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How Should a Fiduciary Treat Social Security in Retirement Planning – A Generational Overview

How Should a Fiduciary Treat Social Security in Retirement Planning – A Generational Overview
August 25
01:16 2015

As we mark the 80th anniversary of Social Security, many are wondering how many more birthdays the program will be able to celebrate. This isn’t just a hypothetical question. Every day, fiduciary advisers sit down with people of all the-future-2-1543567_free_images_royalty_free_300ages to develop plans to help those people achieve a comfortable retirement. How, and if, Social Security works into those plans stands out as a key, perhaps even a critical, question. In assessing the relevance of Social Security to any particular retirement plan, the adviser must include not only the numbers, but also the politics, into the equation. It turns out those equations change as we look at the different generations.

The first question on everyone’s mind, though, is whether Social Security will even see its centennial birthday. The long-time government program began in 1935. According the annual trustees report (published July 22, 2015), “Trust Fund asset reserves would increase through 2019, begin to decline in 2020, and become depleted and unable to pay scheduled benefits in full on a timely basis in 2034.” Despite this stark assessment by government administrators, many believe Social Security – in one form or another – will survive. “Social Security, or a program like Social Security,” says Robert R. Johnson, President and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania, “is an integral part of the social compact in the United States. While changes will likely take place, complete elimination of the system is not feasible nor is it desirable.”

Social Security is often called the “third rail” of politics. Don’t confuse this with it being considered one of three legs of the traditional retirement plan. No, “third rail” refers to Social Security’s unfortunate ability to fatally zap the political career of any elected official who ventures too close. The fear of losing elections, say some, will trump any common sense notion to make the necessary adjustments to permanently fix the system. Joshua E. Self, Senior Wealth Planner at Envision Wealth Planning in Nashville, Tennessee and Raleigh, North Carolina, says, “I think it will still be around because I don’t think the political environment, nor the leaders in charge, has the will to adjust a social welfare program no matter how much sense it makes in the long run.”

“Eliminating Social Security retirement benefits is politically impossible given how much tax is paid into the system,” says Kevin Prendergast, Chief Investment Officer of EFG Advisors, LLC in Schaumburg, Illinois. “Moreover, relatively small adjustments to the COLA (less generous), pushing back Full Retirement Age (FRA), increasing payroll tax, means testing/taxation of Social Security retirement benefits, or some combination can sustain the program for decades more.”

In 1983, when Social Security faced a similar crisis, rather than completely reform it, Congress merely put in place a patchwork solution, knowing the program would eventually go insolvent at some point in the future. We now know that “some point” is a scant 18-19 years away. Does 1983 present a model for today’s politicians? Will they simply kick the can further down the road? “Social Security will be available and we can count on modifications as we’ve seen in the past with regards to paying income tax and having Social Security benefits extended,” says Saul Simon of the Simon Financial Group in Edison, New Jersey.

Others aren’t so sure, given the more problematic economic environment in which we currently reside. “I expect Social Security to celebrate its 100th birthday in 2035, but it will look very different than it does today,” says Peter Lazaroff, Wealth Manager at Plancorp, LLC in St. Louis, Missouri. “People are living longer and spending more time in retirement than ever before. Meanwhile, benefits are shrinking as a result of legislative changes in retirement ages, increasing Medicare costs, and higher taxes on benefits.”

Given all this uncertainty, what the best way a fiduciary can advise today’s worker regarding the incorporation of Social Security into their retirement planning. In some cases, practitioners prefer to retain Social Security estimates no matter what generation the worker belongs to. “I think the prudent thing is to include the current estimates, no matter what age, but have a tool that allows for adjustments in the plan to show exactly what impact certain change to SSI could make to your long term plan,” says Self.

The idea to treat all generations the same makes for a good starting point. Adding a few twists can help future retiremees better understand the process. Prendergast, says, “We include Social Security in retirement simulations for all generations, but illustrate a cost-of-living-adjustment (COLA) that is less than the rate of inflation used in the simulation. For example, our default inflation assumption is 3.73% and our default COLA for Social Security is 2%. Less generous COLAs are our best guess as to how the government/SSA will solve the projected shortfall, though perhaps coupled other adjustments mentioned below. For example, the COLA in each 2009 and 2010 was 0%.”

Working with more sophisticated clients makes the decision regarding how to treat Social Security a bit easier, as the professional can allow the client to decide exactly how to account for the government benefit. “Planning is subjective based on clients desire to count on a certain amount of Social Security income or not so I would say it’s up to the client when doing their own personal planning,” says Simon.

