An estimated 65 million people rely on retirement and disability benefits, and many are concerned about Social Security's future. Last month, the Social Security Board of Trustees released their annual report detailing the program's financial status. The 2022 report presents new opportunities for financial advisors who know where to look.
Since the analysis for the 2020 Social Security Trustees report was completed before the pandemic began, the 2021 Social Security Trustees report was the first to include details about the financial impact of the COVID-19 pandemic. The 2021 report suggested that the trust funds would be depleted much sooner than initially expected. The combined Old Age Survivors and Disability Insurance (OASDI) fund were projected to run out in 2034, and the retirement benefit alone (OASI) would be depleted by 2033.
The 2022 Social Security Trustees Report
The outlook is slightly better in the most recent report. The projected depletion date for the combined trust funds is now 2035, and the OASI depletion date has also moved back to 2034. After the trust funds are depleted, tax revenue is projected to be able to continue paying 77% of promised benefits. Advisors must communicate with clients about the depletion dates and what benefit cuts could look like for their specific situation since cuts will impact every client differently.
A benefit cut combined with new tax revenue and supplemental income from general revenue is likely to answer the Social Security funding problem. This would be a first in the history of the Social Security program. Social Security has always been treated as social insurance with dedicated funds to pay for Social Security. It would take a legislative change to allow general revenues to fund the program on an ongoing basis, but that is a real possibility as the size of the problem is significant.
Financial advisors should educate themselves on the proposals to address the solvency of Social Security and its ability to continue paying benefits, especially those that suggest:
- changes to full retirement age
- increasing tax revenue either through payroll tax revenue or raising taxes on Social Security benefits
- adding another bend point
What can advisors do to prepare clients for what may happen?
- Tell clients that if Congress can't come up with a solution, we're looking at a 23% benefit cut in 2034, according to the latest report.
- Identify how that impacts the client's financial plan in total. Social Security is only a portion of their overall retirement income for many clients. It is critical to identify how much a benefit cut to that portion of their comprehensive retirement income will impact them. You may need to make some changes now to account for a benefit cut in the future.
- Educate yourself about relevant reform provisions and how they might impact different segments of your client base.
Social Security Timing
Social Security Timing® helps advisors show clients the best claiming option for their unique retirement situation. The benefit cuts feature has been updated to default to a 23% cut in 2034 to reflect the latest Social Security Trustees report. The software does the calculations for you, so you can quickly and easily show clients how a cut to Social Security benefits would impact them. Try Social Security Timing for free for 10 days. No credit card is required.