Why Advisers Should Think of Social Security as a Fixed Asset Class

When plan advisers, sponsors and financial advisers talk about retirement planning and income, they may be glossing over a key asset in the average U.S. worker’s retirement portfolio: Social Security.

For all the focus on financial wellness and financial education, only 13% of plan sponsors offer a Social Security optimization tool for participants, according to recent research by PGIM. Meanwhile, the retirement industry is not working enough with plan sponsors and participants to incorporate Social Security into basic retirement planning, says George Fraser, a senior partner in the Fraser Group, a division of BCG, an Alera Group company.

George Fraser

“There have been many people that have talked about Social Security as if it’s an entitlement—it’s not entitlement,” Fraser says. “Every single pay period, most people in this country contribute 6.2%, or 6.2 pennies out of every dollar, toward Social Security. And their employer does the same. So they start life with 12.4 pennies out of every dollar created for a pension—a check. And that’s the way we have to look at it.”

Fraser, who has long implemented a “pennies instead of percents” program through his advisory practice, has also been speaking with clients about the importance of Social Security in retirement planning. In a presentation he gives to plan participants, he hands out lottery tickets to make a point: “You’re not going to win the lottery, but you have already won a lottery ticket: Social Security.”

Fraser says that, in such presentations, participants often walk in questioning why they are there if they cannot even “afford to fix a flat tire,” let alone save additional income. The adviser says that, if he starts out that meeting allowing people to feel hopeless, it won’t go anywhere. Instead, he lets them know they will be going into retirement with a guaranteed check from Social Security of at a minimum of $1,000 a month, which over a roughly 20 year period amounts to about $250,000 in retirement income.

“Then I ask them, with that knowledge, ‘could you save maybe one or two pennies out of every dollar, starting now, and escalate a little bit every year?’” he says. “The success rate is 100%. I never have people turn it down. It’s just hopeful and optimistic, as opposed to fear and shame, which is where I think we need to be going with this.”

Fear Factor

While a majority of American workers are either investing in or receiving income from Social Security, many of the headlines are dominated by discussions of its potential cutbacks or even demise, particularly during political back-and-forths.

Recently, former President Donald Trump criticized Nikki Haley, until recently a rival for the Republican nomination for this year’s election, for suggesting an older retirement age to keep funding Social Security, criticism her campaign denied. On Thursday, during his State of the Union Address, President Joe Biden accused Republicans of considering cuts to Social Security and hikes to the retirement age—a similar charge he made in 2023. Republicans in attendance disputed the claims, as they did in 2023.

“I’ll protect and strengthen Social Security and make the wealthy pay their fair share,” Biden said in his remarks.

Social Security’s Old-Age and Survivors Insurance Trust Fund is projected to run through its reserves by 2033—at which time it would pay out about 77% of benefits if nothing is done to replenish it, according to government estimates.

Josh Cohen, managing director and head of client solutions for PGIM DC Solutions, does not think that should stop anyone from incorporating Social Security into retirement planning.

“There’s going to be Social Security,” he says. “It’s not going away, particularly for the current generation of retirees or near retirees. Even if the Social Security trust fund is exhausted in 10 years and Congress doesn’t make any changes, it will still pay out 75% of the benefits in the pay-as-we go system. … If people want to incorporate those haircuts, they can absolutely do so.”

But while Cohen believes plan sponsors and advisers should incorporate Social Security into retirement calculators and planners, PGIM’s researchers have found that many either do not factor it in or take an “overly simplified” approach that does not adjust to how people actually spend or what assets they have to bear on that spending.

“Social Security needs to be considered part of your total retirement picture,” he says. “For many Americans, it is very meaningful, if not almost solely their source of retirement income, particularly among lower-income Americans.”

Fixed Asset

For his part, adviser Fraser is often amazed when industry experts, policymakers or trade publications— including PLANADVISER—write about Social Security as an “entitlement” that may be taken away.

“I think there’s a domino effect,” he says. “Why have we not, as an industry, spoken more favorably about Social Security? I think it’s because it is about creating fear to make people save more in their 401(k) or their 403(b). I think fear is a terrible motivator. The idea that any politician ever suggests that they are going to reduce Social Security or take it away is political suicide. We would just never end up there.”

He also points out that, when people get concerned with market volatility or the ups and downs of their retirement savings, it is important to remember that “fixed asset” of Social Security will be there as a consideration in investment planning.

“This needs to be looked as an asset class,” Fraser says. “Plan sponsors are concerned that peole aren’t saving enough. But the bottom line is that they do start with something. Accounting for Social Security allows people to make more appropriate choices within their plan if they see it as an asset class that will not go down in value.”

For those making more who can use a bridging strategy, he notes, it will be an even larger sum to consider as part of their portfolio. Because of that lack of guidance, he says, 73% of people leave money on the table, and the average person leaves about $184,000 on the table that they do not receive because they do not have a strategy for Social Security.

“Social Security today, because we do a bad job as advisers, because of politicians, because of the media … advisers tell people that it may not be there for them,” he says. “Instead, our job should be to educate on Social Security. It should be the cornerstone of every financial wellness program.”