Social Security has been in the headlines lately, including articles trumpeting its apparent eventual demise. Add in growing concerns about the impact of inflation on long-term savings and it’s not surprising that advisors are fielding more questions from clients about what it all means for their own retirement plans.
“I’ve had questions, especially from older clients,” says Kris Jerke, president of Ascend Financial in Sioux Falls, S.D. “I’m not as concerned about Social Security in regard to them and their future as I am for our 25- to 30-year-olds that have 30 or 40 years to retirement. I tell them, plan for [Social Security] not being as substantial down the road.”
While Social Security is not going away, the trust funds that cover funding shortfalls are projected to run out of money as they are drawn down. For investors with tens of millions in assets, the health of Social Security, which tops out at payments of around $3,000 a month for individuals who retire at age 66, is less of a worry. But for those who are unlikely to save more than a few million for retirement, the situation is more complex. Particularly for younger clients, advisors may opt to give Social Security projections a haircut.“Assume it’s going to be 25% less than what you’re told today, then it’s no harm, no foul if they fix it,” says Chad Parks, a former financial advisor and founder and CEO of Ubiquity Retirement, a financial technology firm that offers retirement plans to small businesses.
Not going broke. While the notion that Social Security is unsustainable has been out there for much of its existence, this is not supported by history or the program’s financials, say experts. Even if congress takes no action to shore up the program, the fund’s retirement program will be able to pay about 75% of scheduled benefits as of 2034. This is true even though beneficiaries will experience their biggest annual cost-of-living increase in 40 years next year. “I started working on this program in the 1970s,” says Nancy Altman, co-founder and president of Social Security Works, which advocates on behalf of the federal program. “I was told at that time I was not going to see Social Security. I’m now 71.”The program is fully funded for more than a decade, and 91% for the next 25 years, leaving time for congressional action, explains Altman, who also serves on a bipartisan government Social Security Advisory Board. “They always act, because of the political realities,” she adds of the repeated reluctance of politicians to jeopardize a program that has widespread public support. Reality check. Social Security is deferred compensation funded by workers and employers, and should be thought of as such, Altman says. “You can outlive savings, but you can’t outlive Social Security,” she adds. “If you live to 110, you’ll get benefits every month.” As long as workers and employers are paying into Social Security, it will exist, and payouts will be made. The real debate is over whether benefits will be increased or cut, Altman says.This is because payroll taxes currently fund only around 75% of Social Security payouts. In order to make up the shortfall, the Social Security Association is drawing from the two trust funds into which surplus payroll tax revenue has been previously funneled: the Old-Age and Survivors Insurance and Disability Insurance funds, both invested 100% in U.S. Treasury securities. While Social Security is not going away, the trust funds are projected to run out of money as they are drawn down. This means timely payments could suffer and benefits may be cut. Among the factors affecting the funds’ health is an increasing overall life expectancy along with a declining birth rate.Many advisors believe policymakers will step in as they did nearly 40 years ago and ensure Social Security remains viable, even if in a diminished form. Options for boosting Social Security revenue include raising the taxable earnings cap, raising the Social Security tax rate, and investing funds in equities. For advisors who cater to investors with tens of millions in assets, the health of Social Security is less of a worry. But for those who are unlikely to save more than a few million for retirement, the situation is more complex. Put in context. How are advisors managing client questions about their own Social Security benefits? Mainly by making sure clients understand the structure of the program and by putting recent headlines in historical context “It was [the same] in the early 1980s, when Social Security was being projected to not have enough to support the benefits being promised,” recalls Todd Soltow, co-founder of Frontier Wealth Management in Katy, Texas. He believes it is generally healthy for clients to realize Social Security alone won’t provide them with the retirement they envision. And there are other risks to their retirement savings they need to be aware of. “Social Security reductions are just one possible adverse condition that can affect retirement,” notes Soltow, who lists a health crisis or 2008-style market crash as other retirement-plan altering possibilities. “A little bit of worry is probably a good thing,” he adds.Building up retirement reserves outside of Social Security is crucial. “Social Security is still an important piece of the puzzle, even for younger investors,” Jerke says. But a 25-year-old saving for 40 years should be setting aside 10% to 15% of their income in retirement contributions each year, he says. “The most difficult conversations, the toughest ones for me, are the situations where there are not a lot of retirement assets outside of Social Security to rely on,” prompting some to delay retirement, Jerke says. “We have clients well into their 70s who are still working.”