Social Security’s crucial role shadowed by new doubts

Crisis of confidence in the program is prompting many to claim benefits early.

Several recent studies underscore the importance of Social Security as the bedrock of a secure retirement income plan, just as more than half of pre-retirees are questioning whether the program will be there for them.

With apologies to Canadian songwriter Alanis Morrisette, isn’t it ironic? “With Americans living longer than ever and the average retirement age largely unchanged, many households struggle to make their assets last through retirement,” a recent study jointly released by BlackRock Inc., a leading asset manager, and the Bipartisan Policy Center, a public policy think tank, noted. Americans with access to a retirement plan are frequently encouraged to save, but guidance on how much to spend once they reach retirement is lacking.

“Retirement spending is one of the hardest problems retirees face so the industry needs to give people affordable, innovative solutions and tools to help them navigate this challenge,” Matt Soifer, head of distribution for BlackRock’s retirement business, said in a statement accompanying the new report, Paving the Way to Optimized Retirement Income.

The typical American worker could increase their retirement income by about 22% and reduce the risk of running out of money by more than 20% if they used some of their savings to buy an annuity, adjusted their remaining asset allocation to be slightly more aggressive, and delayed claiming Social Security until full retirement age, the report concluded.

LONG-TERM VIABILITY

Separately, the latest Advisor Authority survey from the Nationwide Retirement Institute found that more than half of pre-retirees who are 55 to 65 years old are concerned about the long-term viability of Social Security. More than a quarter (26%) of pre-retiree investors believe Social Security will run out of funds in their lifetime, with the same portion (26%) believing Social Security will run out of funds after they have entered retirement.

Despite those concerns about the program’s stability, most pre-retirees who say they have strategies to protect themselves from outliving their savings — 52% — are relying primarily on Social Security, according to the Nationwide advisor survey.

Another report, the 2023 Schroders US Retirement Survey, echoed Americans’ concerns about the long-term viability of the Social Security program. Overall, 40% of non-retired respondents in the Schroders survey said they plan to take their Social Security benefits between ages 62 and 65, leaving them short of qualifying for their full retirement benefits. Only 10% of non-retired Americans say they will wait until 70 to receive their maximum Social Security benefit payments.

The choice to forgo larger payments is deliberate, as 44% of respondents in the Schroders survey said they were concerned that Social Security may run out of money or stop making payments. In addition, 36% said they will need the money; 34% said it was their money and they wanted to access it as soon as possible; and 13% said they were advised to take benefits earlier than age 70.

“We have a crisis of confidence in the Social Security system, and it’s costing American workers real money,” said Deb Boyden, head of U.S. defined contribution at Schroders. “Fear about the stability of Social Security has people walking away from money that could improve their quality of life in retirement.”

The 2023 Social Security Trustees report warns that if Congress doesn’t address the program’s longterm financing problems in the next decade, the Old Age and Survivors trust fund could be exhausted by 2033, forcing an across-the-board cut in benefits of about 20%.

Once the trust funds are depleted, there would be enough revenue from ongoing payroll taxes to pay about 80% of promised benefits. There is unlikely to be any congressional action on Social Security reform before the 2024 presidential election.

WORK WITH AN ADVISOR

“I’m hopeful Congress will develop a plan to shore up the long-term viability of Social Security, but for now there remains some uncertainty about what the program will look like years down the road,” Eric Henderson, president of Nationwide Annuity, said in a statement.

“The best thing those nearing retirement can do is to work with an advisor to choose the right time to claim benefits,” Henderson said. “It’s also worth having a conversation with an advisor about how you may be able to leverage the money you have saved, including your 401 (k) plan, to create a predictable stream of income.”

The choice of when to retire is a powerful tool for optimizing the decumulation phase. Retiring later means one’s assets have more time to grow and a shorter retirement to sustain, potentially allowing an individual to spend more in their remaining years.

Similarly, part-time work can reduce reliance on savings by subsidizing current spending. And for many retirees, their home is a valuable asset that could be used to create retirement income. Half of homeowners ages 62 and older hold most of their net worth in home equity.

(Questions about new Social Security rules? Find the answers in Mary Beth Franklin’s 2023 ebook at MaximizingSocialSecurityBenefits.com.)