Social Security's Longevity Problem

What You Need to Know

A deeper understanding of life expectancy and longevity can help clients and advisors in a variety of ways, says Linda Stone at the Academy of Actuaries.
The decline of the private employer pension system has raised the stakes when it comes to addressing longevity risk.
Social Security remains a key source of longevity risk mitigation, underscoring the program’s foundational importance to working and retired Americans.

The recently published 2023 Medicare and Social Security trustees report contains many concerning facts, not the least of which is the finding that the projected insolvency date of the main trust fund used to help pay retirement benefits is set to be depleted one year earlier than previously projected — in 2033.

According to the trustees, the Social Security system has shifted from having five workers per retiree in the 1960s to having just two workers per retiree today, and while that figure will drift marginally up and down in the decades ahead, it is not expected to climb much higher than two workers per retiree at any time in the next century.

Other concerning findings show the Medicare program is also facing significant long-term financial stress, and the immediate retirement benefit cuts being projected for the 2030s — should Congress fail to act to right the program — are well in excess of 20%.

In the experience of Linda Stone, the senior pension fellow at the American Academy of Actuaries, the most concerning aspect of the report has less to do with the size of the funding problem itself and more to do with the effect the solvency shortfall would have on real-life working and retired Americans.

Simply put, the degree to which older Americans (and those with disabilities) rely on the Social Security program to manage longevity risk makes it one of the most crucial anti-poverty programs in the United States, Stone says.

A 20% to 25% reduction in what she calls the program’s “already modest” benefits would put a tremendous strain on millions of seniors while disrupting the well-laid retirement plans of older Americans still in the workforce.

Stone boasts an extensive professional background as a pension actuary working in the consulting, corporate and nonprofit arenas. She says her life’s work has shown her in no uncertain terms that the ongoing debate about “saving” Social Security is among the most critical public policy issues of our time.

While she stands firmly in the camp that believes lawmakers eventually will be able to craft a solution that works for the American people, the new trustees report shows the clock is ticking. And, as Stone points out, the longer Congress waits to act, the more painful the remedies may need to be.

Longevity and Social Security

Stone says the closely linked topics of longevity and life expectancy offer an important lens advisors can use to view other pressing issues in the retirement planning arena, particularly the ongoing debate about the funding of the Social Security program and the need to improve the retirement income ecosystem.

“We all know about the decline of the pension plan system in the private sector, and how this has shifted more longevity risk onto individuals,” Stone says. “The appeal of pensions was the provision of guaranteed lifetime income. Clearly, that is one of the most important features of the Social Security program.”

As Stone points out, roughly one in two Americans gets at least half of their retirement income from Social Security, while one in four people get more than 90% of their retirement income from the program.

“Those are really telling statistics,” Stone says. “There is no question that these benefits are fundamental to retirement security and helping Americans address longevity risk.”

Echoing many other retirement experts, Stone says she was troubled to see the insolvency date for the key Social Security retirement trust fund move forward by one year.

“The report suggests benefits will have to be cut by more than 20% in just a decade’s time if no changes are made,” Stone warns. “That’s a scary prospect, and it’s not going to be easy to close the funding gap. It will very likely take a combination of proposals to achieve solvency, and time is running out.”

While she worries about Social Security’s solvency, Stone says she is encouraged to see the ongoing improvements being made to the workplace defined-contribution plan system, especially the updates being driven by the Setting Every Community Up for Retirement Enhancement (Secure) Act and its follow-up Secure 2.0 Act legislation.