Social Security has long been viewed by many as “safety net” of sorts for many retirees. While it was never designed to fully support someone’s complete financial needs in retirement, it provides the only guaranteed income stream that many folks have. For those who don’t have access to a pension plan, social security provides a level of assurance that, despite how the markets behave, they have income they can count on not to decrease during their lifetime.
You see, social security should be just one component of any retirement income plan, with personal savings also making up a sizeable portion of the plan. One of the first steps to creating an income plan involves determining what your true income needs are in retirement and balancing those with your assets to cover your expenses . . . including social security. And this can be challenging because we have to make assumptions about future rates of return, taxes, health care costs and more.
But you know, for years, social security was thought of as a “sure thing” – it was one thing that retirees could count on. Though their future benefits were, and are still, estimates that could change somewhat due to fluctuations in earnings, cost-of-living adjustments, whether they continue to work after claiming benefits, etc., retirees still had confidence that the benefit would be there and they could reasonably predict it.
However, in recent years this confidence has waned – and for good reason. In fact, I recently had a discussion about this with some long-term clients, let’s call them George and Trish. They’re good, hard-working folks in their mid-50’s who moved down to Falmouth a couple of years ago. They have two successful son’s, both living and working in Boston. As we reviewed their income plan, and in particular their expected social security income, they questioned whether they should lower their benefit assumptions. Like many others, they have been hearing a lot about how social security is underfunded and that the trust fund is expected to be depleted soon – in fact, right now estimates are that the fund run dry right about the time they plan to retire.
Trish went on to express concerns about their sons’ retirements as well. If their own benefits are at risk, what could this mean for future generations and their ability to support themselves in retirement? George questioned if they should consider making changes to their own legacy plans to ensure their sons and grandchildren have the resources to retire one day, too? I applauded them for their forward-thinking and desire to protect their loved ones, agreeing that social security benefits are a concern for many these days. But I don’t think the situation is as dire as you might think, or as severe as the media portrays. In fact, I believe that some relatively modest changes would place Social Security on sound financial footing.
Yes, social security does face funding challenges. For decades it has collected more than it has paid out, building a surplus of $2.9 trillion by the end of 2019. But the system is now starting to pay out more than it takes in, largely because the retiree population is growing faster than the working population, birth rates are dropping, and people are living longer. Without changes in how Social Security is financed, the surplus is projected to run out in 2035.
But even then, Social Security won’t be “broke”. It will still collect tax revenue and pay benefits. But it’s estimated to have enough to pay just 75 percent of scheduled benefits₂, according to the latest estimate. To avoid that outcome, Congress would need to take steps to shore up Social Security’s finances, as it did in 1983, the last time the program nearly depleted its reserves. The steps then included raising the full retirement age, increasing the payroll tax rate and introducing an income tax on benefits.
For those actively preparing for retirement, it’s still possible to anticipate what your benefit amount will be. Those preparing to retire sooner than later will likely have a greater level of confidence in their estimates, however, making the planning somewhat age-driven.
So, George and Trish are baby boomers, which are those born between 1946 and 1964. Estimated benefits for this group will likely be on target and are unlikely to be reduced. This isn’t to say that they shouldn’t take some precautionary measures. I suggested we still plan for their projected benefit amounts, but stress test their income plan for a potential benefit cut.
Their sons, however, may not be as lucky. The Generation X’ers, born 1965 through 1980, may want to be more aggressive in their planning. I suggested they consider a reduction of at least 10% in their benefits to help them prepare for this possibility. Their approach will need to rethink their retirement budget, spending and savings habits now, “just in case”. If Congress is willing and able to take appropriate measures to preserve full benefits, the worst-case scenario is that they’ll have greater savings and end up with more than what they need . . . and you know, that is not a bad problem to have!
And the next generations? Well, many experts say it’s too early for millennials and Gen Z’ers to worry about Social Security cutting benefits. At this point in their careers, most are too young to confidently guess how Social Security will pay benefits, as many don’t even yet have their 40 credits needed for eligibility. Their focus is more likely to be on maximizing their earnings potential through their peak earnings years, increasing their expected benefits in retirement.
At the end of the day, social security planning involves some unknowns – but we can plan for this. We start by putting the focus on things we can control, such as beefing up our savings, finding other sources of guaranteed income such as annuities, or perhaps working a few years longer. As with any area of retirement planning, anticipating the unknown and building in mitigation strategies offer us the best chance of success.
So as always – be vigilant and stay alert, because you deserve more!
Have a great week.