Social Security isn’t shattered, but it’s shaky.
The new report on Social Security, which predicts that the combined retirement and disability trust fund reserves will go broke in 2035, has put more Americans on edge, especially those nearing retirement who are worrying about how much in benefits they can expect.
The 2024 Social Security and Medicare trustees report projects insolvency one year later than last year’s estimate. That scarcely brighter outlook stems from the strong economy and wage growth, which has ramped up payroll tax payments that fund the program. For now, low unemployment has meant that more workers are adding to the program, even while a rising number of baby boomers begin to tap their benefits, the trustees said.
The potential depletion of the fund does not, however, translate to an empty till. There will still be money to pay benefits at that stage — though only 83% of what’s been promised to current and future beneficiaries. In other words, without a fix, beneficiaries could see a 17% cut in benefits.
“Congress is painting itself into a corner on fixing Social Security’s pending insolvency,” Mary Johnson, a Social Security and Medicare policy analyst, told Yahoo Finance. “Failure to act on the program in time would lead to automatic benefit cuts.”
How widely would that cut be felt? The program paid nearly $1.4 trillion in benefits last year to about 67 million Americans. For about half of seniors, Social Security provides at least half of their income, and for about 1 in 4 seniors, it accounts for at least 90% of income.
There are several solutions to fix the shortfall, including ratcheting up payroll taxes that fund the program, currently 12.4% split evenly by employees and employers. Other proposals include raising the retirement age for younger workers or lifting the cap on how much of a person’s income is subject to the Social Security tax. For 2024, the Social Security tax limit is $168,600.
Will Social Security be there for you?
One of people’s greatest retirement fears is a reduction in or elimination of Social Security in the future, according to research from the Transamerica Center for Retirement Studies. Seven in 10 people are concerned that Social Security will not be there for them when they’re ready to retire. And nearly 1 in 3 people rely on or expect to rely primarily on Social Security.
I talked to several experts about the advice they’re giving their clients on planning for Social Security as part of their retirement income. Here’s what they said:
1. Assume a reduced benefit
Many planners said they already account for Social Security’s potential shortfall with their clients.
“I tell clients that this is just the latest projection that there will be reductions in current and future benefits for retirees,” said Rob Williams, managing director of financial planning at Charles Schwab. “The date moves, and the amounts move slightly, but the story hasn’t changed — the projections aren’t that that suddenly benefits would stop, or Social Security would go away.”
Many workers, too, have thrown up their hands.
“In my conversation with clients, they’re already assuming that they’re not going to get anything from Social Security,” Alvin Carlos, a certified financial planner and financial adviser at District Capital Management in Washington, D.C., said in an interview.
“I try to set their expectations that they’re still likely to get three-fourths of their benefit. But I encourage them to save more in their 401(k), IRA, or brokerage account. And we recommend that most clients wait until 70 years old to start collecting Social Security. It’s basically an insurance against living until 95 or a hundred.”
“My younger clients, probably 50 and younger, discuss it jokingly, but I’m actually serious when we do our planning because I’ll tell them I’m not planning on getting Social Security,” added Alanna Morey, a certified financial planner with Private Wealth Advisor at Ameriprise Financial, in Naples, Fla. “So for those clients still in that accumulation phase, it’s really about planning to assume that it’s not really going to be a big part of your retirement picture. To me, it’s better to do it that way and be over-prepared than under-prepared.”
2. Save, invest, and don’t claim early
To reduce the stress you might have about whether Social Security will be there for you, take ownership by saving and investing, and start as young as you can, Williams added.
“The responsibility is on each of us to make a plan, then save and ideally invest to build a nest egg. Control what you can control — saving and investing are those things.”
All the planners I spoke with agreed that fears of losing Social Security could be a driver for people to file for benefits as soon as they’re eligible at age 62.
The problem: Claiming benefits early will drastically reduce your monthly check. It’s not advisable.
“News like Social Security running out and the emotions that we all face, it’s natural to then emotionally make a decision,” Williams said. “There is this feeling I hear from clients: ‘I want to get the money while I can before it runs out,’ or ‘I need to because they’re really going to mess this up.’”
A better course, he tells clients, is to think long term. “Stop, pause, step back for a moment, absorb those emotions, and then come up with a more reasonable plan that isn’t driven by emotions,” he said.
He suggests that people aim for their full retirement age. That’s 67 if you were born in 1960 or later. If you could wait until age 70, great. “That takes discipline, but the longer you wait, the higher benefit payment will last for the rest of your life,” he said.
3. Delay Social Security — only if you can
Waiting until age 70 is great advice for Americans who are in good health and have other sources of income.
But some people may have no choice out of necessity.
This week, I received an email from a reader who drove this point home for me. He had read my column about how most Americans expect to retire from full-time work at 62 and why I thought it was a terrible idea.
He wrote: “A lot of us do not want to retire early but have no choice. My story is typical of those of us working in the trades or other highly physical jobs in that we can no longer do the work we are doing due to physical decline. So we take our Social Security as soon as we are able. And many, again, like me, would like to go back to work but are told we are not qualified for anything but the jobs we just quit and are too old for starting positions in nonphysical types of work.”
He urged me to “take into account the numbers of people who do not have the luxury of working in an office their entire lives and have no choice but to retire early.”
He’s spot on.
Congress has less than a decade to fix the shortfall millions of Americans like this man face. Let’s hope they finally get serious.