When the Social Security Administration recently released its 2013 Trustee Report detailing the financial health of its trust funds, the news was mixed. The data turned out to be worse than last year's report, but the trustees claimed that improved projection methods meant that the trust funds would still empty in 2033, the same as last year's projection.
What does this mean to your benefits when you retire? Everything.
If you're counting on Social Security to cover a significant part of your retirement income, you'd better hope the trustees' new projections are right. Because once the trust funds run out of cash, if nothing else changes, benefits will be cut by somewhere around one-fourth.
Here are three key threats to Social Security -- factors to watch closely to see whether the worsening data or the improved projection methods win in the end.
Here's what could slash your Social Security benefits
No. 1: The next decade. Even with the improved projection methods, the trustees expect the trust funds to shrink more quickly for around the next decade or so before slowing its decline.
This is a risk because as the trust funds shrink, there's less money earning interest and less of a balance to draw from if reality turns out to be worse than projections.
The following table has the gory details from the Social Security Administration:
| 2013 | $2,760.3 | $2,776.3 | ($16.0) |
| 2014 | $2,783.5 | $2,818.8 | ($35.3) |
| 2015 | $2,808.0 | $2,861.9 | ($53.9) |
| 2016 | $2,835.7 | $2,908.1 | ($72.4) |
| 2017 | $2,866.6 | $2,957.8 | ($91.2) |
| 2018 | $2,897.9 | $3,006.8 | ($108.9) |
| 2019 | $2,918.9 | $3,043.7 | ($124.8) |
| 2020 | $2,922.4 | $3,061.0 | ($138.6) |
| 2021 | $2,907.4 | $3,053.0 | ($145.6) |
| 2022 | $2,865.7 | $3,017.1 | ($151.4) |
| 2023 | $2,797.3 | $2,948.6 | ($151.3) |
| 2024 | $2,698.8 | $2,843.8 | ($145.0) |
| 2025 | $2,566.5 | $2,699.4 | ($132.9) |
| 2026 | $2,397.2 | $2,511.6 | ($114.4) |
| 2027 | $2,187.0 | $2,268.3 | ($81.3) |
| 2028 | $1,924.2 | $1,967.1 | ($42.9) |
| 2029 | $1,605.2 | $1,605.4 | ($0.2) |
| 2030 | $1,226.9 | $1,179.7 | $47.2 |
| 2031 | $786.8 | $687.7 | $99.1 |
| 2032 | $281.8 | $127.5 | $154.3 |
Projected balances from the Social Security Administration. Difference calculated by author.
No. 2: High -- and rising -- disability rates. As if the trust funds' conditions weren't bad enough already, their health is heavily dependent on both the number of people contributing and the number of people taking benefits.
From a Social Security Disability perspective, the trends don't look promising. As the following chart from the Congressional Budget Office shows, the percentage of the working-age population on Social Security Disability is at a very high level. And it's projected to keep growing:
Chart from the Congressional Budget Office.
Working-age people on Social Security Disability get benefits paid out of the trust fund, hastening its collapse. In addition, as they're generally not working much, if at all, they're typically not contributing much to the trust fund through payroll taxes.
Bottom line: If the growth in disability claims continues, the trust funds' balances could very easily deplete faster.
No. 3: Quickly dwindling workforce participation. Whether because of disability, the lousy economy, or other factors, there is simply a smaller portion of the working-age population actually working these days than in recent history. Since Social Security relies on payroll taxes to replenish the trust funds, a low and falling labor force participation portends further problems for the trust funds' balances.
The following chart from the Bureau of Labor Statistics shows just how ugly it has gotten:
Chart from the Bureau of Labor Statistics.
What can you do about it?
Between the near-term dips for the trust funds, the worrisome disability trends, and the abysmal labor force participation rate, the question isn't whether the trust funds will empty, but when.
There's little you can do to stop the collapse from happening, but you can prepare yourself for that eventual date.
By increasing the money you're investing now, you can improve your nest egg when the trust funds do empty, better protecting your lifestyle from those pending benefit cuts. Here are four investments to consider as you sock away extra money to make up for Social Security's shortfall:
The S&P Depository Receipts (NYSEMKT: SPY ) is one ETF that tracks the S&P 500, providing a low-cost way to get stock market return potential to help build your nest egg. For the potential of providing portfolio ballast, the iShares Barclay's US Treasury Bond (NYSEMKT: GOVT ) ETF owns U.S. Treasury bonds. With interest rates so low, the returns from the bonds in that ETF are not likely to be stellar, but they at least do carry a government-backed guarantee of repayment. If you're worried about inflation ravaging your purchasing power over time, the iShares Barclay's TIPS Bond (NYSEMKT: TIP ) ETF offers a way to buy government bonds that will increase along with inflation. But while those bonds may be able to keep up with the official inflation rate, they won't help much if your costs, like many people's, increase faster than inflation as you age. For the potential of an income stream that may grow faster than inflation but carries more risk of potential default or reduction, Vanguard's Dividend Appreciation ETF (NYSEMKT: VIG ) may fit the bill. It's a low-cost way to invest in companies with solid track records of increasing their dividends. Still, there's a trade-off in that unlike Treasury bonds, there are no guarantees that dividends will get paid.No matter how you invest, the reality is that even lousy investing beats not investing at all. It certainly beats waking up sometime in the next two decades to find that your Social Security check has been slashed by a fourth and not having any alternative source of cash.
Even weakened, Social Security will still be there in some form
Even with the expected cuts as the Trust Fund empties, Social Security will still provide most of the benefits people expect from it. In our brand-new free report "Make Social Security Work Harder for You," our retirement experts give their insight on making the key decisions that will help ensure a more comfortable retirement for you and your family. Click here to get your copy today.
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