It’s No Time to Panic: a Perspective on the Challenges Facing Social Security

Bad news travels fast and far. A recent government report said that the Social Security Old-Age and Survivors Trust Fund will be insolvent in 2033.

We all know what follows: anxious clients make unwise decisions about filing in hopes of capturing what benefits they can, while they can.

News about the Social Security trust fund running out of money has been in reruns almost as long as episodes of “Law and Order.” And it becomes the financial advisor’s job, once again, to counter the low financial literacy among Americans about Social Security, retirement savings, and how taxes can eat away investment savings.

Let’s hit the “pause” button on this rerun and dig into some facts and observations about Social Security and retirement security that advisors can share with clients:

• “Insolvent” doesn’t mean the trust fund is out of money; it means it will have a negative cash flow. Businesses face cash flow issues all the time and overcome them. The government can, too.
• Social Security is the grandmother of entitlement programs, created during the Great Depression to protect older citizens from poverty. There’s no political cow more sacred than Social Security.

Social Security is complicated. Few understand its intricacies. Which probably explains why fewer than 10 percent of men and women take advantage of the “bonus” in benefits they can enjoy if they wait until 70 to file. LifeYield data shows that the average advisory client would forfeit $140,000 in benefits if they filed when they planned vs. when the best filing date for them would be.

We can’t let bad news lead to a rush of bad decisions about filing for Social Security.

Social Security’s Outlook is Ugly. Is This the End – or a New Beginning?

The latest burst of grim news reporting happened in late August with the release of a report of the trustees of the trust fund for Social Security old-age, survivors’ and disability benefits. The report said that in 12 years, the trust fund for old age and survivors’ benefits would run out of reserves; new tax revenues that fund the program will not cover scheduled payments.

Without action by Congress, the report estimated, benefit payouts would be only 76 percent of what was scheduled. And that was before the announcement that beneficiaries would get a 5.9% cost of living adjustment (COLA) starting in January 2022.

We’re familiar with the demographic trends behind this situation: Life spans have climbed over the years (2020 being an exception due to COVID-19), and birth rates have fallen. There are currently fewer than three workers per Social Security beneficiary. In 1940, that ratio was 159 to 1.

It’s a law of nature: People (and their governments) tend to respond to crises, not plan ahead. The trustees, in their report, acknowledged this and urged lawmakers to act to give workers and beneficiaries time to adjust to any changes that shore up the program.

No Shortage of Ideas for Fixing Social Security

Ideas for rescuing Social Security have been around for years.  They include:

• Raise the maximum earnings subject to the Social Security payroll tax. The government now stops collecting payroll taxes when gross income exceeds $142,800 (that will go up to $147,000 in 2022). Some want to impose payroll taxes on those who earn more than $400,000 annually.
• Increase the Social Security payroll tax for workers and employers. Now each pays 6.2 percent for a combined rate of 12.4 percent. Raising the rate to 16 percent would restore solvency for decades, proponents say.
• Lower Social Security benefits for wealthy Americans who rely on its benefits less than middle- and low-income people.

A bipartisan group of lawmakers has proposed the TRUST Act of 2021. It would establish bipartisan and joint House-Senate committees to recommend ways to address insolvency in several federal trust funds, including Social Security and Medicare.

It has happened before. In 1983, when Republican Ronald Reagan was president and Democrat Thomas P. “Tip” O’Neill was speaker of the House, Congress raised the full retirement age, increased the payroll tax rate, and began taxing Social Security benefits.

Rise of Economic Inequality Colors Debate

Social Security was enacted during the Great Depression, when poverty was rampant, and life spans were considerably shorter. “Retirement” was, for most Americans, brief and or nonexistent.

World War II lifted the U.S. economy out of the cellar. What followed was a period of relative prosperity, growth, and an expanded middle class. Boomers remembered that fathers (mostly) went to work every day, earned a living, and retired with a pension.

How times have changed. Fewer people have pensions. The gap in income between the richest and the poorest in American is wider than ever. And economic security is a burning issue again today. Indeed, there are proposals for expanding benefit programs for the poor and middle class and families with children.

Social Security is deeply rooted in our economy and our national psyche. According to the National Academy of Social Insurance, one in five Americans today collects monthly Social Security benefits. Those are a lot of voters.

Could lawmakers work another deal a la “Tip and the Gipper?” Would they allow Social Security to reduce benefits — and renege on a promise many working Americans think is sacred?

Your – and your clients’ views – on those questions are personal. What you can point to, though, are decades of commitment to Social Security – and the insight that fintech tools like LifeYield Social Security+ provide in creating an income plan for life.

It’s helpful to understand how history has stoked retiree anxiety over Social Security and how you can address it – with five tips for talking to clients about Social Security. From there, you can progress to wider discussions of how to generate the income your clients will need in retirement.