While it comes as no surprise that the health of Social Security as we currently know it is less than ideal, the publicized estimates of when Social Security funds will run out are "grossly overestimated," said Baton Investing's Jim Shahen, referencing recent Dartmouth and Harvard studies.
The original prediction for SS depletion has been cited by the Social Security Administration to occur in 2033. Unfortunately, the studies present compelling evidence that the insolvency will happen long before then, with 20 years from now being an unlikely longevity expectation.
The studies circulate evidence that not only are the estimates misjudged, but the implications are devastating for Americans – particularly baby boomers, Gen-Xers and Millennials – and the errors performed by the SSA are increasing in severity.
Forecasting Errors: SSA Continues To Dig Their Own Grave
According to Gary King, Albert J. Weatherhead III University Professor at Harvard and researcher on these studies, forecasting errors by the SSA have been around for years, but the prevalence of these errors and their severity has grown exponentially within the last decade and a half In fact, 90+ percent of the numbers evaluated were found to be "overwhelmed by forecast uncertainty."
"We show that SSA's forecasting errors were approximately unbiased until about 2000, but then began to grow quickly, with increasingly overconfident uncertainty intervals," King stated. "Moreover, the errors all turn out to be in the same potentially dangerous direction, each making the Social Security Trust Funds look healthier than they actually are."
In discussing why such dangerous oversights occur, King revealed that the "SSA's actuaries hunkered down trying hard to insulate themselves from the intense political pressures," which ultimately "led them to also miss important changes in the input data such as retirees living longer lives, and drawing more benefits."
Broad Implications
It is important to realize why these circulated overestimates matter. These inaccurately/incompletely calculated figures are used by the SSA's Office of the Chief Actuary to evaluate policy proposals. With less-than-ideal numbers to work with, which King and his fellow researchers have shown to be consistently used as the sole basis for policy evaluations, the assessments are misguided at best and "counterfactual" at worst.
"Reliance on such forecasts led policymakers and other uses of the forecasts to conclude that the Social Security Trust Funds were on firmer financial ground than actually turned out to be the case," the initial study revealed.
Those Who Will Be Hit Hardest
Based upon the studies' conclusions, Shahen speculated that "this news hits three groups hard: Millenials [sic.], Baby Boomers and Generation X."
Due to the minimal funds Millennials are putting aside for retirement, the inadequate savings Baby Boomers have and the unexpected extraneous expenses (taking care of aging parents, astronomical student loans and their own separate retirement funds) Gen Xers are exposed to, these three groups are heading toward practically unavoidable financial hardship.
However, Baton's CEO Phil Ash stated that although "we've all known for some time that we won't be able to count on social security" and the new data compounds the sentiment, he said, "There are three smart things you can do to make sure you have put enough money away, protect yourself, and ensure you are prepared or retirement."
According to Ash, these three steps include:
- 1. Knowing your specific retirement needs. "Eighty-five percent of people underestimate their retirement needs," Ash explained, couple that with the underestimates purported by the SSA and that spells significant financial trouble.
- 2. Using a safety and growth strategy.
- 3. Understanding the power of better returns.
In light of this recent data, Ash concludes that "while people should be concerned about how much they're saving, the real key to retirement success – and what makes hundreds of thousands or even millions of dollars of difference – is in the actual return you're getting on your investments. Most advisors push the conventional wisdom that an 8 percent return is ‘good'. The fact is it's not good enough and probably won't help you reach your goals."
Therefore, invest in yourself by educating yourself, take an interest in the larger financial picture and take the steps necessary to protect your future and the future of your loved ones.
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