If You’re Planning to Retire on Social Security, Think Again
In 2016, the U.S. collected just under $4 trillion in tax revenue. Yes, trillion with a T. Roughly $2.7 trillion of that revenue – just over two-thirds of the total – went to paying our country’s social insurances (Social Security, Medicaid and Medicare, unemployment compensation, veterans benefits, and the like). Another $604 billion, or 15.3% of total spending, went for national defense; net interest payments on government debt was about $240 billion, or 6.1%. Education aid and related social services were about $114 billion, or less than 3% of all federal spending. Everything else – crop subsidies, space travel, highway repairs, national parks, foreign aid, and much, much more – accounted for the remaining 6%.
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Not only is the majority of our federal outlays spent on these social insurances, this figure is growing every year. When looking at the spending on these social services as a percentage of GDP, only 1% of GDP was spent on social insurances during the World War II era. In 2016, 15.5% of the U.S. GDP was spent on these programs.
By a landslide, the most costly of these social insurance programs is Social Security. It made up a whopping 24% of fiscal spending in 2016. Social security and these other social insurances continue to consume more and more of the fiscal spending each year, and the problem is about to get a whole lot worse.
The Baby Boomer Problem
Twelve thousand new baby boomers are ready to collect social insurances every single day. There is a massive wave of baby boomers knocking at the door, ready to collect their Social Security and the other social insurances that they have been promised.
Baby boomers, according to the S. Census Bureau, are the demographic group born during the post-World War II baby boom, approximately between the years 1946 and 1964. In 2017, this includes people between 53 and 71 years old. Over this period, more than 76 million babies were born in the United States. Factoring in immigration, the current estimate of the baby boomer demographic is close to 80 million people. A big wave of the population is focused in this one age group.
In 2017, the median age of a baby boomer is 62 years old. In the United States, 62 years old is the age individuals can first retire and begin to receive Social Security benefits. Many baby boomers have lived their whole adult lives aiming to retire between the ages of 62 and 66 with their Social Security benefits as their support system. In fact, the math tells us that over 12,000 boomers will be retiring every day for the next several years: ([80,000,000 boomers/18-year age span]/365 days per year = 12,176 retired boomers per day.) Of course, some individuals included in that figure will not retire, and some will die. However, the point is not to be exact, but rather to show that there will to be a massive wave of retirees in the United States in the next 1–5 years.
Unfortunately, of those tens of thousands of retires per day, only a small percentage are actually financially ready to retire. Research by the Insured Retirement Institute depicts the likely financial strain heading for many retiring baby boomers. According to the study, 24% of baby boomers have no retirement savings—the lowest number since the study began in 2011. Only 55% of Baby Boomers have some retirement savings, and of those, 42% have less than $100,000. Thus, approximately half of retirees will be living off of their Social Security benefits.
Related: How Much Do I need to Retire?
We Can’t Afford the Promises We Made
like an unstoppable glacier, social insurances continue to carve a larger and larger chunk out of the fiscal spending budget. The issue is already a big problem. It’s only quickly getting worse. The reality is we can not afford to pay for the promises we have made. Fair or not, we overpromised and will surely under deliver. The question is, who gets screwed? Can you imagine a politician coming to a podium, tapping the microphone and saying, “We are sorry. We overpromised and we no longer will be paying Social Security.”? Not going to happen. Not only would this be political suicide, it would financially decimate entire demographics. Maybe that is a little extreme. But no matter how you try to correct the problem, someone has to admit mistakes. Someone will lose big, and that person will likely be pissed. Rightfully so.
So, What to Do?
With the right plan, the social insurance burden can slowly be stripped from its recipients with some fancy math and a sleight of hand.
What if no politician had to commit political suicide by bearing the bad news, and no social insurance recipient had to know they were the ones being screwed? Well, that’s exactly what is happening. Occasionally, government officials can be pretty thrifty and postpone issues without having to confront them today. With the right plan, the social-insurance fiscal burden can slowly be stripped from its recipients with some fancy math and a bit of sleight of hand. On a basic level, I explain how it’s done below.
The Magic Trick
The dollar value certain recipients of social-insurance programs (including Social Security) receive is mathematically derived and adjusted based on standard quality of life. If the price of everything goes up an average of 2% in a year, social-insurance recipients are promised a 2% increase on their income from the government. These adjustments are called cost of living adjustments or (COLAs). This is determined by the consumer price index (CPI). The higher the CPI, the more money the government needs to spend on these income payments in order to keep pace with the cost of living. However, this same government is about $20 trillion in debt. The lower the CPI, the less money the government needs to spend on cost of living adjustments.
The government has a few tools in its belt to manipulate the CPI. First, the raw data used to calculate the CPI is not available to the public. Second, in the last 35 years, the government has changed how it calculates inflation 20 times or more. The Feds call them “methodological improvements” to the CPI that allegedly provide more accurate reflections of consumer prices and inflation. Maybe, But it also sounds like a great opportunity to make the math tip in favor of the government.
An example of these “methodological improvements” includes the addition of substitution and hedonic changes to the fixed basket of goods and services.
One way to describe how substitution within the CPI calculation is used is “steak to hamburger.” The Bureau of Labor Statistics (BLS) essentially says that if it’s been tracking the price per pound of a T-bone steak for years, but then one year the price of steak shoots up, it will make a substitution for steak with hamburger. It argues that this is a reflection of how the consumer will react to the increased price of steak. But would anyone really agree that the quality of hamburger and steak are equal? What happens when hamburger gets too expensive? Do we substitute with hot dogs?
Hedonic changes is another tool the government added to its tool belt when calculating the CPI. Hedonic changes can now be made to the inflation calculation if the price of something went up but the newer version was a better, more-useful version of the product. College textbooks is one example. As the prices of college textbooks have skyrocketed over the years, the BLS makes adjustments to those increased prices for “improvements” in quality. The BLS says now that textbooks have been printed in color and have more images, it needs to make an adjustment to the price of the books to accurately reflect the increased quality. I have searched for examples of the BLS adjusting for a decrease in quality, but can’t seem to find any. Maybe the BLS believes an IKEA table made of pressed cardboard is of comparable quality of a real hardwood. Who knows.
The Trouble with Tracking Inflation
Inflation isn’t a uniform figure. The effects of inflation on each individual are different depending on what each person buys. For example, a major criticism of the COLAs for Social Security is that it does not accurately reflect the spending habits of seniors who are the majority recipients of these COLA’s. Seniors argue that in comparison to the country as a whole, they spend significantly more on healthcare. With healthcare prices rising quickly, you can see how this could skew seniors’ actual inflation rate from that of the country’s average.
The government has tried to address these issues with several versions on the CPI, and with several methodologies on calculating it. But each time an improvement is made, there seems to be a small tip in the favor of the government: A new rule, a new trick, a new tool. Through these subtle slight-of-hand mathematical changes, what we are left with is the ability for policymakers to skirt blame and also do what’s necessary by pulling back on the social-insurance costs, which are out of control.
Whether those mathematical changes adjust inflation one-tenth of a percent or 3% off of the accurate inflation metric, this is undoubtedly a way for the government to pay less to Social Security beneficiaries as well as other social programs with COLA’s indexed of the CPI.
I did not write this article to explain this issue in major detail. Rather I hope to create a spark in you, the reader, to research this topic further. Being aware of this will allow individuals make better assessments of how they need to handle their own financials and adjust dependency on these types of programs, now and into the future.
What do you think about fading social benefits? Let me know in the comments below!