The Social Security Board of Trustees reports the combined asset reserves of the Old-Age and Survivors Insurance, and Disability Insurance (OASDI) Trust Funds are projected to become depleted in 2033.
This is unchanged from the
last two years, with 77% of benefits still payable at that time. The DI
Trust Fund will become depleted in 2016, also unchanged from last year’s
estimate, with 81% of benefits still payable.
The combined trust fund reserves are still growing and will
continue to do so through 2019. Beginning with 2020, the cost of the program is
projected to exceed income. The projected actuarial deficit over the 75-year
long-range period is 2.88% of taxable payroll—0.16 percentage point larger than
in last year’s report.
“The projected depletion dates of the Social Security
Trust Funds have not changed, and three-fourths of benefits would still be
payable after depletion. But the fact remains that Congress can ensure the
long-term solvency of this vital program by taking action,” says Carolyn
W. Colvin, Acting Commissioner of Social Security. “The Disability
Insurance Trust Fund’s projected depletion year remains 2016, and legislative
action is needed as soon as possible to address this financial imbalance.”
Other highlights of the Trustees Report include:
Income
including interest to the combined OASDI Trust Funds amounted to $855
billion in 2013. ($726 billion in net contributions, $21 billion from
taxation of benefits, $103 billion in interest, and $5 billion in
reimbursements from the General Fund of the Treasury—almost exclusively
resulting from the 2012 payroll tax legislation);
Total
expenditures from the combined OASDI Trust Funds amounted to $823 billion
in 2013;
Non-interest
income fell below program costs in 2010 for the first time since 1983.
Program costs are projected to exceed non-interest income throughout the
remainder of the 75-year period;
The
asset reserves of the combined OASDI Trust Funds increased by $32 billion
in 2013 to a total of $2.76 trillion;
During
2013, an estimated 163 million people had earnings covered by Social
Security and paid payroll taxes;
Social
Security paid benefits of $812 billion in calendar year 2013. There were
about 58 million beneficiaries at the end of the calendar year;
The
cost of $6.2 billion to administer the program in 2013 was a very low 0.7%
of total expenditures; and
The
combined Trust Fund asset reserves earned interest at an effective annual rate
of 3.8% in 2013.
The concept of
retirement income planning may be common parlance among industry professionals,
but plan participants are still adjusting to the new age of personal
accountability.
For many workers in the U.S., the effort of saving for
retirement is no longer a cradle-to-grave proposition with a generous lifetime
pension waiting at the back end, says Shams Talib, a senior partner at Mercer
and leader of the consulting firm’s retirement business in North America. Shams
says a number of recent
Mercer research projects suggest younger workers—especially those born
after the end of the Baby Boom, circa 1965—must come to a new understanding of
retirement if they are to successfully self-fund their golden years.
This understanding must be anchored in a sense of personal
accountability, Talib tells PLANADVISER, which in turn can only be cultivated
by employers who are active in promoting their defined contribution (DC)
retirement benefit programs. Well-executed DC plan communication programs can
play a big part in helping workers come to terms with the new paradigm, he says
(see “Sending
the Right Message”).
And what makes an effective communications program? Shams
says it’s in large part about coming to an understanding of what has changed
for workers over the last several decades. The biggest and most obvious shift
has been the widespread transition by employers away from defined benefit (DB)
pension plans in favor of DC arrangements, he explains. Employers have grown
far less accepting of the open-ended nature of pension benefit liabilities,
passing the bulk of “longevity risk” onto employees.
The negative effects of this change have been widely
reported and are still playing out, adds Orlando Ashford, president of the
talent business at Mercer, but there are some positive outcomes as well. For
example, with the evolution of a DC-centric retirement system,
employee-participants can often become vested in a firm’s retirement plan in
just one or two years. This compares with vesting periods that can last up to
five or even 10 years for many DB plans. As Ashford explains, faster vesting
periods in the DC system allow workers to change jobs more often without
sacrificing employer matching contributions.
Plan sponsors and advisers should be sure to highlight these
types of details when presenting a DC plan, Mercer contends, especially to
younger workers. The Millennial generation in particular—which Mercer defines
as individuals born after 1981—appears especially interested in this kind of
thinking.
