4 Reasons Social Security Is In Trouble - Will You Be, Too?

etra images/Getty Images On Monday, the Social Security Trustees published its annual Trustees Report on the health of the Social Security system. The bottom line has changed very little since last year's report, and the trustees still expect the Trust Funds to empty in 2033. Once the Trust Funds empty, the program will only be able to pay around 77 percent of its scheduled benefits. Still, while the trustees maintain their overall projection for the program, its underlying financials continue to crumble. For one thing, the program's 75-year actuarial deficit increased to 2.88 percent of payroll, up from 2.72 percent last year. For another, the retirement-related Trust Fund -- when considered on its own -- is on the path toward emptying a year sooner than last year's projections. The table below shows the details:

Social Security Trust Fund 2014 Trustees Report 2013 Trustees Report

Retirement Trust Fund	Empties in 2034	Empties in 2035
Disability Trust Fund	Empties in 2016	Empties in 2016
Combined Trust Funds	Empties in 2033	Empties in 2033

What's Driving This Decline? There are at least four key drivers behind Social Security's weakening condition: 1: Falling labor force participation rate. This metric measures the percentage of the U.S. population age 16 and older either working or actively looking for work. Unfortunately, as the chart below from the Bureau of Labor Statistics shows, that measure has dropped substantially this century. Source: Bureau of Labor Statistics Social Security is primarily financed by payroll taxes. The fewer people working (or even looking for work), the smaller the potential wage base to support the program. 2: The relentless rise in the disability rate. The two charts below show the Congressional Budget Office's current and projected disability rates by age, the first for males and the second for females. The disability rates have risen relentlessly since around 1990, and the trends show no sign of stopping. Source: Congressional Budget Office Source: Congressional Budget Office This is a double whammy for Social Security. For one part, the disabled often qualify for Social Security Disability benefits. The more people who are on Social Security Disability, the bigger the strain becomes on that part of the combined Trust Fund. For the other part, people collecting Social Security Disability rarely earn much (if any) income. People who aren't earning income aren't paying into the Social Security system. 3: The aging population. Longevity is a wonderful thing (especially for those of us who aren't getting any younger). Still, the longer people live and the more people who survive into their retirement years, the higher the cost of Social Security will be. The chart below from the Congressional Budget Office shows how the population of those ages 65 and older is expected to grow -- both on its own and as a percentage of the overall U.S. population. Source: Congressional Budget Office Once you stop working in your retirement, you stop paying into Social Security, and instead, you start collecting. Additionally, the longer you live, the higher the total amount the system needs to pay to cover your benefit. 4: Low interest rates. While most of Social Security's income comes from payroll taxes, it also makes money from the interest earned on the Trust Funds. Those Trust Funds are invested in special Treasury bonds, and like any Treasury bond, they mature. In our current low-interest-rate environment, the Social Security Trust Funds are forced to buy lower-interest bonds to replace higher-interest ones that mature. The chart below shows the billions of dollars in annual interest lost since 2010 to lower interest rates: Author's calculations based on data from the Social Security Administration. Social Security is already spending more in benefits than it takes in as payroll tax revenue, and interest is the program's next largest source of income. The longer low interest rates go on, the larger the negative impact those low rates have on the Social Security Trust Fund's solvency. What Can You Do? For those four key reasons, Social Security is, and will continue to be, in trouble. With the Trust Funds expected to empty in 2033, you need to prepare. Your most prudent course is to invest as though you'll need to cover the gap between your expected Social Security benefit and what the program anticipates being able to pay. The sooner you get started, the easier and cheaper it is to get there. With around 19 years before the Trust Funds are expected to empty, you've still got time to build a reasonable plan, but the longer you wait, the tougher it gets. So get moving now. More from Chuck Saletta
•How You Can Retire as a Middle-Class Millionaire •Why a $1 Million Goal for Retirement Still Matters •Are You Planning to Work Until 67? And Will You Be Able To?

The Two Faces of Coal

Over the past two and a half decades, a real dichotomy has emerged in the global coal markets. In the Western world, coal consumption is on the decline. If you live in the West and read news articles about coal in the West, you might think that coal consumption is on the decline globally. But you would be very wrong.

In the US, coal consumption has been flat to declining for the past 20 years. Just since 2007, US coal consumption has fallen by more than 20%. This is the primary reason the US leads all countries in reducing carbon dioxide emissions over that same time period. Last year, the US still accounted for 11.9% of the global demand of coal, but the 455.7 million metric tons of oil equivalent (Mtoe) that the US consumed was roughly the amount we consumed in 1987.

