The Obligation to Save Social Security

With the recent passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, advisers and other retirement plan service providers have an opportunity to build on their successful lobbying effort.

Art by Julie Benbassat

According to the most recently released financial status report from the Social Security Board of Trustees, the combined asset reserves of the Old-Age and Survivors Insurance and Disability Insurance (OASI and DI) Trust Funds are projected to become depleted in 2035.

Notably, that date does not represent the time when Social Security assets would be wholly depleted. According to the Social Security Board of Trustees, approximately 80% of benefits would still be payable at that time.

The report projects that the total annual cost of the federal retirement income program is projected to exceed total annual income in 2020—for the first time since 1982—and remain higher throughout the entire 75-year projection period. As a result, asset reserves are expected to decline during 2020. At the same time, Social Security’s cost has exceeded its non-interest income since 2010.

Given such figures, advisers should strongly consider adding Social Security advocacy to their political activities, industry leaders suggests.

“The anticipated depletion of the Social Security Trust Fund by 2035 begs the question, how will Americans retire? Comfortably and on our own terms? Or without adequate savings, putting pressure on families, the government, and the economy?” asks David Musto, president of Ascensus. “That answer depends on decisions that demand action today. Though it lacks the emotional pull of a partisan soundbite, retirement security is a topic that both sides of the aisle agree needs greater attention and innovation.”

With the recent passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, advisers and other retirement plan service providers have an opportunity to build on their successful lobbying effort. Currently they are turning their attention to a piece of legislation known as the Retirement Security and Savings Act, proposed by Senators Rob Portman, R-Ohio, and Ben Cardin, D-Maryland.

Of the many provisions that would make changes to employer-sponsored retirement plans and individual retirement accounts (IRAs), the industry is keen on an additional catch-up provision that would permit those older than 60 to save an additional $10,000 each year in their 401(k) plans. Another provision would provide for the indexing of IRA catch-up contributions, which are currently set at $1,000 and do not change—unlike other limits that are indexed for inflation. The law would also make two changes to “SIMPLE IRA” plans that many in the industry think are steps in the right direction. The first would permit employers to make additional contributions on behalf of workers, and the second would permit these plans to offer Roth contributions.

While the law includes other popular provisions that will help improve average Americans’ long-term financial outlook, such as the linking of student loan repayment programs and 401(k) plans, it does not address the financial issues faced by Social Security. According to Ric Edelman, the chairman and co-founder of Edelman Financial Services as well as a vocal Social Security reform advocate, now is the time to address the program’s financial stability—“before it is too late.”

He proposes advocacy can start by simply addressing the misconceptions that exist among voters and the public about Social Security. For example, Edelman points out that Social Security was never in fact “self-funding” without the significant input of annual federal tax dollars. Current workers and employers pay substantial taxes—more than 12% annually between them—and their money is given to current retirees. For many years, Edelman explains, more money went into the system than was paid out, and the excess went into a fund for future use.

“But in recent decades, the demographics have shifted; we now have fewer workers and more retirees,” he explains. “As a result, the amount collected in taxes is insufficient to pay the retirees—so the money in the piggy bank is being used. … The designers of the program in the 1930s didn’t anticipate this problem, partly because they didn’t project that life expectancies would be lengthening the way they are. A new approach is therefore needed.”

Edelman personally advocates for a new framework to build upon Social Security’s foundation, called the Trust Fund for America (TFA). The TFA would essentially be funded by a one-time, $7,000 contribution made on behalf of all babies born in the U.S. for the next 35 years. Edelman stresses that any real solution will likely have to come from a blue-ribbon panel appointed by the president and backed by Congressional action, but he believes a simple approach like the TFA could garner enough support to actually fix this monumental problem.

While the task is an important one, it will obviously be a big challenge to make progress on such a politically charged topic as Social Security, especially during the late end of the presidential election cycle. In fact, while during President Trump’s final State of the Union Address of his first term, he pledged to seniors that he would protect Social Security and Medicare, he has also gone on the record saying that cuts to those programs are under consideration.