Planning for uncertainty around Social Security

Americans’ prospects for achieving a comfortable retirement have taken a number of hits in recent decades. Fewer and fewer workers have access to defined-benefit pensions, interest rates have been stubbornly low, and longevity keeps heading higher. Now the COVID-19 pandemic has created risk around a key source of retirement income for many: their Social Security benefits.

The shutdown caused by the pandemic threw millions of people out of work, which cut into the FICA payroll taxes that fund Social Security payments and accelerated the time frame in which the trust fund that backs Social Security payments when FICA taxes fall short — better known as the Old-Age and Survivors Insurance Trust Fund — will run out of money.

As recently as April, the Social Security trustees estimated the reserves of the Social Security and Disability trust funds would last until 2035.

But last month, a report from the Congressional Budget Office projected that the Social Security trust fund will be empty by 2031. At that point, the Social Security Administration might have to limit payments to what can be covered by the FICA taxes coming in, cutting benefits paid to retirees by 25%.

TOUGH DECISIONS

In this week’s cover story, which begins on page 8, Mary Beth Franklin, contributing editor for InvestmentNews, looks at how advisers are dealing with this possibility. One adviser she interviewed is reducing Social Security benefits by 25% in plans he builds for clients younger than 50, while another uses a software program to show clients what their retirement plan would look like with full Social Security benefits versus a 21% reduction in those benefits. Another expert warned against making decisions now based on an uncertain outlook for Social Security.

While the prospects for Social Security cuts are cloudy, it’s important for advisers to inform their clients about the potential problems around the trust fund and what that could mean for their income in retirement, so that individuals have the opportunity to plan for that possibility.

It’s also important for Congress to begin considering solutions, although experts cited in the cover story agreed that solving Social Security’s problems isn’t a priority for Congress, and that situation won’t change no matter what the results of the November elections are.

Of course, there’s another side to this pandemic problem. While the lockdown undermined funding for Social Security given the widespread unemployment, other people have seen their savings mount as they continued to work but found fewer ways to spend their earnings while stuck at home.

A Northwestern Mutual survey released last week found the average savings of Americans over the age of 18 are up 10% from the level in 2019. So the pandemic may also provide advisers with a new group of prospects and give them a chance to encourage newly minted savers to join the community of investors.