Confirmed - Social Security Deluged with Early Retirement Requests
On April 1st, in the context of writing about a newly appreciated shortfall in Social Security funding by the CBO, I wrote this (with the part I wish to discuss in bold):
Here’s a prediction – [the sharply reduced Social Security surplus] will be revised to the worse in about 6 months. I base this prediction on my belief that more people will opt for retirement than are currently projected and that entitlement program tax receipts will be below current projections. Also, nearly every prediction by the CBO has been revised to the worse over the past year, so I am “riding the trend” with this prediction.
At the time, several people commented that they thought this prediction faulty and saw the possibility of the exact opposite as being more likely.
I based my prediction on two concepts:
- With jobs hard to find and credit tightening, many folks would simply opt for early retirement as a means of securing any sort of cash flow at all.
- Many folks would (rightly) conclude that sooner or later the government would change the rules - perhaps moving the retirement date out a few years or reducing benefits or both - and opt to retire early as a means of grandfathering in their own position.
I can't say for sure which of these reasons is most responsible here, but it looks like #1 is the winner for now:
Reporting from Washington -- Instead of seeing older workers staying on the job longer as the economy has worsened, the Social Security system is reporting a major surge in early retirement claims that could have implications for the financial security of millions of baby boomers.
Since the current federal fiscal year began Oct. 1, claims have been running 25% ahead of last year, compared with the 15% increase that had been projected as the post-World War II generation reaches eligibility for early retirement, according to Stephen C. Goss, chief actuary for the Social Security Administration.
Many of the additional retirements are probably laid-off workers who are claiming Social Security early, despite reduced benefits, because they are under immediate financial pressure, Goss and other analysts believe.
Goss said it remained unclear whether the uptick in retirements would accelerate or abate in the months ahead. But another wave of older workers may opt for early retirement when they exhaust unemployment benefits late this year or early in 2010, he noted.
The ramifications of the trend are profound for the new retirees, their families, the government and other social institutions that may be called upon to help support them.
On top of savings ravaged by the stock market decline and the loss of home equity, many retirees now must make do with Social Security benefits reduced by as much as 25% if they retire at age 62 instead of 66.
Despite a major hit to benefits, amounting to a full 25% for only four more years of employment, many people have opted to retire early.
This means that my prediction of another sharp downward revision to the table below is on track:
Next, it was only last year that I was writing about the impeding fiscal calamity that was awaiting us all in 2017 when the outlays for Social Security were slated to exactly match receipts. Now that date could be as early as 2010, apparently.
In the chart above (source), I want you to note the extreme deterioration in surplus funds between the 2008 and 2009 forecasts. Can you spot the trend?
I might speculate that the next version of this table will have a minus 20 where the plus 3 currently sits in the 2010 position. But I happen to think that the real, final number for 2010 will be closer to minus 50.
Given how small these numbers are, compared to the current fiscal deficits, why are they important? Two reasons:
- The Social Security surplus represents hard cash that is used to fund current government operations. Hard cash behaves differently than new deficit money in that it simply comes in one door and leaves out the other. There is no impact to overall money supply. Government deficit spending, on the other hand, is strongly correlated with future inflation.
- A Social Security shortfall represents a long-term liability. That is, it is not just a shortfall this year, but next year, and the year after that stretching dimly off into the far future. This means that the difference between a plus 3 and a minus 50 in one year will translate into a collective shortfall with a net present value measured in the hundreds of billions. It's the difference between receiving a modest one-time tax rebate check and sending a child to college for the next 30 years.
Amidst all the supposed green shoots, the fact remains - the US government is completely and utterly insolvent because of the entitlement programs. Period. End of story. Or, rather, beginning of story. This should be topic number one in DC, with our foreign creditors, and with the US bond market.
Instead, we seem content, for the moment, to whistle past the graveyard, pretending that it doesn't exist.