COVID-19 fear and COVID-19 fatigue are very real — as-is the general ping-ponging nature of daily life we are all experiencing.
We all wish this turbulent period was over — but it is not, and will not be soon. Many of the issues and changes are going to be around for a long time.
Telehealth use, contactless payments, working from home and a new emphasis on environmental, social and governance investing aren’t going anywhere.
But one area I’m particularly concerned about as a long-term threat is Social Security. While retirement assets have held up well so far thanks to the liquidity generated by monetary stimulus from the Federal Reserve and fiscal stimulus from the federal government, that is all poised to change.
Millennials Get Old, Too
One of the biggest problems with Social Security is that it’s not funded properly. This poses a problem for younger demographics — specifically millennials and Generation Z — in which changes need to be made lest they bear the burden of receiving less than they put in, come retirement.
A number of proposals to ensure it is there for younger contributors when they retire seem to be perennially floating in Congress, but so far nothing is set in stone.
If you’re advising clientele of a younger demographic, you need to be explaining to them why they need to care. These generations need to be talking about this issue.
Many of them, ironically and despairingly, think Social Security is going to be gone by the time they retire, which could very well be creating a self-fulfilling prophecy. If Congress doesn’t home in on this soon, they’ll wait until there’s a full-blown crisis, and even then the solution may not work perfectly.
Born in 1960? You Have a Problem
Social Security is often talked about as under threat, with actuaries forecasting the system to go bankrupt in the future — yet as of now, Social Security has never missed a payment or cut benefits.
Many people don’t realize that payouts are determined by the Average Wage Index, which is now being impacted by current and rampant pay cuts, layoffs and furloughs.
If Congress does not act to address this issue, citizens born in 1960 (and likely 1961) will see a nearly 15% cut to their lifetime benefits from Social Security when it’s time for them to collect.
If the COVID-19 pandemic suppresses the economy into 2022, those same cuts will affect even greater numbers of pre-retirees. What’s more, the impact to their Social Security benefits will be permanent.
A recent study from my firm, Escalent, of defined contribution plan participants found that 84% of those born from 1956 to 1964 name Social Security among their top five sources for income in retirement, with one in five (21%) indicating it as their primary source. This means that a significant 15% decrease in Social Security benefits is a massive issue pre-retirees don’t see coming.
A Coming Retirement Crisis
Currently, non-high-net-worth pre-retirees are facing very difficult situations and tough choices, as they’ve been hit particularly hard by layoffs and furloughs. Unemployment for those 55 and older reached 13.9% in April, with certain demographics hit even harder. (It was still elevated, at 8.8%, in July.)
A substantial reduction in earnings coupled with potential cuts in Social Security benefits show that the retirement crisis will hit the 55-and-older group particularly hard. To make matters worse, over 60% of people in this age range under-acknowledge the pandemic’s impact on their investment decisions.
This is a critical issue for those who have not saved what they need for retirement. Much like unemployment numbers, this will disproportionately hit women and people of color. Qualitative research that Escalent has conducted shows that almost none of the people impacted are aware that this issue looms.
Payroll Tax Holi-Delay
New “solutions” to stimulating our economy are being proposed as the country continues to grapple with a pandemic with little end in sight. One such solution — the payroll tax delay ordered by President Donald Trump — sounds great on its face, but even a cursory exploration of its implications offers a grim look at the future we face in the event of its implementation.
While it is being marketed as a payroll tax “holiday,” the latest solution offered is actually a payroll tax delay, making it a very dangerous policy.
Ultimately, the most cash-strapped Americans would be hit with a significant tax bill in 2021, when many might otherwise be expecting a refund. Additionally, a true payroll tax cut would accelerate the insolvency of Social Security, necessitating benefit cuts as high as 20%. There are far better ways to cut taxes in the short term to create stimulus.
Whether they know it or not, pre-retirees need all the help and advice they can get. This is an opportunity for asset managers, plan sponsors and advisors to quickly inform clients and participants about the danger, and maybe even make some noise so policymakers correct the problem.
Taking action now is a good opportunity for advisors and financial services firms to demonstrate they are on clients’ and participants’ side on issues like retirement security, leading to higher trust across the board.
— Related on ThinkAdvisor:
- 3 Reasons Clients Should Take Social Security Early
- Ending Payroll Tax Would Drain Social Security by Mid-2023
- Senators Prod Social Security Actuary on Impact of Ending Payroll Tax