For good reason, many retirees and pre-retirees are worried their Social Security benefits will be cut. Nearly two-thirds of American seniors rely on the program as their primary source of income, according to the Social Security Administration, and 10,000 more Boomers are retiring every day.
The situation only seems more dire when you consider the last few years’ Trustee Reports, which project a trust fund depletion around 2034 – a stat politicians and pundits are eager to point out. With an ever-increasing ratio of retirees to workers, it makes sense that seniors are uneasy about the program’s future.
Still, there are a variety of proposed solutions, several of which Congress has successfully implemented in the past. From means testing to tax hikes to raising the full retirement age, these fixes run the gamut in terms of political feasibility and potential efficacy.
Nobody can predict politics, of course, but clients’ perceptions can significantly impact their choices in retirement. The fear that benefits will be cut leads many seniors to collect early, forfeiting significant chunks of their checks for life. On the other hand, overreliance on future benefits can lead to inadequate savings, poorly timed drawdowns and, ultimately, a lower quality of life in retirement.
As an advisor, you don’t have a crystal ball. However, it is important to help your clients paint a realistic picture of Social Security’s reliability, so they can make informed choices based on their savings, goals and risk tolerances.
An Evolving Program
“Social Security certainly was never intended to be someone’s full retirement,” says Steve Weisman, Esq., estate planning lawyer and founder of Scamicide.com. When Congress implemented the program in 1935, the full retirement age was 65, while the average life expectancy was 62. There were also more than 10 workers for every beneficiary at that time – a stark contrast to the roughly 2:1 ratio we see today.
“It was just supposed to be something that would help, but that purpose has changed over time,” Weisman adds. With the average retirement lasting almost 20 years, even conscientious savers assume Social Security will cover a large portion of their expenses – a little more than half, according to Nationwide Retirement Institute research.
Still, the drastic demographic change since the program’s inception should send a strong signal to clients: don’t rely too much on Social Security. Between benefits taxation, retirement age increases and an increasingly impotent cost of living adjustment, it’s clear that Social Security’s spending power is decreasing.
One thing that’s remained the same, however, is the way the system is funded. “It’s a pay-as-you-go system, yet people think they have an account they’ve paid into,” says Chris Markowski, founder of Markowski Investments and personality behind Watchdog on Wall Street. Payroll taxes are the program’s primary funding source, and the remaining 20 to 30 percent comes from benefits taxation, general fund reimbursements and bond interest. The pervasive idea that you “get back what you put in” causes much of the confusion we see today.
The Forecasted Shortfall
The Social Security Board of Trustees says the Trust Fund will be depleted by 2034 – but what does that really mean? “The projected shortfall compared to payouts is not as bad as it seems,” says Weisman.