#socialsecurityanalysis

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By:  Michael Allbee, CFP®, Senior Portfolio Manager

Social Security isn’t in danger of going broke since it’s financed primarily through payroll taxes, but the financial health of the Social Security trust fund is declining, and benefits may eventually be reduced unless Congress acts. The Social Security Board of Trustees has estimated that its trust fund has reserves to pay all scheduled benefits only until 2033. If Congress fails to act to shore up the system, benefits could be cut indiscriminately by 23%. This would equate to a $420 monthly reduction in the average monthly Social Security check ($1,827) for a retired worker.

The basic problem with the financing of Social Security is one of demography. Beneficiaries are living longer, while low fertility rates mean that fewer people have been entering the labor force over time. If there is a will by Congress to engage in serious discussions, there is a path to putting worries about the long-run viability of the program behind us. It was done before in 1983 with the support of both political parties – Congress enacted changes that fixed about two-thirds of the long-run funding requirements estimated at the time.

Many options have been proposed and combining some of these may help soften the impact of any one solution. For example, the Committee for a Responsible Federal Budget (CRFB) estimates that raising the retirement age by two years to age 69, and then indexing it to longevity, would close 39% of the 75-year funding shortfall. Or the CRFB has estimated that if, instead, all wages were subject to the Social Security payroll tax (instead of the first $160,250 in wages), 63% of the long-run funding gap could be closed. Here is an interactive tool to see how you can fix Social Security.

Tampering with Social Security has always been considered political suicide because of the political clout of seniors, but consider this: those considered Millennials and younger (born after 1980) will outnumber the rest of the older voting population (mostly baby boomers) around the 2028 election and will subsequently get relatively bigger and bigger. With intergenerational inequality at near record highs, Congress may want to stop kicking the can down the road sooner than later.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Tina Schackman, CFA®, CFP®, Senior Retirement Plan Consultant

With approximately 94% of American workers covered by Social Security and 65.2 million people currently receiving benefits, keeping Social Security healthy is a major concern.¹ Social Security isn’t in danger of going broke since it’s financed primarily through payroll taxes, but the financial health of the Social Security trust fund is declining, and benefits may eventually be reduced unless Congress acts.

This could be a reason so many U.S. workers are asking whether they should take Social Security benefits as soon as they turn 62. In fact, in 2021, 25% of men and 27% of women filed for their Social Security benefits when they turned 62, but is this the right strategy for you? Well, it depends on your specific situation. There are many variables that can help or hurt your outcomes when it comes to maximizing your benefit. Let’s walk through a sample client to illustrate a specific Social Security filing recommendation. 

The graph below shows the percentage of the FRA benefit you will receive, but it’s important to note there can be adjustments if you have earned income while claiming your Social Security benefits.

Another question that came up in this example was if John could invest his Social Security benefits into an IRA or Roth IRA. Because Social Security benefits are not considered earned income, they cannot be used to make contributions into your IRA accounts; however, John and Sally can both make contributions into their IRA accounts with their earned income. 

Everyone’s situation is going to be different, especially when there is a spouse involved, so it’s best to speak with an advisor or call the Social Security Administration office to understand your options. And we highly encourage you to do this well in advance of turning age 62 so you can have a well-thought-out strategy for your retirement. 

Footnotes:

1. Source: www.ssa.gov (December 2021)

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

With approximately 94% of American workers covered by Social Security and 65 million people currently receiving benefits, keeping Social Security healthy is a major concern.¹ Social Security isn’t in danger of going broke — it’s financed primarily through payroll taxes — but its financial health is declining, and benefits may eventually be reduced unless Congress acts.

Each year, the Trustees of the Social Security Trust Funds release a detailed report to Congress that assesses the financial health and outlook of this program. The most recent report, released on June 2, 2022, shows that the effects of the pandemic were not as significant as projected in last year’s report — a bit of good news this year.

Overall, the news is mixed for Social Security

The Social Security program consists of two programs, each with its own financial account (trust fund) that holds the payroll taxes that are collected to pay Social Security benefits. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. Other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation) is also deposited in these accounts.

Money that’s not needed in the current year to pay benefits and administrative costs is invested (by law) in special government-guaranteed Treasury bonds that earn interest. Over time, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits, and these reserves are now being drawn down. Due to the aging population and other demographic factors, contributions from workers are no longer enough to fund current benefits.

