The Congressional Budget Office (CBO) is known for its pessimistic outlook as to benefits. However, their recent report on the solvency of Social Security may be right on the mark. Their report says that the “old age” part of Social Security will reach the point where it will not be able to pay full benefits in 2031. This differs from the Social Security Trustees’ annual report which says that point will not be reached until 2034.
What is the reason for the difference in predictions? The coronavirus pandemic and the related economic fallout – that’s what. The Social Security Trustees’ report was created prior to the pandemic and was released early into the pandemic. The CBO report was created after the onset of the pandemic and was just released in early September, considering several items (including the three that are enumerated in the next three paragraphs) that came about as a result of the economic dislocation we are still struggling through.
First, less payroll taxes (the funding source for Social Security) are being collected. Payroll taxes are taken from the salary of those who work in Social Security covered employment (about 94% of the workforce) and are matched by employer contributions. Unemployed people do not pay payroll taxes and unemployment spiked to record levels early in the pandemic and still remains quite high. So, less money is going in to Social Security.
Second, applications for Social Security have increased. Many individuals who are of Social Security age, but had not applied because they were still working, applied for benefits when they lost their jobs. So, more money is coming out of Social Security.
Third, the Federal Reserve has announced that they will keep interest rates low for a long time. Social Security funds are invested in treasuries and treasury rates are significantly lower than they were six or so months ago (and they were pretty low even then). So, the money that is being collected is being invested at a lower rate of return.
So, why is Social Security being discussed in a newsletter that is dedicated to the Thrift Savings Plan? Because Social Security is one of the three sources of income that are counted on by FERS retirees. If it turns out that Social Security pays us less that we had expected, we want to be able to make up the difference from another source; and the most likely source is the TSP.
If nothing is done to shore up Social Security, benefits could be cut by 20% or so. Of course, Congress could come to the rescue of Social Security, but who wants to count on Congress to do anything other than engage in partisan bickering that adds more heat than light to the debate?
Rather than hope that Congress comes to the rescue, we should do whatever we can to boost our TSP savings so that we will have something to fall back on in a worst case scenario. Take a look at your budget and see where you can find more money to set aside for retirement. Do the best you can but strive to contribute enough (5%) to earn the full employer match. In the event that you’re already maxing out your contributions, set additional money aside in an IRA or a taxable account. This way, if Congress doesn’t step in, you’ll be prepared, and if they do step in, you’ll be better off than you would have before.