Social Security benefits are one of the great unknowns when it comes to retirement planning. Baby Boomers don’t have much to worry about since the Social Security trust fund isn’t expected to run out of funds until sometime after 2027, but what about the younger generations? Should they be taking Social Security benefits into account when they formulate their retirement savings goals?
Even if Generation X and younger don’t have access to full benefits, there will be some money left in the system, even if it means individuals receive 75 percent of their current expected benefits instead of 100 percent, said Robert Henderson, president of Lansdowne Wealth Management, LLC in Mystic, Conn.
“For younger people, if somebody is 20 years or more away from retirement, it’s not that I don’t think Social Security is going to be there because I do, but it is so difficult to predict what the amounts are going to be,” he said. “A lot of things can change with Congress and our economy over 20-plus years. In addition, a lot of things can change with individuals’ circumstances, like how much they work, how much they earn and the types of jobs they have.”
Because there are so many factors to take into consideration, if someone is under age 45 Henderson said he may not incorporate Social Security benefits into their retirement plans.
“There’s no way of knowing this far out what that benefit is going to be at that point,” he said.
According to the Social Security Administration, Social Security will make up about 21 percent of an individual’s retirement income, leaving the other 79 percent to be made up with personal savings, defined contribution and defined benefit plans.
It is hard to throw out a generalized number when it comes to Social Security benefits. Everyone makes a different amount of money and works a different number of years.
Most individuals who work with financial advisors make more than $100,000 a year. Higher income people will typically receive a lower replacement percentage from Social Security benefits than lower income workers because that is how the system was initially set up, Henderson said.
If someone made $150,000 a year before they retired, they can expect to receive between 15 and 20 percent of their pre-retirement income from Social Security benefits. If they are married, their spouse also is entitled to benefits so that figure could increase to as much as 25 percent.
Another problem with Social Security benefits is that there are so many rules governing who will receive what that individuals really need to know what they are entitled to.
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Married, divorced and widowed spouses are entitled to benefits, but the problem is that “if you go to the Social Security office they are not going to advise you on the best way to claim your benefits. They will process whatever you tell them to claim,” Henderson said. That means individuals are “left to their own devices to figure out the optimal times to claim benefits between them and their spouses.”
“There are a lot of people crying wolf about the Social Security trust fund [running out of money]. Some of that is overblown,” Henderson said. “The trust fund is going to be solvent for quite a few more years. Last time I checked it was 2027 or 2030, and even when the trust fund is completely dissolved, current receipts of Social Security taxes will still fund 75 percent of current benefits.
“Everyone has this idea in mind that, when the trust fund is depleted, benefits will cease to exist and that is not really the case. The situation is not quite as bad as everyone makes it out to be. It would be nice for Congress to come up with a mechanism so there is always sufficient funding and we will never be in a situation where it is underfunded,” he said.
There are many things that could be done by the government to ensure that Social Security remains a viable option for the American people. They can increase the Social Security taxing rates or continue to increase the retirement age. As it stands currently, the early retirement age is 62 and the full retirement age is 67.
Henderson said he wouldn’t be surprised if the government increased the full retirement age to 68 or 69 in the future to increase Social Security revenue over time.
“One of the things I think they could definitely do is they could raise the tax rates on Social Security benefits, especially for higher earners,” he said.
Social Security benefits are taxed as ordinary income if a person earns money from other sources besides Social Security and their modified adjusted gross income is more than the base amount for their filing status, according to the Internal Revenue Service. Congress could increase that amount or even tax 100 percent of the benefit for higher income earners, Henderson said.
There also has been talk about incorporating means testing, which would involve either lowering the benefit or increasing substantially the tax rate for people with significantly more income. Phasing out Social Security benefits for wealthier people also could happen, Henderson said.