I've had more client conversations about Social Security in the last few months than I can remember having in years, and it turns out I'm not the only one.
A new survey from the CFP Board, released just this week, found that 78% of certified financial planners said their clients are worried about the program's long-term viability. That's now one of the top financial concerns advisors are hearing about, right alongside healthcare costs and taxes.
So the question comes up almost every week: is Social Security even going to be around when I retire?
The short answer is yes. Here’s why everyone is talking about it now.
The Social Security Administration released its annual Trustees Report earlier this year, and the numbers moved in the wrong direction.
The retirement trust fund is now projected to run out of reserves in the fourth quarter of 2032, one quarter sooner than last year's estimate. That sounds alarming, but running out of reserves is not the same thing as running out of money.
Social Security is funded primarily by payroll taxes, and those taxes keep coming in every single payday, whether the trust fund exists or not. When the reserves are exhausted, payroll tax revenue alone will not be enough to cover 100% of scheduled benefits. According to the SSA's own projection, once the reserves are gone, the program would still be able to pay about 78% of scheduled benefits using ongoing tax revenue.
A roughly 22% cut is a far cry from Social Security totally vanishing, but it’s still a serious problem for a lot of households. The Center for Retirement Research at Boston College found that, for the lowest income group of retirees, Social Security makes up 83% of total income. Even in the middle of the income distribution, it still accounts for nearly half.
Congress has a handful of levers it could pull, and none of them are secret. They could raise taxes in targeted ways, push back the full retirement age, or change the formula used to determine cost-of-living increases. Some combination of these, most likely, rather than any single fix.
It’s likely that raising the full retirement age will be part of the solution. That's essentially what happened in 1983, the last time reform came down to the wire. Legislators have shown no real appetite to touch this issue years in advance, and I don't see much reason to think that changes before 2032.
What does this mean for you right now? For starters, don't build a retirement plan that assumes Social Security disappears, because that isn't what the data supports. At the same time, don’t assume that today’s benefit formula will still hold over the next several decades. The realistic middle ground is a plan that treats Social Security as an important, durable piece of retirement income, while making sure it isn't the only piece doing the heavy lifting.
Worrying about Social Security’s solvency isn’t a bad thing. It’s always good to think about your future financial needs. We tend to use these conversations with our clients as a way to springboard into their planning needs. I encourage you to use this opportunity to look at your own financial plan and determine how much you will be realistically impacted by changes to your benefits along with the rest of your resources for retirement.
Jennifer Horton, CFP, CTFA, is an executive vice president and financial adviser at CapWealth. For more information, visit capwealthgroup.com.
This article originally appeared on Nashville Tennessean: Are Social Security benefits running out? How to plan for retirement | Opinion