In many ways, given their proximity to retirement, baby boomers represent the easiest generation to plan for. “In planning for retirement, accounting for Social Security makes more sense for people nearing full retirement age,” says Lazaroff. “Baby boomers should feel comfortable planning on Social Security payments being made as shown on their statements. Many boomers are already in retirement and receiving their Social Security checks, but the youngest of the boomers are in their early 50s. In my opinion, it would be difficult for lawmakers to change the full retirement date or benefits for anyone over the age of 55. The issue that Boomers may face is a change in the way Social Security is taxed, which has important financial planning implications that are important to work out with a financial advisor.”

Generation X suffers from the greatest challenge when it comes to determining how Social Security will play out in their retirements. Too young to be protected by age, they’re also too old to take advantage of long-term growth in their retirement plan. Lazaroff says, “Generation X should be worried about changes to Social Security that might improve the solvency of the system. There are several different options commonly discussed that would extend the lifetime of the program, but most of them involve lower benefits. I’d recommend that Gen-Xers plan for on a later full retirement date and smaller benefits than what their Social Security statement shows today.”

According to a recent survey, “64% of Millennials believe that they are more likely to win the lottery than receive any money from Social Security.” Does it make sense for Millennials to assume there will be no Social Security for them when they finally retire? “Millennials shouldn’t be planning on receiving Social Security, not because I don’t think it will be around, but because it is likely to undergo changes in order to survive,” says Lazaroff. “How much benefit someone will receive and at what age they will receive it is virtually impossible to predict at this point. Because Millennials have the benefit of time, they are more equipped to take advantage of the power of compound interest. Millennials should treat Social Security as the cherry on top of their retirement nest egg. If it’s there, then you will enjoy it. If not, then at least savers will have a nest egg.”

Still others believe Social Security can continue to be assumed in retirement planning for Millennials. “I don’t think it makes sense to assume Millennials will not receive Social Security,” says Johnson. “Taking care of the sick, elderly, and destitute is part of the fabric of America. While Social Security may look different in the future – eligibility rules may change – I am confident that the system will be in place in one form or another.”

The looming national budgetary crisis continues to play the part of the 800 pound elephant in the corner of the room. It’s a wild card that, whatever problems Social Security itself has, represents an overwhelming obstacle too big to ignore. This can have an impact in deciding whether Millennials should continue to count on Social Security being there when their retirement time comes. Douglas Sheahan, President of ICCF Wealth Management in Winter Park, Florida, says, “It doesn’t necessarily make sense to assume it’s completely gone, but entitlements are the biggest issues for our nation’s budget and it makes sense to believe large changes to the system are inevitable.”

Chris Chen, Wealth Strategist at Insight Financial Strategists LLC in Waltham, Massachusetts, reminds us of a similar time in our nation’s recent past when it was the Baby Boomers who sat on the Social Security hot seat, much like the Millennials of today do. He says, “There has been a political tendency for several decades that presumes that Social Security will die. When I was in my early 20s in the early 80s, there was a social security crisis similar to the current one. At that time I did not believe that Washington would be able to fix it, and I openly said that I would probably never collect Social Security. The situation is similar now: the Trust Fund is running out of reserves, and unless Washington ‘does something’ we are headed towards a severe reduction in benefits. In fact, even if Washington ‘does something’ it is likely that it will result in a reduction in benefits. And since Washington is more interested in posturing than fixing the problem, it is completely understandable that people believe that Social Security may die. If anything the political environment is more polarized now than in 1983, and the part of it that would like to see Social Security disappear is stronger, better funded and better organized than in the 80s. So yes, the Millennials should be concerned that they may not receive Social Security.”

It is only natural, and most appropriate, to end with a philosophical consideration. Gregory J. Kurinec of Bentron Financial Group, Inc. located in Naperville, Illinois, says, “When planning for retirement, it is very tough to count on anybody but yourself. I do not feel that Social Security will ever go away or default, however I do feel that it will be altered in some form or fashion. But the same can be said for company pensions, teacher pensions, and municipal pensions. I would advise anyone to not rely on something that is being promised to you but to save on your own to achieve your goals and anything additional becomes a bonus.”

Perhaps, when planning for retirement, self-security is more important than Social Security.

Are you interested in discovering more about issues confronting 401k fiduciaries? If you buy Mr. Carosa’s book 401(k) Fiduciary Solutions, you’ll have at your fingertips a valuable reference covering the wide spectrum of How-To’s every 401k plan sponsor and service provider wants and needs to know.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada. His new book Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort is available from your favorite bookstore.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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