In the latest report, the Trustees estimate that Social Security will have funds to pay full retirement and survivor benefits until 2034, one year later than in last year’s report. At that point, reserves will be used up, and payroll tax revenue alone would be enough to pay only 77% of scheduled OASI benefits, declining to 72% through 2096, the end of the 75-year, long-range projection period.

The Disability Insurance Trust Fund is projected to be much healthier over the long term than last year’s report predicted. The Trustees now estimate that it will be able to pay full benefits through the end of 2096.  Last year’s report projected that it would be able to pay scheduled benefits only until 2057. Applications for disability benefits have been declining substantially since 2010, and the number of workers receiving disability benefits has been falling since 2014, a trend that continues to affect the long-term outlook.

According to the Trustees report, the combined reserves (OASDI) will be able to pay scheduled benefits until 2035, one year later than in last year’s report. After that, payroll tax revenue alone should be sufficient to pay 80% of scheduled benefits, declining to 74% by 2096. OASDI projections are hypothetical, because the OASI and DI Trust Funds are separate, and generally one program’s taxes and reserves cannot be used to fund the other program. However, this could be changed by Congress, and combining these trust funds in the report is a way to illustrate the financial outlook for Social Security as a whole.

All projections are based on current conditions and best estimates of likely future demographic, economic, and program-specific conditions, and the Trustees acknowledge that the course of the pandemic and future events may affect Social Security’s financial status.

Many options for improving the health of Social Security

The last 10 Trustees Reports have projected that the combined OASDI reserves will become depleted between 2033 and 2035. The Trustees continue to urge Congress to address the financial challenges facing these programs so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public.  Many options have been proposed, including the ones below. Combining some of these may help soften the impact of any one solution.

• Raising the current Social Security payroll tax rate (currently 12.4%). Half is paid by the employee and half by the employer (self-employed individuals pay the full 12.4%). An immediate and permanent payroll tax increase of 3.24% to 15.64% would be needed to cover the long-range revenue shortfall.
• Raising or eliminating the ceiling on wages subject to Social Security payroll taxes ($147,000 in 2022).
• Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
• Raising the early retirement age beyond the current age of 62.
• Reducing future benefits. To address the long-term revenue shortfall, scheduled benefits would have to be immediately and permanently reduced by about 20.3% for all current and future beneficiaries, or by about 24.1% if reductions were applied only to those who initially become eligible for benefits in 2022 or later.
• Changing the benefit formula that is used to calculate benefits.
• Calculating the annual cost-of-living adjustment (COLA) for benefits differently.

A comprehensive list of potential solutions can be found at here.

Sources:

1) Social Security Administration, 2022

Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Paul Horn, CFP®, CPWA®, Senior Financial Planner

Deciding when to claim Social Security benefits will have a permanent impact on the benefit you receive. Claiming before your full retirement age (66-67 based on birth year) can significantly reduce your benefit, while delaying increases it. More than ever, we are seeing more individuals not collect their Social Security until they receive their full benefits.

Some clients when they go to file, find out that they have the opportunity to get a large paycheck from Social Security by receiving what is known as a retroactive benefit. When most people hear this, they will jump on the opportunity because who doesn’t want a nice windfall like that? While receiving a large check is appealing what is not discussed is the dangers of choosing this option.

How the retroactive benefit works

The retroactive Social Security benefit allows an individual to choose to start social security six months before the day they claim benefits and by doing so they will receive a one-time check for those 6 months of benefits. The danger of this strategy is that you are going to receive a smaller paycheck for the rest of your life.  A retroactive check is only available to those that claim benefits on or after their Full Retirement Age (FRA). You can look at the chart below to see what age this is for you:

Example

Sally will be 67 and a half in August and is looking to start her Social Security. She speaks with Social Security, and they offer her the option to take the retroactive check and begin collecting as though she was 67. If she takes the benefit at 67 and gets the retroactive check, she will receive monthly benefit of $3,000. If Sally decides to start the benefits at 67.5, she will receive $3,120 a month instead. This difference is small but can add up over retirement. Below is a chart showing the total amount from Social Security she would receive from each option:

What we see from this chart (far right column) that if Sally lives past age 80, she will receive more benefits over her lifetime by not selecting the retroactive benefit. With that being said, she only will receive an additional $14,400 over her lifetime.

What is the best decision for me?

The decision of taking a retroactive check from Social Security is ultimately a personal one. If longevity is in your family, it can be beneficial to not take the retroactive option since it reduces your Social Security benefit. However, the difference is not that large in the grand scheme of things so it is up to you on how you choose to proceed.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.