“I’m not trying to scare you, but …”
How many times has your financial professional started a conversation with those words?
Believe me, we don’t like saying it any more than you want to hear it. Advisers don’t want you lying awake at night worrying about all the things that could ruin your retirement plans. That’s our job.
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But it’s also our job to help make sure you’re prepared for potential problems. If at all possible, we want you always to have a Plan B.
So we talk about risk. And we talk about what could happen to your spouse’s finances when you die. These days, we often have to contend with the unpredictability of a retirement plan that doesn’t include a pension.
And, unfortunately, we must discuss the uncertain future of Social Security.
I’m not trying to scare you, but …
I worry that people are being misled by the numbers they see on the benefits statements they’re getting from the Social Security Administration.
Those statements — which provide an estimate of how much you’ll receive depending on whether you file for benefits at age 62, full retirement age or age 70 — are a good planning tool. You should have some idea of how much you’ll get. But I wonder how many miss the fine print that cautions, “Your estimated benefits are based on current law. The law governing benefit amounts may change.”
If you think that can’t happen, think again. Social Security is often viewed as something that can’t be touched, but the government has tinkered with it in the past to avoid a shortfall. In 1983, a set of amendments made it so that up to 50% of your benefits could be added to taxable income if your income exceeded certain thresholds. In 1993, legislation was enacted that increased the portion of benefits subject to taxation to 85% for higher-income recipients. Also in 1983, the age for full Social Security benefits went from 65 to 67 for anyone born in 1960 or later.
There have been plenty of warnings over the past few years that another change could be coming.
The Congressional Budget Office projected in 2016 that, under current law, Social Security’s trust funds would be exhausted in 2029 and benefits would need to be reduced. And in its 2016 annual report, Social Security’s Board of Trustees said if nothing changes, Federal Old-Age and Survivors Insurance reserves would be depleted by 2034.
Despite years of unnerving shortfall forecasts, however, neither Hillary Clinton or Donald Trump talked much about what should or could be done to strengthen Social Security during their presidential campaigns.
The discussion didn’t make it much past the primaries. Democrat Bernie Sanders suggested raising the system's taxable wage base to $250,000. Republican hopeful Marco Rubio’s site said he would gradually raise the retirement age. Clinton’s site said she would consider increasing taxes on the wealthiest Americans by raising the cap on Social Security taxable income and taxing other income that currently isn’t taken into account by the Social Security system. And Republican candidate Paul Ryan’s site added that yearly means testing could be an option.
Of course, the pushback on means testing — eliminating or otherwise limiting the amount of benefits for higher-income individuals — isn’t something any politician would choose to face, because it undermines the idea that benefits are an earned right. People pay into the program, and they want their money back when it’s due.
There have been other proposals over the years — including increasing the amount all workers pay into the Social Security system. But so far, nothing seems to be sticking.
Surely, someone, somehow at some time in the next 18 years will come up with a solution and be able to sell it to Congress and the public.
But what happens if they don’t?
I don’t want to scare you, but …
If you plan to rely on Social Security in 2034, there’s a chance your monthly payments will not be what you expected. According to the Board of Trustees’ 2016 annual report, if nothing changes to mitigate the shortfall, benefits would have to be reduced by 21%.
Which means you really should have a backup plan — just as you would have for any threat to your retirement.
And that’s where your adviser comes in. He or she can help you look at all the options, including carefully assessing the types of assets that could help you replace that guaranteed income. It might be a good quality fixed annuity or fixed index annuity, or a properly funded indexed life insurance policy.
Americans are living longer. That’s a great thing — but it’s also part of the problem: More people will be taking money out of the Social Security system and fewer will be paying into it.
It also means your income plan might have to last two or three decades, or longer. Talk to your adviser about your plan, and your Plan B, so you’re as ready as you can be to protect your future.
Kim Franke-Folstad contributed to this article.
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