On Social Security, financial advisers tell clients to not count on much

Beyond debating its solvency, advisers embrace the reality of a broken system

Jul 27, 2017 @ 4:00 pm

By Jeff Benjamin

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Ask two financial advisers what they think about the future of Social Security benefits, and you'll get two different answers.

Ask three financial advisers the same question, and you'll get three different answers. And on it goes.

Yet, for all the uncertainty and complexity surrounding the future of Social Security, financial advisers have no choice but to consider it when calculating their clients' future retirement income.

That's where the real speculation, best-guess estimates and hope comes into play.

"There is no guarantee with Social Security, because it's a transfer tax, and the surplus will run out," said Tia Lee, director of wealth planning at Spectrum Management Group, which manages $500 million in client assets.

"I do believe Social Security will continue to be available, but for my clients under 55, I discount what they will receive in retirement," she added.

Depending on where you look and how you like your numbers crunched, the Social Security trust fund is estimated to be exhausted somewhere between 2029 and 2034.

That doesn't mean money won't still be coming in through taxes and going out as benefits, it just means the end of the surplus account.

As the number of Social Security beneficiaries continues to climb, it's estimated that by 2025 the ratio of three workers paying in for each retiree will drop to two workers for each person collecting the benefit.

"The ratio of workers to retirees is falling, which means payroll taxes have to go up just for Social Security to stay broke," said Patrick Beagle, owner and chief executive of WealthCrest Financial Services, which advises on $150 million in client assets.

Mr. Beagle, who also contracts to teach pre-retirement planning to federal employees, said younger people are the most pessimistic about Social Security benefits.

"People in their 20s and 30s have no hope whatsoever about getting anything from Social Security," he said. "They look at it as a basic redistribution program of taking from them and giving to someone else."

He said a lot of the people he sees over age 50 are often naive and ill-informed when it comes to Social Security benefits.

"They don't know what to expect," Mr. Beagle said.

Citing the fine print on Social Security projected-income statements that explains by 2034 there will only be enough money to meet 79% of the obligation, Mr. Beagle tells clients between ages 50 and 60 to not count on more than 75% of their projected benefit.

"When I do planning projections, I try not to make any promises regarding Social Security," said Jon Ulin, managing principal at Ulin & Co. Wealth Management, which manages $50 million in client assets.

"It doesn't appear Social Security is going to vanish, but it does appear in an aging population, they will need to increase our payroll taxes and increase the retirement age and cut benefits," he added. "The most realistic approach for younger people is not to expect it at all."

Most financial advisers, when talking to clients about Social Security benefits, opt to skip past the hairy details and cut right to what seems logical.

Trouble is, what seems logical rests in the eye of the beholder.

"I just don't believe Social Security is ever completely going away," said Blair duQuesnay, chief investment officer and principal at ThirtyNorth Investments, which manages $135 million in client assets.

"Congress can't even manage to make changes to a seven-year-old entitlement [ObamaCare]; how are they going to get rid of something like Social Security?" she added. "For anybody collecting now, or within 10 years of collecting, there is just no way it won't be there."

Ms. duQuesnay said the future might include higher Social Security taxes or even some kind of means testing on benefits, but for her clients she always factors in Social Security as part of their retirement income, unless directed otherwise.

"I'm always happy to run simulations for clients who don't think Social Security will be there," she added.

Signed into law in 1935 by President Franklin D. Roosevelt, Social Security has undergone 31 material changes, but only eight resulted in any kind of reduction in benefits.

The most recent change was in 2009, when Congress ruled that Social Security benefits would be eliminated for people who had broken the law and were currently incarcerated.

Social Security program: A timeline of important changes
Click on the year to see the details, and click on the arrow to see the next time range
  1. 1935

    President Franklin D. Roosevelt signed into law the "Social Security Act." The benefits received were based on cumulative lifetime earnings of the employee.
  2. 1939

    Changed the benefit formula from cumulative lifetime earnings to average monthly earnings for the quarter just prior to retirement. It also weighted the formula so lower wage earners would receive a higher percentage of their income replaced by their Social Security check.
  3. 1950

    Increased benefits paid by 77% to account for cost-of-living increases since 1939 and substantially expanded the scope of the program by including a broader range of the workforce.
  4. 1952

    Benefit levels increased by 12.5% to account for cost-of-living increases.
  5. 1954

    Increased benefits by 13% to account for cost-of-living increases and further broadened workers' eligibility for benefits by including self-employed, state and local government employees and ministers.
  6. 1956

    Began a program to provide disability benefits to workers.
  7. 1958

    Increased benefits by 7% to account for cost-of-living increases, provided benefits for dependents of disabled workers and provided for 12 months of retroactive payment to disabled workers.
  8. 1960

    Lowered the age of eligibility for disability benefits from 50 years old to any age and increased children's survivor benefits to 75% of their parents' retirement benefit.
  9. 1961

    Decreased the age of eligibility for Social Security benefits from 65 years old to 62 years old with a lower benefit.
  10. 1965

    Created the Medicare program, expanded the definition of disability, provided college students benefits if their parents were collecting Social Security, provided benefits to divorced wives and younger widows if they had dependents at home.
  11. 1967

