By Marcia Mantell, RMA
The increasing chatter about the delicate state of Social Security is striking fear into even the hardiest these days. You can find assumptions about how much sooner Social Security is going to go bust due to COVID-19. Or, how more retiring boomers will surely cause its demise any minute now.
Any number of large, reputable companies are actively marketing how Social Security benefits will be cut about 25% starting in 2034. Or in 2030. Or maybe tomorrow. Better saddle up now – your big retirement pay cut is coming!
The over-exuberance about the failure of the most successful government program in American history creates undo anxiety and concern. These are either just scare tactics to lather up hard-working people or idle chatter when there’s nothing else to talk about. Either way, it makes me crazy!
So, I went on a search (again) earlier this month to put some rational thought and real numbers together about the plight of our most important social insurance program. Here are five perspectives on the pending doom of our social safety net.
1. Chicken Little cried, “The Sky is Falling!”
Much like the storybook figure, some people are whipping up mass hysteria and haranguing about the highly unlikely and improbable assumption that Social Security will fail. Social Security is not going bankrupt.
It’s critical that all retirees, near-retirees, and future retirees understand how the Social Security program works. It is funded by workers’ wages and self-employed folks. Employers are required by law to fund to Social Security by way of payroll taxes. We see our FICA deductions on every pay stub.
Those dollars hit the Social Security Trust Fund and are paid out to current beneficiaries. Money flows in and out every week, and any surplus is stashed in the “Reserve Account.” Beginning in 2021, the Reserve Account will be tapped to pay a portion of current recipients’ benefits.
We’ve known for decades this “rainy day” fund was going to be used to pay benefits. We’ve also known that it was going to be used up by about 2034. No news there, folks. It factually gets reported every year by the Social Security Trustees and Actuaries.
2. But COVID-19 has accelerated Social Security’s demise
No, it hasn’t. The great anticipated demise of Social Security is premature, to say the least.
Yes, a few more Boomers retired a little earlier than they may have been planning. But that is offset by another group of Boomers finding work. And, yes, there are still 9.5 million people out of work. Mostly moms of young children. But the experts who track these types of employment cycles estimate that COVID is just another blip in the overall economy similar to a recession. Things will not only recover but thrive.
Economic cycles are just that. They swirl around for a bit. Have highs and lows before settling back into full production with low unemployment. With rising wages overall, more payroll tax dollars will be funding Social Security. And we’ll be back where we started with the Reserve Account fully used up around 2034.
3. How can we fix the Reserve Account?
Social Security is a federal law. Therefore, only Congress can make changes to the law. And, they seem rather busy debating other issues these days.
A number of representatives continually fight to shore up the program, and Social Security comes up as a campaign issue during certain elections. But, the fact of the matter is Social Security is not an urgent issue for Congress to consider. 2034 is still thirteen years away.
There are umpteen proposals and letters and analyses in the hopper. Proposals over the last 25 years from both Democrats and Republicans include:
- Social Security Expansion Act
- Social Security 2100 Act
- Social Security for Future Generations Act
- Protecting and Preserving Social Security Act
- Strengthen Social Security by Taxing Dynastic Wealth Act
You can find the full list on Social Security’s website. Or search your senators’ websites to see where they stand on reforming and improving Social Security.
The bottom line here: There are many possible avenues Congress could go down, but there’s simply not enough political pressure from the citizenry to move forward. But there’s time.
4. What happens if Social Security benefits get cut by 25%?
Clearly there will be an impact on retirees’ benefits if something isn’t done. But what does a 25% cut look like?
Using Vanguard’s online Retirement Income Calculator, you can run various high-level scenarios to see how your income sources, including Social Security, will cover your estimated retirement expenses.
Scenario 1: As an example, assume the following about “Sally” who is 60 today and planning her retirement.
Begin Social Security at 67 at $3,000/month.
Current Income is $135,000; saves 10% in her company retirement plan.
Current retirement account is $1.5 million; 5% annual return rate.
Estimates 90% of her current income will cover her retirement expenses, including taxes.
Sally’s initial plan starts out with a $1,000/month shortfall. She needs $10,125 per month, but Social Security and her savings deliver $9,061.
Leaving aside that she’ll have to make some trade-offs, let’s now look at what happens in the model if her Social Security is reduced 25%. Her shortfall nearly doubles to $1,800 per month.
Scenario 2: Next case, Sally is a higher earner and saver. She makes $235,000 and has saved $2.5 million. Her Social Security at Full Retirement Age is $3,200/month. But, her lifestyle (90% of current income) is high: $17,625/month.
Before trimming her lifestyle, the plan output shows a $4,300/month shortfall. And, with a 25% cut in Social Security, she’s short $5,100/month. She’ll have a lot of adjusting to do either way.
Scenario 3: Last example case, Sally saved $4 million. How much difference does that make? Frankly, a lot. Now, her plan is over-funded by $1,400/month with her full $3,200/month in Social Security. If Social Security is cut 25%, she’ll only have $600 in extra money each month. So, she loses much of her wiggle room for unexpected expenses.
5. And for those spreading doom and gloom, what if Social Security drops to $0?
Well, this is simple. Everyone’s retirement fails. And, it’s quite dramatic.
This time, using the T Rowe Price Retirement Income Calculator, Sally is married to Richard. They are close to retirement, have saved $1.5 million. The tool uses two interesting assumptions that cannot be modified:
For lifestyle spending, it eliminates certain categories of spending such as payroll taxes and contributions to the retirement plan.
Social Security payments are assumed to begin at age 70.
Keeping those factors in mind, Sally and Richard plan to retire at 66 and 67, respectively. The tool shows their probability of success (after running 1000 iterations in a Monte Carlo simulation) is 83%. And, if they change from an aggressive investment strategy to a moderate strategy, the confidence goes up to 86%.
Now, take out Social Security, assuming $0 for each. Their plan plummets. Probability of success drops to 8% if they have a moderate investment strategy and 19% with an aggressive investment strategy. Essentially, their plan fails.
How do we plan going forward?
As you’d expect, the more you’ve saved, the less a 25% Social Security reduction will wreak havoc on your plan. But, most “Sally’s” don’t start off with $1.5 million. So, that potential cut in benefits is going to pinch. And, it could hurt a whole lot of retirees. But you won’t be poverty-stricken if you’ve built something of a retirement nest egg.
Keep in mind that any possible cuts to Social Security are unlikely for more than a decade. So, there’s time to shore up your personal situation. Save more. Reduce debt. Think about working longer or going part-time. And lobby your representatives and senators. Only they can provide real solutions to solve the Social Security problems.
While there are a million different scenarios one can run, the only one that matters is your own. Use any of the free or low-cost Social Security or retirement income planning tools online. Load in your information and see your implications if Social Security is cut.
This is a cautionary tale. Social Security is not going away. However, it could be modified in future decades, so use this time to rethink savings and investing strategies and consider trade-offs. Most of all, ignore the noise. The sky is not falling.
About the author: Marcia Mantell, RMA®, NSSA®
Marcia Mantell is the founder and president of Mantell Retirement Consulting, Inc., a retirement business consultancy. She develops innovative programs, marketing materials, and educational workshops for the financial services industry, advisors, and their clients. She is the author of “What’s the Deal with Retirement Planning for Women?”, “What’s the Deal with Social Security for Women?” and blogs at BoomerRetirementBriefs.com.
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