Is Social Security in Trouble?

Last week, many found themselves asking, “What does Brexit mean for the U.K. and economies around the world?” and “How did the experts get it wrong?”

This summer, discussion revolves around not only the impact of the U.K.’s vote to leave the European Union, but also the upcoming conventions for the U.S. political parties. Amid these distractions, most people did not get to digest the Social Security and Medicare Trustees’ Annual Report, released last week.

The main takeaway: By the end of this decade, these programs will start spending more than they take in tax revenues. According to the report, “Social Security and Medicare together accounted for 41% of federal program expenditures in fiscal year 2015.”

The report further states: “Both Social Security and Medicare face long-term financing shortfalls under currently scheduled benefits and financing. Lawmakers have a broad continuum of policy options that would close or reduce the long-term financing shortfall of both programs. The Trustees recommend that lawmakers take action sooner rather than later to address these shortfalls, so that a broader range of solutions can be considered and more time will be available to phase in changes while giving the public adequate time to prepare. Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits.”

The above sentiment—which has been a common trustee plea for a number of years—means that by delaying action, the eventual corrective action will require more pain: raising the age for entitlement, reducing benefit payments and raising both the Social Security wage base and contribution percentage.

For example, the report indicates that Social Security faces depletion by 2034, which would trigger a 21% benefits reduction across the board. Currently, 49 million Americans collect retirement benefits and another 11 million receive separate disability benefits. The situation is nothing new as Congress fails to act year after year—and the end result will be even harder to swallow.

Note too that the assumptions could be wrong, especially regarding the employment outlook, as the possibility of automation and artificial intelligence could displace millions of workers and reduce the Social Security’s “covered payroll.”

What are the implications for independent insurance agents and their clients? In a word: self-sufficiency. Saving is more difficult these days for the millions of Americans with student loan debt, which leaves them unable to save the 10% most financial advisers recommend. More than ever, people should devise a strategy to save for retirement through their employer’s 401(k) plan by establishing regular and Roth IRAs and other savings vehicles.

Agents should inform their clients about the need to save for retirement—at all ages. Current retirees haven’t seen much of an increase because they didn’t receive a cost of living adjustment for 2016, and the current projection for 2017 is a paltry .2%. Further, one of the Brexit’s effects is a flight to safety currencies like the U.S. dollar and Japanese yen. Another consequence was a significant percentage drop in the 10-year treasury rate—now back below 1.5%, which hurts the interest income of retirees.

The current presidential candidates have not outlined any meaningful changes for Social Security and Medicare, and the political landscape doesn’t seem to promise any remedies on the horizon this year.

Dave Evans is a certified financial planner and an IA contributor.