    Increased the benefits by 13% to account for cost of living increases and provided benefits to disabled widows and widowers at reduced rates as early as 50 years old. It also made it easier for younger workers to qualify as disabled, gave credit for military service and provided benefits to ministers unless they opted out versus opting in.
  12. 1966

    Provided benefits to workers from the general revenue fund if the worker reached age 72 prior to 1968, even if they had no quarters of coverage under the act. This meant the Social Security Fund was reduced by these citizens but instead their checks came from income tax revenues.
  13. 1969

    Increased benefits by 15% to account for cost-of-living increases.
  14. 1971

    Increased benefits by 10% to account for cost-of-living increases.
  15. 1972

    Benefits increased by 20% to account for cost-of-living increases and provide for regular cost-of-living increases to benefits going forward. It provided for delayed claiming credits, minimum benefits for low-wage earners, provided benefits for dependent grandchildren and Medicare for disabled beneficiaries.
  16. 1977

    [First measure taken to reduce benefits]
    Change to the computation of benefits for those reaching age 62 in 1979. The change related to the way earnings were adjusted for inflation in the benefit calculation and lowered benefits slightly for some. Froze the minimum benefit amount and reduced spousal benefits for those receiving a government pension. After these two steps to reduce benefits, this amendment increased the delayed claiming credits and had several other measures that would in essence increase benefits.
  17. 1980

    [Second measure taken to reduce benefits]
    Due to the expansion and increased expenditures from the disability insurance program, there were steps taken to reduce these benefits, which included the establishment of a family disability benefit limit. The amendment also attempted to reduce disability benefit payments by requiring the secretary to review the disability benefit recipient's eligibility every three years. The amendment also took steps that would increase benefits for some disabled people which included the elimination of the 24-month waiting period for Medicare for a re-occurrence of disability. If a disabled person attempted to return to the workforce, but later found themselves unable to do so, they received immediate disability within a 15 month re-entitlement period.
  18. 1981

    [Third measure taken to reduce benefits]
    Phased out benefits for children of retirees attending college, ended Social Security benefits for parents once their child turned 16 years old, limited the lump sum death benefit ($250) to only spouses and children.
  19. 1983

    [Fourth measure taken to reduce benefits]
    Gradually increased the age for full retirement benefits eligibility from 65 to 67, pushed back the yearly cost-of-living increases from June to December each year, began taxing 50% of the benefits received, eliminated benefits for workers receiving pension benefits from non-covered employment.
  20. 1984

    Responded to concerns regarding the 1977 to 1983 amendments attempting to reduce disability benefits and put in place restrictions on the agency's ability to reduce or eliminate disability benefits.
  21. 1985

    [Very Important Legislative Change]
    Legislation restricted Social Security changes in various stages of the Congressional budget process. The provision made it out of order for either the House or Senate to take up changes in Social Security as part of a reconciliation bill or reconciliation resolution. Separate votes in each body, suspending or otherwise altering the rules under which the respective bodies operate, would be required to make consideration of any proposed Social Security changes permissible.
  22. 1986

    Made permissible inflation adjustments lower than 3%. Prior to that, inflation had to exceed 3% in order for Social Security benefits to receive a cost-of-living adjustment.
  23. 1987

    Extended coverage to military training of inactive reservists and provided automatic disability benefits if a disabled worker returned to work but was later deemed disabled again.
  24. 1989

    Extended benefits to children adopted after the worker became entitled to benefits.
  25. 1990

    Extended benefits to employees of state and local governments who did not have retirement plans. Extended benefits to spouses whose marriage to the worker is otherwise invalid and liberalized the definition of disability for disabled widows and widowers.
  26. 1993

    [Fifth measure to reduce benefits]
    Reconciliation act of 1993 made up to 85% of Social Security benefits taxable.
  27. 1996

    [Sixth measure to reduce benefits]
    Prohibited disability and Social Security benefit eligibility for individuals whose disabilities were based on drug and alcohol addiction.
  28. 2000

    Decreased the age at which you could claim full benefits and earn a meaningful wage from age 70 to 65.
  29. 2001

    [Seventh measure to reduce benefits]
    Eliminated wage credits for members of the uniformed services for all years after 2001.
  30. 2009

    [Eighth measure to reduce benefits]
    Eliminated Social Security benefit payments to people that had broken the law and were currently incarcerated.
    Provided a one-time $250 payment to every adult eligible for Social Security benefits.
Source: Spectrum Management Blog

In that same year, Congress approved a one-time $250 benefit to every adult eligible for Social Security benefits, illustrating why it has become known as the "third rail of politics" — touch it and you're finished.

Kashif Ahmed, president of American Private Wealth, said the younger the client, the less they should expect from Social Security.

"The financial planning software always includes Social Security, but I tell folks we shouldn't rely on it," he said. "If it survives, and you get some, it's likely good for some gas in your car. And if you truly are relying on Social Security for retirement, well, that really isn't much of a retirement."

Nik Schuurmans, founder of Pure Portfolios, a $50 million advisory firm, is 35 and works with a lot of clients in his age range.

From his perspective, Social Security is going to be drained by the older generations, and he doesn't believe "there is the political will in Washington to tackle this."

"For my clients over age 40, we calculate the full benefit, but for those under 35 we tend to omit it or give it a haircut," he said. "Most of the people I know who are my age are very dismissive and very cynical about Social Security and the federal government in general."

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