Can You Count on Social Security?
Can You Count on Social Security?
The short answer? Probably. But there are legitimate reasons to be cautious. The most recent calculations show that the Social Security Trust Funds can continue to pay out full benefits until 2034, at which point only about 81% of benefits can be paid.
The bad news is that this is right around the corner. The can can’t be kicked down the road for much longer. To make matters worse, we already have a ballooning debt problem, so it’s not as if there is extra money to throw at this. Congress will need to act, there is no other way.
And that leads to more bad news which is that…congress has to act, and we all know how that usually goes. It will almost certainly need to be bipartisan as well, and that’s becoming more and more difficult to achieve.
However, there are some reasons to stay optimistic about a resolution. First off, there is still time. It’s inching closer and closer but there is time. Every member of congress is aware of the problem and they know at some point it must be addressed. More good news is that Americans of all political backgrounds receive social security. Independents, Republicans, Democrats; doesn’t matter. They have all been paying into it and if they’re at least 62, are receiving it or will soon be receiving it. In other words, both parties have a strong incentive to fix this issue, as leaving it unresolved would likely be costly in an election.
As the deadline draws nearer, I do believe we will begin to see some real motivation in congress to tackle this problem. It will become a louder and more frequent talking point in campaigns. There are simply too many Americans receiving or expecting their full social security benefits for it to be any other way.
How could they fix it? They’ll have multiple avenues to explore. They could extend the retirement age, they could increase the social security tax, raise the cap on taxable earnings, change the COLA adjustments; or some combination of the above. What exactly is done could depend on the political climate during that time, all we can say with certainty is either something will be done, or the benefits will drop almost 20%.
So how does this fit into your financial plan? Uncertainties are a part of planning, and it’s wise and prudent to plan for all possibilities. Let’s say that the issue isn’t resolved and the benefits you were expecting, or already receiving, do drop by 20%. You’ll have two ways of dealing with this: reducing your expenses by 20%, or making up the shortfall with your portfolio income.
Let’s illustrate this with a simple example. Meet Tom, who will be 67 in 2034. His estimated Social Security Income was $3,000, but turns out he will only be getting a little over $2,400 because the fund solvency issue was never fixed. He’s on a tight budget in retirement and doesn’t think he can spend $600 less every month without a big sacrifice in lifestyle.
His total monthly budget was $10,000, so instead of withdrawing $7,000 from his portfolio, he will need to withdraw $7,600. Put in annual terms, he will need to withdraw an extra $7,200 a year. Over a 23 year period (assuming a life expectancy of 90), that is an extra $165,600 he will need to withdraw that the IRS was supposed to provide him.
That may sound daunting, but with proper planning and strategy, this can be overcome fairly easily, either through investing more early on, taking on higher risk for higher yield, or perhaps through an income annuity to provide that extra $600 a month.
The main takeaway here is that this problem can be dealt with. Instead of using your time and energy worrying about the solvency of social security, use that time and energy to come up with a plan to overcome it.
Ryan Page, CFP®, MBA®
Office & Text:720-826-1092
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
