Sam Payne, RICP, VP Sales, Business Consultant
Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. This year’s report, absent the affect of COVID-19, is a sobering reminder of the financial situation the trust funds have been facing for years.
Since its advent in the 1930s, Social Security has provided a “safety net” for retiring Americans. Its original intended purpose was to “lift” seniors out of poverty in their retirement years. Today it benefits over 65 million Americans, with the bulk of those relying on their Social Security checks to provide the bulk of their retirement income. Today it has become so much more than it was intended to be, yet the program has remained largely unchanged.
A pending Social Security system crisis has been forecast for years. Maybe this year the warning will be taken seriously.
According to the 2020 Trustees report, The Social Security program will see net cash outflows as early as next year (2021), and if the program continues without serious policy changes, the continued outflows will eventually exhaust the programs reserves. Left unabated, this will eventually lead to dramatic benefit cuts. Below is a projected timeline for Social Security Benefit cuts.
There are many reasons Social Security is in this situation, here are a few that got us here.
- We Are Living Longer
As financial planners and advisors, we highlight the risks in retirement and one of the top five is longevity, the real risk that you could outlive your income. Well that same risk of longevity affects Social Security as well. Just think about it. When Social Security was established in the mid-1930s the average mortality for a male (at that time most workers were male) was just over 60 years old. The Social Security full retirement age was 65. Today with a mixed workforce paying into and expecting benefits, the average age expectations for workers is 79 years old.
- Lower birth rates
Since inception of the Social Security program, birthrates have declined. Social Security was designed to be funded by workers contributions – younger workers paying into the system fund retirees’ benefits. As the birthrate declines, fewer younger workers are entering the workforce and paying into the system. The number of younger workers relative to the growing number of retirees has fallen causing contributions that are insufficient to pay for current benefits. Currently this shortfall is being covered by the Social Security trust’s reserves. Without action, there will come a time when these reserves are depleted.
- Lower Immigration
A low birthrate in the US could be offset with high immigration rates. Historically the US has benefitted from high immigration rates, and these immigrants were typically younger workers entering the workforce and paying into the system. Immigration rates have declined sharply over the last twenty years further reducing the number of workers paying into the system.
- Political Inaction
Social Security is a “hot potato” for sure when it comes to the political arena, and despite 35 years of warning about a shortfall by the trustees, congress has been reluctant to develop a meaningful response to address the issue. Our current sharp and toxic partisan divide has made the political inaction more severe.
- Low Returns
As a bulk of the trust’s assets are required by law to consist of US Treasury instruments, recent years have been a key issue. According to the fed, the rates will remain low for some time, further compounding the problem.
The 2020 report does not account for the impact COVID-19 will have on the trust fund, but one can imagine with the number of individuals out of work (not paying into the system), there will be a substantial impact reflected in next years report. This impact could come from increased mortality among COVID-19 benefit recipients, continued unemployment, and lower immigration.
So what are the solutions?
- Tax increases
- Benefit cuts
- Early claiming age increase
- Full retirement age increase
- Adjust the cost of living increase
What to do?
At the end of the day, the Social Security system we know today is in peril. We don’t know for sure when or how it will change, but the likelihood is that Social Security will not look the same 10 -15 years from today. So how do you communicate with your clients and prospects?
I suggest communicating to three groups with a different yet similar message.
- Currently enjoying retirement
- This group is unlikely to be affected by changes, historically benefit cuts have fallen on those who retire after the cuts are made.
- Nevertheless, a financial review with a budget and income projections incorporating both Social Security and other sources of income is always prudent.
- This conversation should encompass the five major retirement risks
- Near and looking forward to retirement
- This group needs your help. A timing discussion around claiming Social Security is paramount.
- Keeping an eye on any retirement or claiming age changes and adjusting the plan accordingly is the smart thing to do.
- In addition, developing a plan that incorporates any changes in the taxation of benefits is key
- Working hard, loving life and years from retirement
- This group 15 -20 years from retirement bears the bigger potential of adverse effects of the Social Security insecurity.
- Help them develop a plan for their future
- Model several scenarios that include the different benefit levels that are being discussed and published
- Help them recognize the importance of starting their own retirement income plan now.
Bottom line, Americans need our help! Helping them identify the real and present risks to the retirement of their dreams. We have the tools, the strategies and the techniques to educate, collaborate, plan and help build a retirement plan to live for!
Now is the time to have Social Security educational events, highlighting the 2020 report and offering planning solutions!