The future of Social Security, which faces a funding crisis in the coming years, keeps many people up at night.
Thank you for reading this post, don't forget to subscribe!If Congress doesn’t act, beneficiaries are looking at steep cuts in about 10 years. The trust fund that backs Social Security will be insolvent in 2033, which will mean benefits for current and future recipients will be slashed by 23%.
For the average retiree, that would mean hundreds of dollars a month in lost income — making the situation of many older adults who rely on the benefit to stay out of poverty even more precarious.
This looming deadline shouldn’t come as a surprise to anyone: The last time significant changes were made to Social Security was in the early 1980s, and the impending benefit cuts have been telegraphed for years.
Many financial planners and industry analysts are confident Congress will act in time to save the program. They say no politician wants to be known for gutting a crucial benefit to which nearly every working American is entitled.
But as the years pass, concerns about legislative cooperation grow. If benefits were indeed cut by 23%, is that something that a typical investor could plan for?
“Re-creating an income source that rises with inflation and lasts as long as you live — it’s a valuable benefit and expensive to replace,” said Rob Williams, managing director of financial planning at Charles Schwab.
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Social Security is crucial for many retirees. Half of the U.S. population 65 and older live in households that receive at least 50% of their income from Social Security benefits, and about 25% of older households rely on Social Security benefits for at least 90% of their income, according to the Social Security Administration.
“I think it’s very important to plan for a potential shortfall in Social Security funding. If the forecast 20% reduction materializes in or around 2033, it would have a significant impact on most retirees and those approaching retirement,” said Brian Cody of Cody Financial Advisors in Gillette, N.J.
How much would a worker need to save each year to offset a potential Social Security cut? That’s a complicated question, and the answer depends on how many years you have left until retirement and on your current salary and expected benefits.
For example, a worker earning roughly $100,000 a year today would anticipate about $34,000 a year, or roughly $2,800 a month, in Social Security benefits. That worker would need to save and invest about $16,000 per year for 10 years to make up for a potential 20% cut in benefits that would increase with inflation over a 30-year retirement, Williams said.
“If you have five to 10 years to retirement, that can be a lot to come up with. If you’re younger, the more time you have to save and the more you can take ownership over your financial future,” Williams said. “The decimal point is less meaningful than it being a responsibility that’s yours and yours alone — it’s a responsibility I have in America to save for retirement.”
A drop in Social Security benefits, however, would put a strain on many current retirees’ budgets.
Without any Social Security benefits, 37.7% of older adults would have incomes below the official poverty line — but with Social Security benefits, only 10.3% currently do. The benefits lift 15.4 million older adults above the poverty line, according to the Center on Budget and Policy Priorities, a nonpartisan research organization.
“Social Security is particularly important for older women and people of color, who have fewer retirement resources outside of Social Security. Depending on their design, reductions in Social Security benefits could significantly increase poverty, particularly among older adults,” the CBPP said.
In another example, based on the current average monthly Social Security benefit of $1,789 and the average annual cost-of-living adjustment of about 3%, that payment would be about $2,476 in 10 years, according to Billy Voyles, president of Fundamental Wealth Designs in Minnesota.
If Social Security dropped to a roughly 80% payout, that would equal a $495 drop in monthly income for the average beneficiary, or about $6,000 a year, Voyles said. To replace that income, you would need an additional $150,000 in savings if you were withdrawing 4% annually, Voyles said.
For some, saving that kind of money may be an insurmountable task. Nearly half of families have no retirement savings at all, according to the Economic Policy Institute. The average American has $65,000 in retirement savings, according to the Federal Reserve.
“What I’ve found is that most people at or near retirement age feel pretty confident in maintaining their [Social Security] benefits. However, younger folks seem to already consider Social Security dead in the water. I certainly wouldn’t rely on benefits, and banking on any government assistance is never a wise strategy,” said John Loyd, a financial adviser in Fort Worth, Texas.
“Typically, for younger clients, I will ask if they are OK if I do not factor [Social Security] into financial-planning calculations. Most of the time they agree, and if they do happen to get some form of benefit — I think they will — it will just be icing on the cake,” said Loyd.
To get a clear picture of your future benefits and retirement outlook, consult a financial adviser who can help you come up with strategies to anticipate any changes in Social Security.
“It becomes a question of, what are your options? If you have a retirement shortfall, you work longer, spend less or save more — or a combination of those,” Voyles said. “Does this force people back into the workforce?”
Cutting Social Security benefits is so controversial that the program is often referred to as the third rail of politics. Congress has never let Social Security miss a payment, but there have been no substantial changes to the program since the 1980s. The changes at that time included a gradual increase of the full retirement age to 67 from 65.
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“Congress is not going to touch Social Security in a drastic way, because you won’t vote for them and all they want is to be voted for,” Voyles said. “I don’t think Social Security will be gone. It just won’t be as impactful as now. It will be modified, but not gone.”
Fixing Social Security could involve solutions such as raising taxes, cutting benefits, raising the full retirement age again or a combination of such moves.
There’s no cookie-cutter answer for how much people need to save in case Social Security fails, because everyone has different income, needs and goals, said Cameron Burskey, senior partner at Cornerstone Financial Services in Southfield, Mich.
“I do not believe Social Security is going anywhere. U.S. citizens would lose all faith in the system if Social Security disappeared,” Burskey said.
For younger investors, the sooner they start to save and invest, no matter the future of Social Security, the more savings and flexibility they’ll have, and the less they’ll need to rely on Social Security as a major source of income in retirement.
“I would hope they make changes to Social Security sooner rather than later for the benefit of the younger people, so they can plan,” Voyles said. “The earlier they tell us, the faster we can act and prepare.”
