BOOM! Goes the Social Security Assumptions

There was an article in the WSJ yesterday about the IMF warning anyone who will listen that models for life expectancy currently being used by pensions and government entitlement programs underestimate how long people will live. The conclusion was that this adds about $7 trillion to what most studies believe to be the totality of the social security and medicare future shortfalls.

Over the years the articles I’ve read about life expectancy seem to believe that expectancies will increase at an accelerating rate due to medical innovation. When I’ve mentioned this in the past there have been comments about not wanting to last for years in a frail state needing to be cared for down to the most personal of daily tasks. That is not the context of the work being done in the field.

Obviously it will be a couple of decades or longer before we know whether this holds water and if it does, how much water it holds but we know that people generally are living longer and we know that there will continue to be medical advancement and we will learn more about nutrition and other lifestyle habits that offer the plausible outcome of living well for a longer period of time.

Where this possibility exists it drew one very funny comment about encouraging smoking and repealing motorcycle helmet laws (amusingly helmets are not required in Arizona).

Perhaps with a bit of confirmation bias I believe this supports the idea of social security and medicare looking much different in some number of years (ten? 20?). For many years I have been saying that the programs as we know them are not sustainable. I think that whenever things actually hit the fan we will look back and unsustainability will have been obvious like the way we look back on the tech wreck and the financial crisis (hindsight bias).

Not being an actuary or demographer I certainly have no idea how far down the net worth/income scale that benefit cuts will come but a lot of people relying on social security will have a serious and unfortunate situation befall them which of course is not only a micro problem but will also be a big macro problem.

I tend to believe that plenty of people will figure ways to get by without being homeless even if it is difficult, involves a lot of sacrifice and taking some sort of job that they view as undesirable. There will still be a lot of problems on the personal economic front but individual problem solving is worth something.

Individual problem solving is what living below your means (something I’ve written about almost obsessively) is all about. Spending less allows for saving more which hopefully results on less reliance on a social program that may not be there for you. This does not mean live like a monk in a cardboard box but presumably as you get a little further along in your profession and start to make a little more money you could increase your personal savings rate.

Also if the scenario of making more plays out for you for a while but then derails (through no fault of your own–I hate that saying) then you obviously have an easier time covering your monthly expenses either through savings or getting a job at Home Depot or the like. You can cover a decent portion of a $2000-$3000 monthly nut compared to $8000 in expenses with a $10/hour job until the career gets back on track. I speak from experience here. During the year before I started at Your Source I helped put a roof on a garage, helped build a rock well and did some logging among other things to supplement the income that went with only having a couple investment management clients.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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1 Comment on BOOM! Goes the Social Security Assumptions

  1. you should be careful about believing everything you read. or at least about over reacting to it.

    future life expectancies are by no means assured. and there is plenty of time to adjust to whatever comes without wrecking the best way workers have to insure their retirement that we have so far.

    according to the most recent CBO (and Trustees) projections, workers can pay for their own longer life expectancy by raising their payroll tax one half of one tenth of one percent per year. in todays terms that means an extra forty cents per week while their wages go up about eight dollars per week per year.

    you have to understand that after forty years most workers are worn out from working, whether they have a “hard physical job” or just a meaningless cubicle job. they can afford to pay for their own retirement if we let them.

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