A recent report by The Wall Street Journal suggested that an increasing number of Americans are claiming their Social Security benefits early due to fears over the program’s financial solvency.¹  In these instances, there are scenarios in which they may maximize their benefit.

These fears were heightened by the latest annual report issued by the Social Security and Medicare Boards of Trustees, in which it stated the Old-Age and Survivors Insurance Trust Fund—which pays retirement and survivors benefits—will only be able to pay scheduled benefits on a timely basis until 2034. After that, the fund’s reserves will become depleted and the continuing tax income will be sufficient to pay just 77% of scheduled benefits.²

Reforming Social Security

Social Security has faced funding crises in the past and elected leaders have always arrived at solutions, albeit temporary ones, to extend funding. These solutions have centered on raising the contribution rate, the income ceiling subject to the Social Security contributions and the age at which full retirement benefits commence.

It comes as no surprise then that many reform proposals under consideration today involve some form of higher taxes or reduced benefit payments. Among the more notable proposals are:

• Reducing cost-of-living adjustments (e.g., by 1% or change the CPI measured used to compute the COLA increase)
• Adjusting the Primary Insurance Amount (PIA) by inflation rather than by the Social Security Administration (SSA) average wage index (here are a number of other proposals that affect/reduce the PIA); this could be done on an across-the-board basis or in a progressive fashion that leaves the lower income beneficiaries unaffected and the higher income beneficiaries subject to indexing
• Reducing Social Security benefits paid to individuals whose modified adjusted gross income (MAGI) is above $60,000 (single) or $120,000 (married), with a phased-in reduction capped at 50% when MAGI reaches $180,000/$360,000
• Raising the full retirement age to anywhere from age 67 to 70 starting for those age 62 in 2022, as well as reducing spousal and other family member benefits

Adjusting Retirement Plans

Many members of younger generations are not confident Social Security will be there when they’re ready to retire. If that’s the case with younger clients, they should consider eliminating it from their retirement plan projections to better ascertain what level of individual savings will be required to meet their retirement income goals.

For near-retirees, a reduction in benefits is a looming possibility. For such clients, it may be useful to rerun their retirement plans with a lower Social Security income stream to see how it may impact their financial security in retirement, and what measures (e.g., working longer) best mitigate the risk.

While an adjustment of retirement plans may be in order, what younger generations can immediately consider is the value of employee benefits … of which retirement plan matching should be looked at.  There is no crystal ball for what the future holds in store for Social Security, but it does appear that things will continue to shift with the program, as has been the case for a number of years.

Sources:

1. https://www.wsj.com/articles/social-security-benefits-early-future-1fd0fdf2?mod=Searchresults_pos1&page=1
2. https://www.ssa.gov/OACT/TRSUM/index.html

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