Social Security Upcoming Challenges, Decisions and Actions

According to a survey by Bankrate, “61 percent of Americans don’t know how much money they’ll need to save for retirement, including nearly three-fifths of every adult generation over age 37”

Since 2011, members of the Baby Boomer generation (born between 1946-1964) are turning age 65 at a rate of 10,000 per day; and this rate is expected to continue until 2030. It’s important to note that individuals eligible for social security may differ on when they decide to start collecting on their Social Security benefit. The option to participate begins at age 62 with an approximate 30% reduction in monthly benefit versus waiting to full retirement age (FRA). For those who wait to collect past their FRA, the monthly benefit increases by 8% each year to age 70. As reported in the June 2018 AARP Bulletin by Kenneth Terrell, 16.5% of Americans retiring in 2020 will receive a monthly Social Security check. By 2040, the number of recipients will be 20.9%.

The Reality of Social Security Finances

Mary Beth Franklin reported in Investment News, “The combined reserves of the Social Security trust funds are expected to be depleted in 2034, the same time frame projected last year, according to the latest annual report from the Social Security and Medicare Board of Trustees”. Despite the unsettling news that the “Trust Fund” may be out of capital by 2034, the news may not be cataclysmic. According to Matthew C. Klein’s article in Barron’s, “Money is the one thing the US federal government will never run out of … There in no intrinsic reason why the system could not “borrow” from the Treasury forever after the trust fund is extinguished” [if allowed by law].

As the population ages and begins to collect their rightful benefits, the challenge will remain as to what the government suggests and enacts to protect Social Security and other promised benefits, i.e. Medicare. Kicking the can down the road has been exhausted; the benefits system must be examined objectively to protect promised funds. Klein added, “By the end of this century, about 28% of Americans are expected to be at least 65 years old.”

Nationwide Retirement Institute® recently released its Nationwide Social Security 5th Annual Consumer Survey, April 2018. The report is chock full of timely information which should be reviewed by anyone contemplating retirement. Four out of five future retirees agree that the Social Security system is in need of change. Many are fearful that benefits will be reduced and are not aware of the basics of their eligibility, participation and monetary benefits of their Social Security profile. Sadly, 55% believe that Social Security will be their primary source of income in retirement. Compounding this angst is the anticipated reality that if the “Trust Fund” is depleted by 2034, payroll taxes will only fund 77% of Social Security benefits. This will further stress recipients if they start receiving 23% less in their Social Security monthly checks. The effects on an already overburdened, under-funded government system can be potentially catastrophic.

These five free Social Security calculators can help with decision making:

• AARP’s Social Security Benefits Calculator
• Social Security Administration's Retirement Estimator
• Financial Engines Social Security Retirement Calculator
• The Consumer Financial Protection Bureau’s Planning for Retirement
• The Center for Retirement Research at Boston College's Target Your Retirement

Suggested Fixes

The Social Security Board of Trustees is charged with managing the “Trust Fund”. Economic and actuarial interest rate assumptions are made to meet these trust needs. However, the assumptions may not necessarily match those of governmental agencies, such as the Congressional Budget Office or White House Office of Management and Budget. Unfortunately, the real results are not known until after the data is fully analyzed. The reality of not meeting set goals can have a negative result on expected returns, resulting in shortfalls. Klein added, “The economic gimmick of the ‘trust fund’ allows for regular transfers from the rest of the federal government through the payment of interest on special US Treasury bonds.”

As they have done in the past, legislation can be passed changing the FRA from 67 year (individuals born before 1951) to a higher number. Currently, workers contribute to Social Security via payroll taxes, with a maximum earned limit of $128,400 subjected to the tax. Raising either, or both, the tax percentage or the maximum earned amount would bring increased funding, but with expected taxpayer pushback.

Romina Boccia stated additional steps may inadvertently burden “younger generations with higher taxes or unsustainable debt. Lawmakers should immediately replace the current COLA [cost of living adjustment] with the more accurate chained CPI [consumer price index], focus Social Security benefits on those who need them most, and enable more Americans to save for the future in private retirement accounts”.

Expect the Best and Plan for the Worst

Employee Benefit research Institute (EBRI) released their 2018 Retirement Confidence Survey and reported:

• Retirees are less confident than they were last year that they will have enough for basic expenses, medical expenses or long-term care.
• Confidence that Social Security and Medicare will continue to provide benefits equal to what retirees receive today has decreased.
• Retiree confidence in Medicare and Social Security has dropped compared to previous years — fewer than half feel confident in these systems.
• Retirees today are more likely to say their health care costs are higher than what they expected when they first retired.
• 2 in 3 retirees say they thought about how the age at which they claim Social Security can impact their benefit amount.
• Only about half of retirees say a workplace retirement savings plan has been a source of income in retirement.
• Just 1 in 5 workers and 4 in 10 retirees say they have calculated how much money they will need to cover health expenses in retirement.

Compounding the lack of knowledge around retirement and finances, Bankrate recently reported, “61 percent of Americans don’t know how much money they’ll need to save for retirement, including nearly three-fifths of every adult generation over age 37”. To make matters worse, Bankrate further noted, “Even among those non-retirees who are saving, three-fifths have little or no comfort managing their investments in products like a 401(k).”

There Is a Solution

Time can be a friend or nemesis; it depends on when the journey begins. It is apparent that most retirees have failed to plan and will meet with financial challenges in retirement. Lack of goal setting and not being proactive are evident. The ability to catch-up with necessary assets late in a career and age become insurmountable for most.

The importance of handling cash flow and expenses correctly early in one’s career should be a priority. In other words, taking positive steps to improve financial health early on and developing good habits will allow you to have the where-with-all when needed. If help is required, consider consulting with a knowledgeable fiduciary professional such as a Certified Financial Planner™.

Much can happen in the next 16 years until 2034. Despite the inherent challenges facing Social Security, it remains incumbent on an individual to do their due diligence with financial planning — maximize savings and minimize spending. This may involve self-control and going on a financial diet. Terrell sums it up best, “Whatever path Congress ultimately pursues, Social Security advocates urge voters to make sure they get real answers from politicians.” Empty words and promises just kick that can further. The road is almost at its end, as is most constituents’ patience. Don’t become a statistic.

At a minimum, plan to have Social Security as a secondary source of income versus the primary source it has become for so many. Strategize accordingly to have what you will need when you retire, no matter what Social Security may look like in the future.

Dr. Wolfson is a financial consultant and advisor. He retired after 27 years of active chiropractic practice. Dr. Wolfson can be reached at (631) 486-2792 or drhwwolfson@gmail.com. View more published articles here.

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