If you haven't already, it's essential to take the time to familiarize yourself with the latest Social Security Trustees report. The solvency issues are a significant concern for people on the cusp of retirement today since the depletion date outlined in the report, 2034, is well within their life expectancy. As you're discussing Social Security benefits and how they fit in the context of the retirement strategy, it's important to note that the Social Security trust fund is scheduled to run out soon in the absence of any congressional action. Here are a few things to keep in mind as you're planning.
Last year's inflation projection was surprising. The 2021 Social Security Trustees Report projected 3.06% inflation before returning to 2.4%. In actuality, inflation last year was about 5.9%. This year's report assumes 3.8% inflation before returning to the long-term projection of 2.4%. As of right now, inflation is trending far higher with recent estimates reaching double digits. This is an immediate increase in the program's cost to all program beneficiaries if you consider cost-of-living adjustments (COLAs). In general, COLAs tend to be outpaced by wage growth. If wages are growing, taxable payroll is generally increasing. This is described in the low-cost scenario in the report.
It's assumed that inflation adjustment payments are delayed, but revenues increase immediately. Therefore, higher inflation scenarios in the report assumptions improve program finances rather than a decline. High inflation with stagnant wages creates a significant revenue problem.
The average annual COLA adjustment between 1975–1982 was 8.7%. No reports before 1980 had a projected double-digit increase. The highest COLA was 14.3% in 1980. Reports in this period forecasted inflation dropping after just one year. At no point was the projection for inflation as high as the actual figure.
In 1981 the Social Security Trustees published two separate sets of intermediate assumptions. One assumed Congress would draft new legislation to increase employment and curb inflation, and the other carried the continuation of current policy. Both underestimated near-term inflation but overestimated the time to return to an expected number.
Inflation is incredibly hard to predict accurately. So, ensuring your clients' retirement strategies remain strong even in a high-inflation environment is critical. The inflation stress test in Income InSight can help you demonstrate the impact of inflation. The software assumes 7.6% inflation per year for the first 10 years of the plan; this is equivalent to the annual geometric average inflation from 1975-1984.
The number of disability insurance claims has declined over the last 12 years, but the assumption was reduced this year from 5 to 4.8 people per thousand. That's a significant change and resulted in a projected reduction of program expenses by .07%. This reduction represents more than half of the overall change to the combined old-age, survivors, and disability insurance and almost the entirety of the change in disability insurance.
However, there is reason to believe there may be an increase in disability claims. The COVID-19 pandemic has significantly impacted mental health. There was a 27.6% increase in cases of major depressive disorder and a 25.6% increase in anxiety disorders in 2020. Anxiety and depression are covered by Social Security disability. To qualify for SSDI, you must have documented history of at least two years of treatment for anxiety and/or depression. We may see an increase in mental health-related SSDI claims that offset the demographic trend.
Social Security Timing®
Advisors need to address benefit cuts. While we may see some legislative changes to shore up the system, helping clients visualize how a cut to Social Security benefits would impact their retirement can help them make smart claiming decisions. Social Security Timing allows you to show the impact of a 23% cut in 2034, as outlined in the report, with the click of a button. Both the cut amount and date are customizable. Show the client how cuts would move their break-even age. Even with a benefit cut, most people are still better off delaying. The software makes it easy to demonstrate this vital concept to your clients who are likely nervous about the future of Social Security.