In Practice September 24, 2024

Social Security: Beyond the Headlines

The third story in this quarter’s PLANADVISER In-Depth considers the current state of Social Security.

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Concerns over the state of Social Security have long been running rampant, and not without reason: This year, an average of 68 million Americans per month will receive a Social Security benefit that will add up to roughly $1.5 trillion for the year, according to the Social Security Administration.

The worry over dwindling benefits stems from the state of Social Security’s Old-Age and Survivors Insurance Trust Fund, which is expected to only be able to pay full benefits until 2035 by the most recent update. As if that date were not close enough, the administration updates the forecast every year, some years moving it even closer.

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The uncertain future of the benefit so many Americans rely on has some wondering: Is the sky really falling on Social Security, or are the heightened concerns a fear tactic used for various purposes, including to drum up business among retirement and investment providers?

Social Security Update

While the exhaustion of the trust fund that pays out Social Security is worrisome, it does not mean the benefit is going bankrupt. There are multiple sources of funding for Social Security, including Federal Insurance Contributions Act payroll taxes. But 2021 marked the first year that it was necessary to start drawing down on Social Security reserves, and that will continue until the fund is exhausted. After that, the program will only be able to pay 79% of scheduled benefits, according to the administration.

“Congress has a decade still to take some action,” says Mary Beth Franklin, a Social Security expert and head of RetirePro LLC. “Unfortunately, from the lawmaker standpoint, they love to keep kicking this down the road.”

The longer you kick that can down the road, the more options for the future of Social Security that go away, she adds. For instance, some of the money from the trust fund is invested in “special issues” of the U.S. Treasury, which pay about 2.4% interest. While there had been calls to invest that money in the stock market instead, if the trust fund goes to zero without action from Congress, there will not be money to invest.

Other potential changes, like increasing the age at which people can take Society Security or removing the cap on how much of earnings can be taxed, would only help a little, Franklin says. Realistically, there will have to be a combination of these—and other—moves.

How Fearful Should Savers Be?

Despite headlines that Social Security is going to disappear, experts say it likely will not. As Franklin points out, there is still time for legislators to act, and even if the reserves are exhausted, nearly 80% of benefits will continue to be paid out.

Does that mean there are some fear tactics being used so that people will put more money in their retirement plans?

“There’s no question that’s the case from our industry,” says George Fraser, a senior partner in the Fraser Group, a division of Benefit Commerce Group, an Alera Group company. “I don’t think that providers, advisers and investment managers spend nearly enough time talking about the base of Social Security and how important it is to most people in this country.”

The data backs that up: Only 13% of plan sponsors offer a Social Security optimization tool for participants, according to research by PGIM published last year.

Fraser is not alone in his belief that Social Security should be considered a fixed asset class, not a luxury for older Americans alone. Josh Cohen, managing director and head of client solutions for PGIM DC Solutions, told PLANADVISER earlier this year that Social Security is not going away and “needs to be considered part of your total retirement picture.”

Even so, the fears of Social Security being depleted are unlikely to leave the national conversation. In a recent survey, the National Institute on Retirement Security found that 90% of Americans say it is important for the next government leaders to solve the Social Security financial shortfall.

Employer’s Role in Maximizing Social Security

A recent survey from Charles Schwab of 1,000 U.S. 401(k) plan participants showed that while confidence in Social Security may be waning, participants still expected it to make up a significant portion of income in retirement: 22%, according to workers who are 10 years from retirement, compared with 37% of the income they expect to come from their 401(k)s. Younger workers—those who 11 years or longer from retirement—expect just 13% of their income in retirement to come from Social Security, compared with 45% from retirement savings.

“One of the best things people can do is have that level of planning done,” says Marci Stewart, head of client experience at Schwab Workplace Financial Services. But employers also play an important role, especially considering a significant share of workers are using health savings accounts and company stock plans to save for retirement, according to Schwab’s study.

Exploring those benefits can help people do the planning that’s necessary and cover any shortfall if there is one, Stewart says. Employers can also engage employees in financial education to provide clarity on Social Security and its misconceptions, including specifics of how benefits become diminished the earlier they are taken.

Because there are ways to maximize Social Security so that—shortfall or no shortfall—savers can make the most of it. The first step is to make savers understand what their checks will actually look like, Fraser says. You can check the estimated amount of your benefit via the Social Security Administration’s website, multiply it by 12 to see what you will receive in a year and multiply that by 20 to see how much you can expect over a 20-year retirement. This provides a baseline; then you can start making practical changes to a plan as needed.

“Married couples have the most options,” Franklin says. “They should think of claiming Social Security as a household decision, rather than two individual decisions.”

She usually tells married couples that the spouse with the bigger benefit should wait until age 70 to claim their benefit while the other spouse claims reduced benefits early to bring some income into the household.

For some people, it can also make sense to draw down on their 401(k) or individual retirement account first, so they can snag a bigger benefit later, Franklin adds.