Some headlines are sure to draw eyeballs. Case in point, each time the Social Security Administration issues its annual report, there will be a series of articles discussing the fact the that the Social Security trust fund will run out of money. The attention is especially likely in years like this one where the time frame of the trust fund’s solvency is shortened. Headlines starting with “Social Security is projected to be insolvent…” and “Social Security reserves estimated to be depleted…” can induce fear about whether you will get any return for the Social Security taxes taken from your check.
Is this much ado about nothing?
This isn’t to say you shouldn’t pay any attention to news about Social Security. There is good reason to periodically revisit and understand what is going on with the program. (We have touched on this subject in past blog posts.) Social Security’s funding status is something you will want to monitor to determine if changes to how the program is funded and distributed will affect you.
The issue I see is that, I have heard people on social media and the radio interpret it to mean that Social Security is bankrupt or that the program will disappear. That is not the case. I believe the Social Security Administration statement about its situation is the clearest so I will just quote it directly here.
“The Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, will be able to pay scheduled benefits on a timely basis until 2033, one year earlier than reported last year. At that time, the fund’s reserves will become depleted and continuing tax income will be sufficient to pay 76 percent of scheduled benefits.”
How should I plan for Social Security?
Because I coach clients on retirement planning and have my own post-2033 retirement plan to think about, this information is helpful. When running a retirement calculation for myself, here are a few things I look out for:
· For those who have retirement scheduled to start after 2033, I would run a modified estimate of my Social Security benefit. I usually use an estimate of 70-75% of the projected benefit for myself. I don’t believe there would be a crude cut of benefits at that time, but it gives me reassurance that I am not overestimating what will be there. You can then input this number into your retirement calculations to see if you need to save more to reach your goals.
· Assume Social Security income will start later. The Social Security full benefits age was 65 for many years before it was previously extended to 67 to shore up benefits. I think there is a good chance this will happen again. This may also require additional retirement savings.
· If you planned exceptionally well for retirement, you may want to keep an eye on the debate regarding means testing. In this scenario, benefits may be cut more for higher income retirees. Once again, you may need to save more to make up for the lost income.
I have heard clients suggest they would take Social Security benefits at age 62 in anticipation the benefit will be reduced. You know your situation best, but because taking Social Security early can permanently lower your benefits by about 25%, it may negate avoiding a possible cut in benefits. (Collecting it early may still be beneficial if you have a short life expectancy or don’t have enough retirement savings to delay.) I personally doubt there will be a cut in the benefit for those who are already receiving Social Security benefits because of the potential political fallout for all involved. Social Security has been called the 3rd rail of politics, meaning to speak of cutting it at all is precarious.
The overall key is not to panic but to use the information to plan. Make sure you’re still on track for retirement with a potentially reduced Social Security benefit and consider consulting with a qualified and unbiased financial planner to figure out what you can do. See if your employer even offers access to one for free through a workforce financial wellness program. Just because Social Security is having financial problems, doesn’t mean you need to.