Advisers need to give clients a Social Security reality check: IN's Pavia

Oct 28, 2010 @ 3:54 pm

By Jim Pavia

The uncertainty of the Social Security system is making retirement's three-legged stool a bit wobbly.

Our leaders in Washington have made it quite clear that the Social Security Trust Fund, which has $2.6 trillion in reserves, won't last forever.

There are 15 million people out of work, which means that less money is being added to the system in the form of payroll taxes. At the same time, more people are living longer and therefore collecting more Social Security benefits for extended periods.

This year, for the first time, Social Security will pay out more in benefits than it will collect in payroll taxes. That is a threshold that the government hadn't expected to cross until about 2016.

The same thing will happen next year. So clearly, something needs to be done.

There is talk inside the Beltway about increasing the age at which people receive Social Security benefits. There is also conversation about how to work around the absence of the annual cost-of-living adjustments, possibly taxing workers more and even privatizing Social Security.

As an aside, President George W. Bush's plan to partially privatize the Social Security system went nowhere in Congress.

So who knows which proposals will win out? Not even the brainiacs in Washington know for sure.

President Barack Obama has appointed a bipartisan commission to come up with proposals to address the Social Security dilemma. The commission's recommendations are to be delivered in December.

Those proposals must be approved by 14 of the commission's 18 members (10 Democrats, and eight Republicans).

The Social Security's surplus for years has been used to help balance the federal books. Washington insiders have correctly urged that this presidential commission ensure that the trust fund isn't used to pay for further fiscal failures.

To make matters even more interesting, by 2037, Social Security is projected to be able to pay out just 75 cents for every dollar in benefits promised to workers. It is a real problem for those who will depend heavily on Social Security in their retirement years.

So while they hash it out on Capitol Hill, you as a thoughtful and responsible financial planner or investment adviser should deliver a reality check to your clients and let them know that they need to plan now to decrease their reliance on Social Security.

If they ask why, tell them quite simply that it might not be there when needed.

This is particularly true for those of your clients who are 40 and under.

Although it won't be an easy conversation, many financial professionals are accustomed to playing the role of psychiatrist anyway. So give it a shot.

Your clients of course will argue that they need to focus on current financial responsibilities. You must stress that if they fail to save adequately now and count on Social Security as a main source of their retirement income, they will be making a very big financial mistake.

Several financial advisers with whom I spoke offered a few ideas for saving more and reducing dependence on Social Security.

As clients have approached retirement, some advisers have urged them to try to put aside at least two years' worth of expenses in a safe, liquid account, such as a bank savings account or money market fund. Once they retire, they can use the money to pay bills and replenish the fund with capital gains, dividends and interest.

Some advisers tell clients to consider downsizing to smaller homes or relocating (in advance of a planned retirement) to less expensive areas. That move could lower their costs dramatically, saving thousands of dollars that could be socked away into a retirement fund.

Another strategy is to pay down consumer debt quickly, and of course, your clients should always look to avoid taking on new debt.

Finally, some advisers simply urge their younger clients to start seriously saving and planning for retirement earlier. Many apparently need to be reminded that trying to play catch-up when you are in your 50s or 60s never really works.

It is up to trusted financial professionals to let clients know that it isn't safe to stand on a stool with one very shaky leg.

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