Where Is Social Security Headed?

With its combination of payroll taxes, bonds and accrued bond interest, the system is currently operating at a surplus, albeit in the face of liabilities. 2034 is the year in which the fund is expected to run out, at which point current payroll taxes would be the only funding source. The oft-cited report also points to a 2.83 percent 75-year actuarial deficit, which is the reason why, if Congress did nothing for 17 years, benefits would be cut by 23 percent.

Potential Changes

There are several ways Congress might address that deficit. One of the most impactful would be a 1.4 percent payroll tax increase for employer and employee each – certainly not a popular measure, but arguably more voter-friendly than slashing seniors’ benefits. That increase alone could account for the deficit for the next three generations, according to the Trustees’ current projections.

Another proposal is an increase in the full retirement age – “one of the most likely changes and minimally disruptive to what people are planning on now,” says Weisman. Congress has already bumped the FRA to 67 for people born in 1960 or later, and further increase would have little effect on the current crop of retirees.

Other potential changes include an increase in the FICA threshold, tying retirement age to life expectancy and non-bond investment of Social Security funds. “Many of these solutions, coupled, could cover the shortfall in a way that doesn’t significantly hurt most Americans,” says Weisman. In fact, the Committee for a Responsible Federal Budget has put forth The Social Security Reformer, a free tool that shows the cumulative effect of smaller, piecemeal solutions.

Still, opinions vary wildly on which of these solutions, if any, will pan out. “Cuts may be coming down the pipe, and I’ve been telling people for 20 years not to count on Social Security, and not to rely on politics to solve the problem,” says Markowski. The last payroll tax increase occurred in 1983, and it successfully shored up a much more imminent shortfall. However, in today’s environment of wage stagnation, slow economic growth and rising health insurance premiums, families and small business owners may not be ready or willing to take another tax hike.

If one thing’s likely, however, it’s that none of these changes will take place in the next few years. “Congress is slow to act unless there’s an emergency,” says Weisman. Social Security reform is an evergreen campaign issue, but changes have historically been made in the nick of time.

Taking Responsibility

With so much uncertainty and difference of opinion, it’s tough to determine a course of action. History and political necessity suggest Congress will act at the eleventh hour, shoring up the 23 percent shortfall just before it hits. With an unprecedented retirement wave at hand, however, it’s tough for clients to remain optimistic when their retirements are on the line.

“Be more responsible than Congress,” suggests Weisman. “Plan earlier, and take advantage of the many programs and tax-qualified savings vehicles available now.” From HSAs to Roth IRAs to lifetime annuities, there are more opportunities than ever to tax-efficiently provide for lasting retirement income.

More conservative, less optimistic clients may want to rule out Social Security altogether, viewing it as a potential bonus on top of an already adequate series of assets and income streams. “I think advisors should prepare their clients with things they can control,” says Markowski. “There’s a price that comes with living an extra 10 years, and you have to put away the extra money.”

Regardless of your clients’ levels of optimism, however, collecting early is probably still a poor choice. While a lack of Congressional action may lead to a 23 percent shortfall, collecting at 62 will reduce benefits by 25 percent for life. Assuming average or above average longevity, delaying will be a wash at worst – but a tremendous boon if benefits are preserved.