Social Security has been in the headlines lately, including articles trumpeting its apparent ultimate demise. Add to that growing concerns about the impact of inflation on long-term savings, and it’s not surprising that advisors are increasingly answering questions from clients about what all this means for their own retirement plans.
“I’ve had questions, especially from older clients,” said Kris Jerke, president of Ascend Financial in Sioux Falls, SD. “I’m not as concerned about Social Security in regards to them and their future as we are about our 25- to 30-year-olds who have 30 or 40 years until retirement. I tell them, plan for [Social Security] not so substantial on the road.”
For investors with tens of millions in assets, the health of Social Security, which amounts to payments of about $3,000 a month for individuals retiring at age 66, is less of a concern. But for those who are unlikely to save more than a few million for retirement, the situation is more complicated.
For younger clients especially, counselors may choose to give Social Security projections a haircut.
“Say it’s going to be 25% less than what you’re being told today, then it’s no harm, no mistake if they fix it,” said Chad Parks, a former financial advisor and founder and CEO of Ubiquity Retirement, a financial technology company that pension plans to small businesses.
Won’t break. While the idea that Social Security is unsustainable has been around for much of its existence, it’s not supported by the program’s history or financial records, experts say.
Even if Congress doesn’t take action to support the program, the fund’s retirement program will be able to pay about 75% of its planned distributions by 2034. This is true, even though the beneficiaries will experience their largest annual rise in the cost of living in 40 years. year next year.
“I started working on this program in the 1970s,” said Nancy Altman, co-founder and president of Social Security Works, which advocates on behalf of the federal program. “I was then told that I would not go to Social Security. I am now 71.”
The program will be 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 advisory board on Social Security.
“They always act because of political realities,” she adds of politicians’ repeated reluctance to jeopardize a program that enjoys widespread public support.
Reality check. Social Security is a deferred benefit funded by employees and employers, and should be viewed as such, Altman says. “You can survive saving, but you can’t survive Social Security,” she adds. “When you turn 110, you get benefits every month.”
As long as employees and employers pay to Social Security, it will exist and payouts will be made. The real debate is about whether the benefits will be increased or decreased, Altman says.
This is because payroll taxes currently fund only about 75% of Social Security benefits. To make up for the shortfall, the Social Security Association is drawing on the two trust funds that previously funneled excess payroll tax revenues: the old-age, survivors’ and disability insurance funds, both of which invested 100% in US Treasury bills. .
While Social Security is not going away, the trust funds are expected to run out of money when they are withdrawn. This means that timely payments may suffer and benefits may be cut.
One of the factors influencing the health of the funds is a rising general life expectancy and a falling birth rate.
Many advisers believe that policymakers will step in as they did nearly 40 years ago and ensure that Social Security remains viable, even in a diminished form.
Options for boosting Social Security income include raising the taxable profit limit, raising the Social Security tax rate, and investing funds in stocks.
For advisors targeting investors with tens of millions in assets, Social Security health is less of a concern. But for those who are unlikely to save more than a few million for retirement, the situation is more complicated.
Put in context. How do advisors handle customer inquiries about their own Social Security benefits? Primarily by ensuring that clients understand the structure of the program and by placing recent headlines in historical context
“It was [the same] in the early 1980s, when Social Security was not expected to have enough to support its promised benefits,” recalls Todd Soltow, co-founder of Frontier Wealth Management in Katy, Texas.
He believes it is generally healthy for customers to realize that Social Security alone will not give them the retirement they envision. And there are other risks to their retirement savings that they should be aware of.
“Social Security cuts are just one potential adverse condition that could impact retirement,” notes Soltow, who lists a 2008-style health crisis or market crash as other options for changing the retirement plan. “A little worry is probably a good thing,” he adds.
Building up pension reserves outside of social security is crucial. “Social security is still an important piece of the puzzle, even for younger investors,” says Jerke. But a 25-year-old who saves for 40 years should put aside 10 to 15% of his income each year in pension contributions, he says.
“The hardest conversations, the hardest for me, are the situations where there aren’t many retirement assets outside of Social Security to rely on,” causing some to delay retirement, says Jerke. “We have clients well into their 70s who are still working.”
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