Social Security in 2022
As we near the end of 2021, many financial advisors are preparing for the year ahead–including examining potential changes to Social Security and how those changes could have a significant impact on retired clients. In our FinPlan Friday post of the year, Joe talks about how financial advisors can prepare for changes to Social Security in 2022.
In our video blog series, FinPlan Fridays, Covisum® Founder and President Joe Elsasser, CFP®, offers his take on the issues financial advisors see every day. Joe is a practicing financial planner with a unique perspective on the challenges Covisum provides technology solutions. Join us on the first Friday of every month for FinPlan Fridays and get helpful tips to grow your financial planning practice.
I'm Joe Elsasser, CFP®, Founder and President of Covisum, and I'm also a practicing financial advisor. Welcome to another FinPlan Friday. Today's topic is Social Security in 2022. You've probably seen the headlines that a 5.9% cost of living adjustment is going to apply to all beneficiaries. Now, that's really interesting because last year's trustees report, which was the latest report issued in the history of the system, projected only a 3% cost of living adjustment. Now, with recent comments from the fed chair suggesting that this inflation may not be transitory, it will be really interesting to see what the next Social Security trustees report holds. Under normal circumstances, those reports tend to be issued sometime between February and May. That's what I would expect for next year.
Social Security Depletion Date
Now, when that Trustees Report comes out, if there is a significant change to the inflation assumption, either in the near-term or in the long-term, it's quite possible that we'll see Social Security depletion dates move forward. In the 2021 Trustees report, the depletion date for the Old Age and Survivor Insurance Fund was adjusted by just one year from 2034 to 2033, and after which point the ongoing tax revenues of the program would be able to support roughly 76% of ongoing promised benefits. Of course the headlines didn't say all of that. The headline said, "Social Security Will be Broke One Year Sooner."
Now, if we get into next year and we have a significant change in the inflation assumption, it's quite possible that we'll see a depletion date that moves forward yet another year–moving from 2033 to 2032. If it's a really significant and long-term adjustment to inflation, we might even see it move two years, particularly if there are other assumption changes in that report having to do with payrolls since many people aren't returning to work. So, it's quite possible that we will see Social Security depletion dates move forward by another year in next year's Trustees report.
It's important for financial advisors to prepare their clients in advance.
And if not in advance, at least to have a mechanism for handling it at the time we start seeing those headlines, because I promise the headline will not say, "76% of benefits will continue to be payable by then current revenue." Instead, the headline will say, "Social Security will be broke a year sooner." And the kinds of questions you'll be fielding are questions like, "Should I claim early since Social Security is going to be out money?" Now, in most cases claiming early out of fear does not make sense, but how can you convince a client of that? It's really simple.
When you sit down and actually calculate the value of different Social Security strategies, it becomes really apparent that for most people claiming early is not the best decision, and that continues to be the case even under a benefit cuts scenario. So, that's step one–do the math for a given client. Now, Social Security Timing® enables you to do that very simply. It allows you to identify both an earliest and an optimal strategy under the current Social Security rules. And then it allows you to apply a benefit cut scenario to ensure that even under a benefit cut that scenario, that optimal scenario still works out better for the client than claiming early. So, that's step one is really stress test the Social Security decision under a benefit cut scenario.
Determine the impact on the client's overall plan and their ability to achieve their goals throughout retirement? You need to use your financial planning software, because it's going to impact how you utilize all of the other client's assets. Now, if you're using one of the primary financial planning tools out there, there are a variety of ways you can attempt to model that. For those who use Income InSight®, you can model that simply by clicking the Social Security benefit cut stress test, and it applies the same stress test that was applied in Social Security Timing to the Social Security cashflow in the plan. It will utilize assets to maintain the client's standard of living throughout retirement net of tax, and that will give you the ability to see whether they have the ability to reach their goals, even in a benefit cuts scenario. Now, if they don't, it might make sense to consider smaller cuts to lifestyle now, working longer, or finding other ways to supplement income in order to avoid a larger cut later.
So, those are really the big considerations as we enter 2022 to be mindful of that 5.9% cost of living adjustment, but also be mindful of the impact that it may have on the long-term solvency of the program. Be prepared to talk with clients about how that impacts them. They're claiming decision and their plan in total.