By Brett Arends, MarketWatch Updated June 9, 2019 7:55 a.m. ET
The
mother of all political battles is coming, and it’s about a wall.
No, not
that one. It’s another, much bigger wall. One that fewer people are talking
about — so far.
It’s
the wall that Social Security is
due to run into in just 15 years.
That’s
when, say Social Security’s trustees, the program’s trust fund is scheduled to
run out of money. If nothing else is done, they say, after 2034 Social
Security’s annual income will only be enough to pay “about three-quarters of
scheduled benefits.”
We’re
talking about a 25% cut in payments.
How big
a deal will this be?
As it
happens, the Federal Reserve just put out a report that tackles this. Alas, it
got very little attention, because the media and politicians were covering a $5
billion boondoggle that may or may not get built in the desert.
According
to Fed data, at most one
quarter of people currently nearing retirement are going to be
able to shrug off any cuts at all in Social Security. Actually, it’s probably
considerably less than one quarter.
And
everyone else will be in serious trouble. Half of those nearing retirement will
end up in dire straits. That’s because most of them have little or nothing in
private retirement plans.
The
country’s 401(k)s and
individual retirement accounts? The old-fashioned company pension plans? Most
of these assets are owned by the wealthiest 25% of the country, the Fed
calculates. Between 83% and 85% of the total balance is in the hands of the
highest-earning one-fourth.
For everyone
else? It’s down to Social Security or bust. And that’s especially so for the
bottom half of the income distribution. “Social Security is the key to
understanding retirement resources for most families,” says the Fed.
For
example, the Fed looked at the balance sheets of those currently in their 50s
who are nearing retirement. For the middle two quartiles by income — in other
words, the middle 50% — Social Security accounts for somewhere between 47% and
64% of their total retirement wealth. For those in the bottom 25% it’s nearly
all of it. They hold, on average, just $28,000 in private retirement plans.
Oh, and
even the figures at the top are less good than they appear. The top 25% of
earners might look all right, but they are “averaged” in the Fed data, so they
include people like Tom Cruise and Sandra Bullock as well as your Aunt Sue.
So,
when Social Security hits that wall, will benefits be cut, or taxes raised? No
one yet knows.
But
here’s what we do know.
In 10
years’ time, when this issue becomes urgent, people in or near retirement will
make up more than half the voting age population.
They’ll
make up and even bigger share of the actual likely voters.
And
those people, as we’ve just seen, can’t do without Social Security — no way,
and no how.
According
to the U.S. Census, by 2030 those over age 65 will account for 26% of the
voting age population, and those aged 45 to 59 and nearing retirement another
29%.
And
according to the U.S. Elections Project, in the last presidential elections
just 43% of those in their 20s bothered to vote. The figure for the over 60 was
71%.
(Even
in 2008, amid Obama-mania among the young, only 48% of those in their 20s
voted.)
Put
those two things together, and by 2030 around 60% of likely voters will be over
45 — and half of those — will already be over 60.
Good
luck passing a 25% Social Security cut.
Balancing
the Social Security account instead would need extra taxes of about 1% of GDP,
say Social Security trustees. (Balancing Medicare would need another 0.4%.)
These will not be politically trivial sums: Current taxes are only about 16.5%
of GDP, so we’re looking at a hike of nearly 10%.
Good
times.
Brett
Arends is a MarketWatch columnist. Follow him on Twitter @BrettArends. This article
originally appeared on MarketWatch.
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