Social Security Age Projection Questioned
Just about everybody expects Americans to live to ever older ages.
But a special Social Security advisory board now warns that government planners have so underestimated the longevity trend that future generations of taxpayers will face much heavier burdens to support aged retirees.
The good news-bad news report issued Monday challenges the Social Security system’s current estimates as much too conservative in forecasting how long people will be collecting retirement benefits.
The welcome news for the children and grandchildren of baby-boomers is that they have a better chance than members of any previous generation to reach age 85 and beyond. For example, life expectancy in the year 2070 is likely to be 85.2 years, compared with a projection of 81.5 years under current estimates, the report said.
The sobering implication is financial: how to pay the taxes for the long decades of retirement that future generations of workers will enjoy.
The report is likely to revive the debate, which has quieted in recent weeks, over the best way to ensure the financial future of Social Security. It is the first study since 1995 to look at the basic assumptions used by government actuaries in discussing the future of the Social Security program.
The study also warns that the number of older women living in poverty could increase substantially. And it expresses skepticism about proposals to allow individuals to switch some of their Social Security payroll taxes to individual stock accounts, calling for further study to measure the risks of such investments.
The nation’s population over the age of 65, now 34 million, will double by the year 2030, when all of the baby boomer generation will have become eligible to collect full retirement benefits. Under current estimates, Social Security will face a fiscal challenge in the year 2034, when tax revenues will be sufficient to provide only 75% of the benefits promised under current law. Closing that 25% gap--through higher taxes, lower benefits or a combination of those two ideas--is a challenge that Congress and voters must meet in coming years.
But the financial pressures will become even greater when the boomers’ offspring reach retirement. “The long-term deficit of the Social Security program may be worse than currently estimated,” the Social Security Advisory Board said in a report by its technical panel of outside experts.
The size of the potential financial deficit would increase 26% by the year 2070, compared with current estimates, if the recommendations proposed in the technical panel’s report on Monday are adopted by the Social Security system. The panel said that Social Security planners should assume that large numbers of people will live much longer than now expected and that there will be a significant increase in the number of people who qualify for disability benefits.
Some members of Congress support proposals to permit workers to keep some of their Social Security payroll taxes and invest the money in stock accounts under their personal control. President Clinton has called for the Social Security system itself to invest a part of its surplus in stocks.
But the report raised concerns about the potential advantages of investing in stocks, which carry a higher rate of return than U.S. Treasury securities. Social Security surpluses are now invested in Treasury bonds.
The potentially higher return of stock market investment--whether by individuals or the Social Security fund itself--may be offset by the additional risk, the panel said.
The panel recommended the use of computer models and further study to investigate the question of risk in stock investments, compared with the certainty of benefits promised under the current system.
On the issue of poverty among women, the report said that there is a rising proportion of the population that never marries and an increase in the number of divorces after less than 10 years of marriage. A worker may choose to collect retirement benefits based on the worker’s own earnings or 50% of a spouse’s retirement benefit. Because most women earn less than men, they generally collect more as spouses. A person who is married for at least 10 years and gets divorced but does not remarry is entitled to the spousal benefit.
The growing group of “never married and divorced women after short marriages--a group with higher than average vulnerability--could occupy a larger percentage of the elderly population,” the report said.
Because it was prepared by an independent group of economists, demographers and actuaries, the report will be used as ammunition by participants in the debate over Social Security’s future.
Critics of the current system will focus on the warning that improved longevity will create financial stress. Defenders of the current program will cite the warnings from the technical panel about the risks and uncertainties of investing Social Security payroll taxes in the stock market.
The panel’s report extends to 2070 because Social Security law requires the government to make a 75-year forecast for the system. It is, in effect, a statistical guess about what will happen to workers, wages, longevity and tax collections in the future.
