Financial Planning – Social Security is still in trouble. What should advisors tell their clients?
The latest numbers are in, and Social Security is still drifting toward insolvency — just slightly less rapidly than it was last year.
On Tuesday, Social Security’s board of trustees released its 2024 report on the program’s finances, and they’re precarious. By 2035 — one year later than projected last year — the trust funds for the Old-Age and Survivors Insurance and Disability Insurance programs are on course to become depleted, and will only be able to pay out 83% of scheduled benefits.
As it did last year, that insolvency date puts Social Security on a collision course with America’s looming “gray tsunami.” By 2030, according to the U.S. Census, all 73 million baby boomers will have reached retirement age, potentially putting enormous strain on the program.
For retirement advisors, all of this raises a question: Can their clients count on getting Social Security when they retire? Somewhat surprisingly, many advisors say the answer is yes.
“I tell my clients, even the youngest, to plan on it being there for them,” said Larry Luxenberg, owner of Lexington Avenue Capital Management in New York City.
Joseph Boughan, owner of Parkmount Financial Partners in Scituate, Massachusetts, is also optimistic.
“I would say for people that are planning to retire and close to it, it is best to assume that they will get the benefits,” Boughan said. “The government is highly unlikely to just default on their obligations.”
Why are advisors so sanguine? Many attribute their confidence not to a deep faith in Congress, but to a simple political calculation: No lawmaker can afford to let Social Security die on their watch.
“At any time, cutting current benefits by 17% will be the last act of any politician who is involved with it,” said Dennis Hunt, a senior financial advisor at Moisand Fitzgerald Tamayo in Melbourne, Florida. “As it turns out, the folks who receive Social Security are also the ones who vote.”
If Congress does someday take action to shore up Social Security’s finances, a number of potential solutions are available to it. On the revenue side, lawmakers could remove the limit — or “scrap the cap” — on the Social Security taxes paid by the ultrawealthy. On the benefit side, Congress could once again raise the full retirement age for future generations, meaning Americans would collect less money over the course of their lifetimes.
But as many advisors pointed out, none of these solutions is likely to be attempted any time soon. Judging by Congress’ recent habit of tiptoeing to the brink of government shutdowns only to pass a stopgap spending bill at the last minute, legislators may not address Social Security until much closer to 2035.
“Congress is highly likely to fix Social Security but equally likely to wait till a true deadline looms before it does so,” Luxenberg said.
In the meantime, some clients do worry about the future of the program and whether they’ll be able to rely on it for part of their retirement income. How should planners address their concerns?
Chris Diodato, founder of WELLth Financial Planning in Palm Beach, Florida, has found that some of his older clients are the most anxious about Social Security. Some, he said, even insisted on collecting benefits at age 62 — the earliest possible age to file, incurring the smallest possible payouts — because they feared the program wouldn’t last much longer.
For such clients, Diodato recommends gaming out some of the worst possible scenarios.
“I encourage clients to run their plans as if they cannot take full benefits before age 70 or early benefits before age 65,” he said. “Increasing income tax rates throughout the plan is also a good way to try and account for future legislative risk.”
Other investors may wish to see a sliding scale of possibilities. Andrew Herzog, a wealth advisor at The Watchman Group in Plano, Texas, lets his clients decide which assumptions to make.
“As the default option, we leave Social Security benefits at 100%,” Herzog said. “However, we ask each client if they feel comfortable with that assumption, or if they would like us to reduce benefits in order to be more conservative in the planning.”
Other planners say their clients simply aren’t worried about the program.
“All in all, clients aren’t stressed about it,” said Jeff Farrar, co-founder of Procyon Partners in Shelton, Connecticut. “It’s not like a wolf at the back door. It’s more like termites in the basement — a longer-term problem that can be solved ‘later.'”
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