The Social Security Administration sends a statement every year to workers that projects their future benefits. Financial planners look at those statements when they project future retirement income—but most are advising clients not to believe what they read.
All the talk in Washington about Social Security being at a tipping point (or actually going broke) worries many seniors and future retirees. And an informal survey of financial planners suggests that they're skeptical, too. Although most agree Social Security benefits will be paid as projected for today's seniors and most boomers approaching retirement, many discount the projections for younger workers.
“The younger the client, the less are our expectations for the benefit,” says Kevin Dorwin of Bingham, Osborn & Scarborough in San Francisco.
So, will Social Security be there when it's time for your clients to retire?
Last year, a Gallup poll found 60 percent of Americans don't expect Social Security to pay them benefits when they stop working. The worries are especially acute among younger people: 77 percent of 18- to 34-year-olds told the pollsters that Social Security is either in a state of crisis or has "major problems."
The political spin is unfortunate. Social Security isn't a direct cause of the federal deficit, although policymakers do need to address a problem down the road in 2036, when the program's huge surplus will be exhausted from a combination of factors, including big payouts to retiring boomers. In 2036, absent any further changes, Social Security would have enough funds from current revenue to pay about 77 cents on every dollar of promised benefits.
Neither political party has yet put forward a specific Social Security reform plan to fix this problem, although President Obama might yet embrace the recommendations of his own bi-partisan National Commission on Fiscal Responsibility and Reform, which call for long-range benefit cuts via higher retirement ages, lower cost-of-living adjustments, and a more progressive benefit formula.
There's also been some confusion about how last December's deal extending the Bush tax cuts might impact Social Security's health. That deal included a temporary two percent reduction in the employee share of Social Security contributions for economic stimulus purposes; the reduction lasts one year, but won't impact the health of Social Security's trust fund, since the $120 billion in lost revenue is being made up from the government’s general fund. The Obama Administration has been talking about a further extension, but it's likely the trust fund would continue to be held harmless.
Social Security isn't going away anytime soon, and it's highly unlikely that reforms will impact today's seniors or boomers nearing retirement. But for younger Americans, much depends on whether Washington makes a deal soon to put the program back into long-range actuarial balance.
I'm betting that a fix will be put in place that assures future beneficiaries get everything coming to them—for two reasons:
Politics. Although Americans are worried about Social Security's future, that doesn't mean they don't support the program. Polls show remarkably strong support for Social Security across all political and demographic lines. It just makes political sense for elected officials to keep Social Security strong.
Policy. It's difficult to overstate the role of Social Security as a key source of retirement security. The program's monthly benefits will be the most important--and only--source of guaranteed income for most retirees: 40 percent on average.
For many seniors, Social Security will be the only source of inflation-protected guaranteed income--by law, benefits are adjusted annually according to a cost-of-living formula tied to one of the government's key measures of consumer prices (CPI-W). That makes it an invaluable tool in combating longevity risk – the risk of running out of money in old age.
Social Security also provides critical protection to elderly women, who outlive men and tend to bring fewer assets into retirement due to lower lifetime earning histories. The program is the sole source of income for 42 percent of single women over age 62, according to the AARP Public Policy Institute.
And, re-balancing Social Security really isn't all that hard. Much of the problem could be solved by raising cap on income subject to payroll taxes, but it's likely some modest benefit cuts will be on the table as well – adjusting the cost-of-living formula or perhaps an increase in the retirement age.
The Financial Planner's View
Most financial planners agree that current retirees and workers within 10 years of their NRA can count on receiving most –or all-- of their benefits, since the Social Security Administration's current projections include all the adjustments from the last set of reforms to the program in 1983 (when a gradual rise in the full NRA was put in place, from 65 to 67). The only possible additional change that could impact older beneficiaries would be an adjustment in Social Security's cost-of-living adjustment (COLA).
But many planners advocate a conservative approach for younger workers. Since Social Security currently can promise to pay only 78 percent of benefits past 2035, many discount future benefits on the assumption that no deals will be reached in Washington to repair that problem.
"If the majority of a client's retirement years are projected to be after that date, I use that information," says William Duncan, an independent financial planner in Henderson, Nev.
Laura Scharr of Ascend Financial Planning in Columbia, S.C., discounts projected client benefits based on different age brackets. "For clients over 60, I assume 100 percent of benefits, but only a 1 percent COLA, versus my overall 4 percent inflation assumption," she says. For clients over age 50, she assumes 75 percent of benefits, and 50 percent for those over 40. "If a client is under age 40, I assume nothing unless they're in a lower socio-economic bracket."
But even affluent clients need to consider longevity risk. "Even some of our clients with $1 million or more of investable assets can use up those funds because of their spending habits," says Mark Balasa of Balasa, Dinverno Foltz, a private wealth management firm in Itasca, Illinois, serving high-net-worth clients. "So if you run a plan for them without Social Security, they don't have enough to make it to their life expectancy."
Jon Beyrer of Blankinship & Foster in Solana Beach, California, assumes that Social Security's COLA will lag actual inflation by 2 percent annually. “We’ve seen that play out over the last couple years,” he says. “And four clients 55 and younger, we assume their benefit will be 25 percent less than what the SSA calculators show now. This could play out as an increase in the full retirement age, forcing the retiree to take a reduced benefit if they want to start at age 66 or 67.”
I'd argue that there is a way to help clients combat Social Security's shrinking value. In most cases, it makes sense to urge them to wait to file for benefits until at least their NRA or beyond. Monthly benefit payments are eight percent higher for every year you wait up until age 70. Beneficiaries who wait until age 70 to claim benefits will receive monthly income about 76 percent higher than it would be by claiming at age 62.
About Those Annual Benefit Statements
Finally – a word about those annual Social Security statements: They're being discontinued.
The Social Security Administration (SSA) announced in April that it will stop mailing out the annual benefit statement as part of a budget-cutting move that will save $30 million this fiscal year, and $60 million in 2012.
Statements usually are sent out about three months before your birthday; the suspension cuts off everyone with birthdays starting this month (July) and later. Next year, the SSA intends to resume sending statements to Americans over age 60; it’s working on an online download option for everyone else.
If you need to estimate benefits for a client, the best bet for now is to use the SSA's excellent online Retirement Estimator tool.
Mark Miller is a journalist and author who writes about trends in retirement and aging. He has a special focus on how the baby boomer generation is revising its approach to money, careers and lifestyle after age 50.
Mark edits and publishes RetirementRevised.com, featured as one of the best retirement planning sites on the web in the May 2010 issue of Money Magazine. He writes Retire Smart, a syndicated weekly newspaper column and also contributes weekly to Reuters.com. He is the author ofThe Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living (John Wiley & Sons, 2010).
Click here to download a free chapter of The Hard Times Guide on How to Get the Most from Social Security.