perhaps even embrace – reform initiatives.
Instead of doing that, says de Rugy, Republicans were all too happy to join Democrats through the years in effectively buying votes by expanding Social Security benefits beyond the limit of payroll-tax revenue.
You see, while the troubles plaguing Social Security largely are attributable to foundational changes in demographics such as longer lifespans and lower birth rates, that’s not all of it.[11] Experts say generous benefit increases have helped to speed up the trust-fund depletion rate, as well.
Andrew Biggs, a Social Security policy analyst at American Enterprise Institute and former deputy commissioner at the Social Security Administration, notes that “since 2000, the average benefit for a new retiree increased by 36% above inflation, coming in at $1,754 per month in 2021.”[12]
In a recent opinion article for Fox Business, Biggs essentially says that Social Security has strayed far from its original purpose over the years, creating a benefit structure far more generous than what is required to merely keep Americans out of poverty. In the piece, Biggs points out that a high-earning couple today could receive more than $80,000 in annual Social Security retirement benefits.[13]
Public perception of Social Security’s role in providing for seniors appears to have adapted to this generosity, making any discussions of actual program reform infinitely more challenging. Indeed, one poll last year found that 83% of Americans want to see Social Security expanded.[14]
Social Security reform may be the most electrified of American politics’ various highly charged and perceived-untouchable “third rails.” But it doesn’t change the fact that the program becomes less viable with each passing day.
Something will have to give, eventually. Either benefits will have to be reduced or taxes will have to be raised – a lot. Based on the nation’s “unsustainable” fiscal outlook, simply choosing to travel ever-deeper into the abyss of debt is no option.
There are no easy answers. And it certainly appears there are no painless solutions. But as Veronique de Rugy implies when she says “the GOP’s transformation into the party of big and fiscally reckless government is proceeding apace,” there seems to be no one left in Washington who’s willing to have a meaningful discussion about any of it.
So, as Washington politicians desperately avoid having the difficult discussions about Social Security, even as the program grows increasingly less stable, what options are available to individual retirement savers so they at least have a chance of saving their own financial skin?
Let’s talk about that now.
The worrisome outlook for Social Security and potential for its collapse could prove to be a problem for retirement savers in two different ways.
The first and most obvious way is that an uncertain future for Social Security raises the possibility that the program at some point may not be capable of providing benefits in the way it has up to this point. Is it likely to go away entirely? No. But the prospect of significant benefit cuts should underscore for savers the importance of taking steps today to optimize their own retirement accounts.
That effort toward account-optimization could include making sure alternative assets generally regarded as safe havens with a historic lack of correlation to mainstream assets are a part of your savings regime. Physical precious metals are examples of such assets.
Another way a distressed Social Security could negatively impact retirement savers is in the form of a macroeconomic “shock.”
A day is coming when the Social Security trust fund is due to be depleted and it appears drastic fiscal measures will, in fact, be required to keep the program running in some form. When that day comes, it hardly seems unreasonable to suggest that it could be a source of volatility in the economy, which is always a worry for retirement savers. That’s just the type of economic condition when assets with safe-haven reputations could help protect savings and providing retirement account owners with valuable peace of mind.
So, the outlook for Social Security is increasingly ominous. And Americans are worried about the chance that it will collapse. This is a perfect time not only to configure your own retirement accounts for growth but to hedge against a variety of risks – including risks attached to fiscal and economic uncertainty. Analysts say many factors have led to a trend of increasing global uncertainty that began with the millennium and is poised to continue.[15] If retirement savers also must consider possible chronic Social Security instability, that’s all the more reason to establish risk-mitigation strategies in their retirement savings accounts.
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