The Issue
Earlier this month the Social Security program turned 80-years old, as the Social Security Act was signed into law by President Franklin D. Roosevelt on August 14, 1935. The program was never intended to be the primary source of retirement income for most people, but rather one leg of the three-legged stool of retirement security; the other two legs being pensions and personal savings. Unfortunately, traditional employer sponsored and funded pensions have steadily given way to defined contribution plans (i.e. 401(k) plans) for the past 35 years and the level of personal savings by most Americans is inadequate to help meet their retirement income needs. Consequently, Social Security income is becoming more important to a growing number of retirees with each passing year.
This increased reliance on Social Security benefits for retirement security is coming at a time when the Social Security trust funds are at an ever increasing risk of depletion. Per the table below from the Summary Report for the 2015 Social Security and Medicare Trustees Reports, The Disability Insurance (DI) Trust Fund is expected to be depleted in 2016, while the Old Age and Survivors Insurance (OASI) Trust Fund is predicted to last to 2035. Medicare Hospital Insurance (HI) is another area of concern, as that Trust Fund faces depletion by 2030.
Source: http://www.ssa.gov/oact/TRSUM/tr15summary.pdf
The Remedies
The looming depletion of the Social Security Trust Funds is certainly not a surprise to anyone, as the issue is closely monitored by stakeholders and administrators alike. There is no shortage of finger pointing and misinformation as the scenario unfolds, but in large part the situation is a result of the same demographic migration of the Baby Boomer generation that is affecting other areas of our society and economy.
There are simply fewer individuals that were born into Generation X (those born between 1965 and 1980) and Generation Y/Millennials (born between 1981 and 2000), and those thinner ranks of workers and entrepreneurs will be relied upon to help close the funding gap on Social Security program. Another key ingredient in this situation is that people are also living longer in retirement.
Steps have been taken in the past to shore up the Social Security and Medicare trust funds, including increased payroll taxes (last done in 1990), extending Full Retirement Age out to age 67 for those born in 1960 or later (1983), and the implementation of a tax on up to 50% of Social Security benefits with the tax revenue generated being allocated back to the OASI Trust Fund (1983). More change is needed, however, and here are some possible remedies that I believe we could see enacted in the future:
- Adjust the annual Cost of Live Adjustment (COLA) calculation, which is a step that 17 states took from 2010-2013 to help close the gap on their underfunded pension plans (http://crr.bc.edu/wp-content/uploads/2014/05/slp_38.pdf).
- Raise the Full Retirement Age to age 69 or even to age 70.
- Reduce the benefit amount for high income retirees through the application of a means test.
- Increase the payroll tax (currently 6.2% up to the earnings cap).
- Raise the earnings limit that the OASI and DI taxes are applied to (the 2015 cap is $118,500).
These ideas and more are being floated in the U.S. Congress every year (10 such proposals so far in 2015), and eventually something will come of it. With history as a guide, however, it is unlikely the “fix” for Social Security will come before the 11th hour.
The Janiczek Wealth Management Approach
We have always included any anticipated Social Security benefits as an inflating source of passive income in the Lifestyle Protection Analysis™ retirement scenario planning we perform with our clients, regardless of current age and when they would claim the benefit. So given our belief that Social Security solvency will be addressed in the coming years, we have turned our attention to helping clients in optimizing their benefits.
Maximizing the Social Security benefits for a couple in retirement can have a meaningful impact on the outcome of their Lifestyle Protection Analysis™ scenarios, and the decision of when to claim should be considered carefully. The rules are complex to begin with, and when you throw in the potential of Windfall Elimination Provision and Government Pension Offset reductions, the optimal claiming strategy becomes even more clouded. We now utilize a web-based tool to help guide clients on the decision well in advance of the time to claim benefits, and it is something we can use either in a stand-alone analysis or as part of the Wealth Optimization Plan™ that we periodically update with clients.
The message is simple…Don’t leave money on the table that you have earned over your lifetime. For those of you still faced with a Social Security claiming decision, let’s talk about it at our next Investment Review meeting.
