Congress' inaction on Social Security could cost clients 2 months’ pay

Congress' inaction on Social Security could cost clients 2 months’ pay
The estimate of lost income, due to planning mistakes alone, is separate from actual cuts to benefits, according to a recent academic paper.
JUN 03, 2021

Not knowing about what will happen to the Social Security system when its trust fund would be depleted around 2035 has financial consequences for people saving for retirement.

The cost is, on average, more than two months of earnings, according to a recent academic paper published by the National Bureau of Economic Research.

The figure isn’t tied to the actual financial consequences of the Social Security system becoming insolvent. Rather, it’s a cost that researchers said stems from not knowing how to plan, given the uncertainty around how Congress will adjust the system to ensure its long-term viability.

“This indecision leaves young and middle-aged workers not knowing whether they will face Social Security benefit cuts, payroll tax increases or an increase in the full retirement age,” the authors wrote. “We find that the cost of indecision can be large. In some cases, the value of knowing today what the policy change will be in 2035 is worth more than two months of labor market earnings.”

The federal government could help people avoid planning mistakes by moving as quickly as possible to address Social Security’s future, they noted.

Changes to Social Security will affect retirement income in almost all instances. For example, a simulation shows that an increase in the full retirement age to 70 would cost a woman born in 1970, with average earnings, about $124,000, while it would be nearly $148,000 for a woman born in 1990, the report found.

But because people can plan for changes they know will occur, the negative effects due to indecision by Congress can be avoided, the authors stated.

Having 15 years to plan for a 20% cut in benefits is worth about $9,000 for an average-earning woman born in 1975, or about 1.5 months of pay, they calculated.

“If the value of advance knowledge is measured relative to earnings, then the stakes are actually higher for low-income workers than high-income workers,” the paper read. “Low earners rely more on Social Security, so it comes as no surprise that advance information about future policies would be proportionately more valuable to lower-income individuals.”

The two types of mistakes people could make in retirement planning are either assuming that Social Security benefits will remain constant even after the trust’s exhaustion, or that they will face benefits cuts that end up not happening, according to the report. Both types of planning mistakes can be equally costly for people trying to save for retirement, the authors noted.

By 2035, revenue from Social Security will be able to pay about 79% of promised benefits, according to the most recent report from the agency.

“Policymakers are well aware that the trust fund will be exhausted in the early 2030s, and the policy options that will be available at that time are known now,” the paper stated. “[S]imply deciding now what policy will be followed when the trust fund runs dry, rather than waiting until 2035, can be the equivalent of giving people a bonus of between one and two and a half months of earnings.”

The authors of the paper, “How does Social Security reform indecision affect younger cohorts?” are John Shoven, professor emeritus at Stanford University; Sita Slavov, director of the public policy doctorate program at George Mason University; and John Watson, a lecturer in finance at the Stanford Graduate School of Business.

Latest News

In an AI world, investors still look for the human touch
In an AI world, investors still look for the human touch

AI is no replacement for trusted financial advisors, but it can meaningfully enhance their capabilities as well as the systems they rely on.

This viral motivational speaker can also be your Prudential financial advisor
This viral motivational speaker can also be your Prudential financial advisor

Prudential's Jordan Toma is no "Finfluencer," but he is a registered financial advisor with four million social media followers and a message of overcoming personal struggles that's reached kids in 150 school across the US.

Fintech bytes: GReminders and Advisor CRM announce AI-related updates
Fintech bytes: GReminders and Advisor CRM announce AI-related updates

GReminders is deepening its integration partnership with a national wealth firm, while Advisor CRM touts a free new meeting tool for RIAs.

SEC charges barred ex-Merrill broker behind Bain Capital private equity fraud
SEC charges barred ex-Merrill broker behind Bain Capital private equity fraud

The Texas-based former advisor reportedly bilked clients out of millions of dollars, keeping them in the dark with doctored statements and a fake email domain.

Trump's tax bill passes senate in hard-fought victory for Republicans
Trump's tax bill passes senate in hard-fought victory for Republicans

The $3.3 trillion tax and spending cut package narrowly got through the upper house, with JD Vance casting the deciding vote to overrule three GOP holdouts.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.