The story is the same in the European Union (EU). Since 2007, coal consumption in the EU has fallen by 12%. While the consumption decline since 2007 is not as dramatic as that in the US, the decline in EU coal consumption since the late 1980s has been greater. In 1989, US and EU coal consumption were almost identical (480.5 Mtoe for the US versus 487.6 Mtoe for the EU), but then consumption in the EU fell sharply during the 1990s. Today the EU share of the world's coal consumption is 7.5%.

The story of declining coal consumption in recent years holds true for most of the developed world. Canada, Australia, and New Zealand have all seen their coal consumption decline since 2008. Japan's coal consumption was on the decline until the 2010 Fukushima nuclear power plant accident, but has been increasing since as Japan tries to make up for the loss of nuclear power. Germany is a notable exception in the EU. It has seen coal consumption rise in three of the past four years, but there too the general trend for the past 40 years has been sharply lower coal consumption.

Consider that in 1980, the US, the EU, and Asia Pacific each consumed! some 400 to 500 Mtoe of coal. EU coal consumption never went much beyond that level before beginning to decline to the current level of 285.4 Mtoe. US coal consumption rose a little bit, but topped out at 574.2 Mtoe in 2005.

But in the developing world, coal consumption trends have been very different. In fact, coal's gains in the developing world are hard to put into perspective. This graphic should help:

In 1980 the combined coal consumption of the US and the EU was 866 Mtoe. Today, the combined coal consumption of the two is 741 Mtoe. But the increase in Asia Pacific's coal consumption since 1980 is 2196 Mtoe — nearly triple today's combined coal consumption of the US and EU.

China is the world's top consumer of coal, and was responsible for the largest share of Asia Pacific's gains since 1980. Of the 2196 Mtoe increase in coal consumption, China was responsible for 1620 Mtoe — 73.8% of the total gain.  This represents a more than six-fold increase in China's coal consumption since 1980, which is of course partially explained by the outsourcing of manufacturing from developed countries.

No other country comes close to China's coal consumption. In 2013, China consumed 1925 Mtoe, 50.3% of the global total. The US was a distant second at 456 Mtoe (11.9% of the global total), followed by India at 324 Mtoe (8.5%), Japan at 129 Mtoe (3.4%), and Russia at 93.5 Mtoe (2.4%).

China also produces the most coal. The 1840 Mtoe mined there in 2013 was 47.4% of the world's total, but not enough to satisfy China's coal demand. As with the consumption figures, the US was also a distant second in production at 500.5 Mtoe, which was more than the US consumed and 12.9% of global consumption. US coal exports are on the rise as a result. Following the US in coal p! roduction! were Australia at 269 Mtoe, Indonesia at 259 Mtoe, and India at 229 Mtoe.

Australia and Indonesia both produce far more coal than they consume, and as a result they are major exporters to Asia. In fact Australia is the world's top coal exporter, with nearly 90 percent of its exports destined for Japan, China or South Korea. US coal producers would love to expand into this market but are at a geographical disadvantage. Further, there aren't many options for US producers wishing to export coal from the west coast. As a result, most US coal exports are destined for Europe.

Nevertheless, the US has 26.6% of global proved coal reserves — the most of any country and enough to produce at its 2013 rate for 266 years. At current market prices for coal, these reserves would be valued at some $15 trillion, so there will be tremendous incentive to mine this coal.

Following the US in coal reserves are Russia with 17.6% of global reserves, China with 12.8%, Australia with 8.6%, and India with 6.8% of global reserves. Each of these countries has enough proved reserves to produce coal for at least 100 years at 2013 rates except for China, which has only enough reserves for 31 years of production at its 2013 consumption rate. Russia, on the other hand, has enough proved coal reserves to produce at its 2013 rate for over 450 years.

Conclusions

The global coal markets are the story of skyrocketing consumption in the Asia Pacific region that far more than offsets the consumption declines in the West. The US has the world's largest coal reserves, and because the US Environmental Protection Agency is attempting to phase coal out in the US, coal producers would like to grow their coal exports. However, these producers are constrained by geography and the availability of west coast coal export terminals in tapping into the growing Asia Pacific market.

The coal sector is one that I have not generally favored for several years. There are some opportunities, but pitfalls abound. Mo! re coal p! roducers are likely to end up as the James River Coal Company (OTCMKTS: JRCCQ), which was forced to declare bankruptcy and is planning to auction off its assets as a result of falling coal demand. But even in sectors with such a bleak outlook, sometimes a true bargain may appear. When it does, we will bring that to your attention in The Energy Strategist.  

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)