Should your clients be worried about Social Security?

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[Originally written October 2018; last updated November 2020]

Current retirees, and those approaching their golden years, have something to look forward in 2021: They’ll likely be getting more money from the Social Security Administration, in the form of a cost-of-living adjustment.

According to the Senior Citizens League, the COLA next year is poised to rise by approximately 1.3%, CNBC reported. That’s down from 2019, when the COLA adjustment rose 2.8%. At that time, the Social Security Administration announced the average recipient will get an additional $39 per month from the government, which translated to nearly $470 per year.

Since the COLA adjustment is more of a prediction than a reality, the SSA has not spoken to what the average recipient will get in terms of an increase. It raises the question, though: With more people living longer – a number of whom are retiring earlier than the traditional retirement age of 65 – is Social Security on the brink of insolvency?

Most Americans worry about this very thing. Indeed, according to a recent poll from Quinnipiac University, less than one-third of respondents said they were confident about receiving benefits from the SSA once they’re eligible. Perhaps unsurprisingly, older respondents — those 50 to 64 — had more confidence about getting all the funds they were to receive from the entitlement program. .

Social Security: A brief history
Installed and signed into law by President Franklin D. Roosevelt in 1935 under the act of the same name, Social Security has served as a bedrock of economic support for retirees for over 80 years.

Full-time employees contribute to the system over the course of their working lives when a portion of their checks are withheld, understanding that they’ll make it back when they enter the post-career world.

Approximately 33% of non-retirees say they intend to rely on Social Security in their retirement, according to a separate Gallup survey, with 33% of those currently retired saying they rely on it as a key source of income.

Economists and historians, however, warn that Social Security wasn’t built to financially support as many people as it’s come to sustain. To the contrary, when Social Security was originally set up, the average life expectancy for women and men was 64 and 60 years of age, respectively, based on Census data.

But with the SSA preventing recipients from receiving their checks no earlier than the age of 65, most people didn’t live long enough to derive income from the entitlement program.

Senior woman writing in checkbook with man at her right. What is the state of the Social Security system?

Contributor-to-beneficiary below 3 to 1
Today, not only do most Americans live well past their mid 60s – the average life expectancy now at nearly 79, according to the Centers for Disease Control and Prevention – but the difference between those contributing to Social Security and receiving has narrowed considerably.

In 1945, the worker-to-beneficiary ratio was approximately 42 to one, based on estimates from the Mercatus Center at George Mason University. Fast forward to today, and it’s just shy of three to one, down from 3.4 workers per retiree in 2000 and 5.1 in 1960.

Wealth experts say that this trend line is unsustainable. Best-selling author and financial advisor Chris Hogan noted at his blog that part of the problem is the tax system. In 2015, the Federal Insurance Contributions Act helped Social Security collect approximately $786 billion in funds for the retirement program. However, SSA actually gave out more than it received that fiscal year – $91 billion more.

“Do the math. It’s not good,” Brown wrote. “That gap first occurred in 2010, and as baby boomers retire over the next 10 years, that gap will widen. If nothing changes, the gap would be about 40% in 2040.”

Given that fewer Americans have set aside money to spend when they become senior citizens — more than 1 in 10 adults would be unable to come up with $400 in an emergency, the Federal Reserve warned in a recent report – Social Security’s instability has resulted in a perfect storm of unfavorable economic conditions for people aiming to retire comfortably.

What’s the solution? No one knows for sure the best path forward. What virtually everyone does agrees upon is something needs to change: whether that’s reducing the monthly check amounts Social Security recipients receive or further raising the beneficiary age limit.

Although financial advisors recommend their clients live below their means, the fact of the matter is most people live up to it – if not beyond. In other words, high net worth individuals may not be in as good a financial position as the numbers suggest.

Global Financial Distributors has the wealth and estate planning tools that can provide true retirement stability. Contact GFD to learn more about Leveraged Planning.