Planning and Social Security

This year, some 45.5 million Americans will receive $63 billion in retirement benefits, according to the Social Security Administration. Of these recipients 65 years or older, 50% of married couples and 71% of unmarried persons depend on Social Security for more than 50% of their income. Indeed, all of our clients’ plans depend, to some degree, on Social Security for future or continued funding of their retirement needs.

According to the latest Board of Trustees report released in July of 2017, if nothing is done to address the problems, the Social Security Trust Fund will be exhausted in 16 years. To be clear though, exhaustion of the Trust Fund does not mean that retirement benefits will cease.

The trustees expect that benefits would be reduced to 77% of their prior-year levels once the trust funds are depleted in 2034. Obviously a drop of this significance would place severe hardship on the millions of Americans who depend on Social Security for the majority of their income. And it will have noticeable impact on many more.

The problem occurs largely because the huge number of Baby-Boomers retiring will draw benefits faster than they are being replaced by the smaller number of workers paying into the system. For decades there have been over three workers for every SS beneficiary, but that number is now down to 2.8 workers and will be 2.2 workers for every Social Security beneficiary in 2035.

In addition, retirees are living longer. In 194 the life expectancy of a 65-year-old was almost 14 years. Today it is over 20 years according to Social Security. By 2035 the number of Americans 65 and older will have increased from 49 million today to over 79 million.

The problem has to be fixed, but there seems little political appetite to do so. The Trustee Report suggests two solutions for Congress to consider. The first would be to be to reduce benefits. The reductions would be significant, according to the trustees. If Congress reduced benefits for both current and future beneficiaries, a 17% reduction would be required. Given the political fallout of reducing current income for retirees, it is more likely that only future beneficiaries would see a cut. In this case benefits would need to be reduced by 21%.

The other option would be to increase the payroll tax from its current 6.2% (12.4% with the employer’s portion added) to 7.59% (total tax 15.15%). The 2.75% increase would undoubtedly have detrimental economic impact further reducing the likelihood of action along these lines.

Another option not mentioned in the report would be that of means- or income-testing for Social Security. A precedent for doing so already exists in with the 2003 Medicare Modernization Act. This provision to increase the cost of insurance benefits applied only to high-income enrollees of Medicare Part B. In 2011, IRMAA was expanded under the Affordable Care Act to increase the cost of Medicare Part D for high-income enrollees as well. Social Security benefits are also taxed for beneficiaries when their provisional income rises above certain thresholds.

The most likely Congressional fixes will be the most voter-neutral ones, happening quietly or into the future for beneficiaries. These remedies might include raising the amount of earnings to which Social Security taxes apply, raising the retirement age, and reducing benefits for wealthier recipients through means-testing.

What is certain is that changes to Social Security are coming sooner or later. So it behooves us to remain vigilant and to include as a normal part of our planning process, the possible impact these changes might have on plans and lifestyle, until we know more.