Unexpectedly Intriguing!
June 6, 2018

The aging of the baby boomer generation has always ensured that this day would come, but until yesterday, when the Trustees of Social Security's Old Age and Survivor's Insurance (OASI) Trust Fund and Disability Insurance (DI) Trust Fund released their annual report for 2018, it wasn't supposed to arrive for another two years.

We're referring to the day when the program's administrators would have to begin regularly cashing in the special-issue bonds that they have been steadily accumulating in the trust fund since 1982, just to keep paying out Social Security retirement benefits to America's senior citizens. If they didn't raid the trust fund, under current law, Social Security would have to go back to its default mode of operation where the amount of money that it pays out in benefits cannot exceed the amount of revenue that it collects through the Social Security payroll tax, which would mean benefit cuts for every Social Security beneficiary.

But since there is a trust fund, that day of reckoning for Social Security benefit cuts can be held off for a spell. And by "spell", we mean that it will happen just over 15 years from now, after all of the trust funds's special-issue bonds have been cashed in....

The Social Security program’s costs will exceed its income this year for the first time since 1982, forcing the program to dip into its nearly $3 trillion trust fund to cover benefits.

This is three years sooner than expected a year ago, partly due to lower economic growth projections, according to the latest annual report the trustees of Social Security and Medicare released Tuesday. The program’s income comes from tax revenue and interest from its trust fund.

The trust fund will be depleted in 2034 and Social Security will no longer be able to pay its full scheduled benefits unless Congress takes action to shore up the program’s finances. Without any changes, recipients then would receive only about three-quarters of their scheduled benefits from incoming tax revenues.

Here's the relevant chart from the Trustees' report that shows what will happen after the combined OASI and DI trust funds are depleted in 2034, where all benefits to Social Security recipients at that time will be immediately cut by 21%, which is guaranteed under current law. That's the promise that those who successfully fought Social Security reform nearly a decade ago fought to keep.

2018 Social Security Trustees Report Figure II.D2.—OASDI Income, Cost, and Expenditures as Percentages of Taxable Payroll [Under Intermediate Assumptions]

What does all this mean for you? Well, if you expect to be alive and count on receiving Social Security benefits in or after 2034, you can reasonably expect that you will only get 79% of the retirement income benefits that is currently indicated that you will receive at the "my Social Security" web site.

What will that mean for the money that you will live on in retirement? You're in luck, because about two weeks ago, we created may be the first retirement planning tool that can take future Social Security cuts caused by the program's trust funds running out of money into account when determining how much you would need to save to support the kind of spending you may plan do in retirement. We've updated the default data to reflect the updated information provided by Social Security's Trustees in their 2018 report. [If you're accessing this article on a site that republishes our RSS news feed, please click here to access a working version of the tool.]

Spending, Social Security, and Retirement Withdrawal Data
Input Data Values
Annual Spending In Retirement
Monthly Social Security Retirement Benefit
Percentage of Retirement Savings to Withdraw Each Year After Retiring
Percentage that Social Security Benefits Will Be Cut After Trust Fund is Depleted

Total Retirement Savings Target
Calculated Results Values
Amount Needed Before Social Security Cuts
Amount Needed After Social Security Cuts

For the default data, $45,786 is the average amount of annual household expenditures for Americans Age 65 or older in 2016, which comes from the U.S. Bureau of Labor Statistics and U.S. Census Bureau's annual Consumer Expenditure Survey. Data for 2017 will become available in September 2018.

In recent years, retirement specialists have suggested that an annual withdrawal rate of anywhere from 2.4% to 4.0% of your retirement savings and investments would represent a "safe" rate of withdrawal, where the lower the figure you enter, the more conservative your results will be, which is to say the higher your retirement savings target will become. As a general rule of thumb, the lower you expect the rates of return on your retirement investments to be, the lower the withdrawal rate you should enter.

If you would like to consider the scenario where you would only have retirement income from Social Security, take your Monthly Social Security Retirement Benefit amount and multiply it by 12 in the entry field for "Annual Spending In Retirement" (multiplying the default monthly benefit of $1,850 by 12 is $22,200, which is what you would enter for that case), where the result can be an eye-opening exercise. At the very least, it will give you an idea of what kind of additional savings you would need to build up in your private retirement accounts to compensate for the future cuts to Social Security.

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