With recent forecasts that the country’s two largest entitlement programs—Social Security and Medicare--will be exhausted earlier than expected, a majority of investors recognize the importance of gaining a better understanding of the timing of withdrawals from retirement plans such as a 401(k) and Social Security. Our recent survey of investors found that a combined 87 percent think it is “very important” or “important” to have this information.
It was most important to baby boomers ages 51-60 (85.9 percent) and ages 61 and up (just over 92 percent) and of near equal importance to those who are still working or semi-retired and those who are retired, as well as those who are participating in a 401(k) and those who are not.
Social Security is projected to have sufficient resources to fully pay promised benefits for the next 25 years. After that, the program will only be able to pay out 77 percent of promised benefits. Last year was the first time benefits paid out exceeded the program’s payroll tax revenue. Interest paid to the program by its trust fund made up the difference.
“Projected long-range costs for…Social Security are not sustainable under currently scheduled financing and will require legislative corrections if disruptive consequences for beneficiaries and taxpayers are to be avoided,” the Boards of trustees said in a statement.
Social Security is comprised of trust funds in the U.S. treasury to account for income and disbursements. Social Security (as well as Medicare) taxes, premiums and other income are credited to the funds. The Old-Age and Survivors Insurance (OASI) Trust Fund pays out retirement and survivors benefits and the Disability Insurance (DI) Trust Fund pays disability benefits.
According to the Social Security Administration, Social Security (and Medicare) costs are projected to “increase substantially” through 2035 because the number of beneficiaries are expected to rise rapidly as baby boomers retire and persistent lower birth rates will cause slower growth of both the work force and the gross domestic product GDP).
About 54 million people were receiving Social Security benefits at the end of 2010. Total expenditures last year were $712 billion.
The primary source of income for the combined Social Security Trust Funds is the payroll tax. In 2010, Social Security cost 4.9 percent of GDP. This is projected to increase to about 6.2 percent of GDP by 2035. While the combined funds are expected to become exhausted in 2036, the DI trust Fund is projected to be exhausted in 2018. “At a minimum,” the report said, “a reallocation of the payroll tax rate between OASI and DI would be necessary, as was done in 1994.”