“Millennials aren’t necessarily driven by money,” Ashford
explains. “But the compensation has to be strong enough to take that question
off the table. It needs to be fair, relevant and competitive. But then it gets
to the question of, is this exciting work? Am I with really smart colleagues,
am I learning, am I developing, do I get a chance to grow internationally?”
Ashford
says most companies want their stables full of Millennials, because they
typically are more affordable, eager to please and naturally help companies
market themselves as being progressive. And while Baby Boomers, and to a lesser
extent, Generation Xers, are scrambling to make sense of their new-found
personal accountability, Millennials are entering the workforce knowing nothing
else.
Beyond the employer-driven shift toward DC plans, there have
also been more subtle, worker-driven changes in behavior that are of increasing
importance in the retirement planning context. For example, Shams says
employees in previous generations often desired to stay with one or two
employers for the entire course of their working lives, and they were not very
likely to change industries mid-career. Generation Xers and Millennials, on the
other hand, appear to be more interested in regularly switching employers and
industries.
According to the Bureau of Labor Statistics (BLS), there is
actually scant data on the question of whether employees are changing jobs more
now than in the past. To determine the metric, one would need data from a
longitudinal survey that tracks successive generations of respondents over
their entire working lives, the BLS explains. So far, no longitudinal survey
has ever tracked sufficiently many respondents for that long.
Still, Talib says it is clearly true that the shape of the
U.S. workforce is changing, largely due to the increasing prevalence of remote
office technology and “off-the-balance-sheet” employment arrangements. And
anecdotally there does seem to be mounting evidence behind the proposition that
workers are changing jobs more often, he says.
“We are seeing the workforce become much more mobile, and it
is increasingly transient,” Talib explains. “At the very least there is the
recognition that employees have been given more responsibility towards their
own life goals, and especially their own retirement goals, as the default
retirement benefit shifts from defined benefit to defined contribution.
“The employees are in charge now,” he adds, “so they need to
be more equipped to make long-term financial planning decisions. We’re asking
these young people to make complex financial decisions that will have an impact
30 or 40 years later.”
One strategy that companies are trying with success is
applying behavioral science to improve retirement savings patterns, Talib says.
“Behavioral
scientists have studied how people make tradeoffs between present and future
rewards,” Talib says. “They say low savings for younger workers is partly a
result of ‘hyperbolic discounting,’ which means that people value money spent
today much more than they value the idea of deferring their spending far into
the future. Put another way, buying stuff today provides a bigger psychological
boost than saving money for later.”
One can argue that the way plan sponsors and advisers are
presenting information to their participants is actually compounding this
problem, Talib says. Most young workers can’t reasonably entertain the idea of
retiring for at least another 25 to 35 years. It’s difficult for them to
imagine what their 401(k) account balances might convert into in terms of a
retirement income. “Even those forward-thinking sponsors who provide income
projections are likely to find that presenting income numbers alone will not
change savings behavior.”
So it’s time for sponsors and advisers to get creative,
Talib says. He points to research from the Stanford Center on Longevity, which
found that when 401(k) participants viewed an age-enhanced, “3D” avatar of
themselves, they were willing to put an average of 6.8% of their salary into a
401(k) plan, versus only 5.2% for people who had not seen the avatar.
Michael Fein, president and co-chairman of CIC Wealth, says
another key is to remember that, as workers age, they generally start to make
more money. It’s critical to work with these employees over time to instill the
sense of personal accountability for retirement savings.
“When you talk about workers born in the 1980s or even in
the late ’70s, these folks are just starting to make better money,” Fein tells
PLANADVISER. “They have much more disposable income and they must decide what
to do with it. I often hear clients say, ‘I really want to redo my bathroom or
buy a new car,’ but it’s the adviser’s role to convince them to start socking
it away as soon as possible.
“I always tell them it’s more important to save, and when I
can’t convince them, I say, whatever big ticket item you want to buy, put away
as much as you spend,” he continues.
So
if the worker wants to spend $5,000 on a big screen TV, he’ll have to put
$5,000 into the savings account first, Fein explains. “And the main thing to
remember is that most people work hard and spend all day dealing with work, so
it’s very difficult for them to do financial planning.”