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One of the chief obligations of financial advisors is to inform clients about the risks that threaten their retirement plans. In that regard, the chief risk for your clients who are in retirement or approaching that phase of life is the solvency of Social Security.
It is essential for the advisor to separate fact and fiction for the client.
Based on the latest forecast, people who are 79 are expected to outlive the system’s ability to pay scheduled benefits. While the exhaustion of the program’s trust funds is 10 years from now, the impact of the possibility of insolvency is already here. Recent retirement research suggests that 44% of those 62 to 65 are planning to take benefits early as a result of the fear of insolvency. This is a decision that may well haunt those people for decades.
Behind these facts, there are risks that advisors need to explain to clients about the program and its obligations to seniors.
Social Security benefits are not contractual payments. In 1960, the Supreme Court ruled that seniors do not have an earned interest in the payment of benefits. Benefit levels are whatever Congress wishes them to be.
The latest forecast suggests that retirement benefits would be reduced by 23% in little more than 9 years. That is not a worst-case scenario. It is in fact a warning about what might happen even in a robust economy.
Current law does not define how system-wide reductions to benefits would be allocated to the individual. The widely accepted belief that there would be across-the-board benefit cuts applied equally to all beneficiaries is little more than wishful thinking.
Last, reliance on Social Security rises with age. For those under 70, about 25% will depend upon the program for 90% of their income. By the time that they are 80, the figure rises to more than 40%. Heaven forbid that your client suffers the misfortune of living into their 90s. About 30% of retirees have that fate.
Some of those facts might be news to your clients because the program is largely insulated from reality by myth and cliche.
The standard cliche holds that politicians will never cut benefits because they would be run out of office by angry voters. The fact is that benefits were cut in 1977 and 1983. The 1983 reduction hit people in their 90s. Despite that reduction, members of Congress were reelected in 1984 and 1986 at historic rates.
Keep in mind the comparison to 1983 is somewhat faulty because at that time the problems faced by Social Security were minor and temporary.
The myth about Social Security is that it is a hotly debated topic in Washington. Democrats are $10 trillion apart on what benefits the program should provide. In other words, they aren’t talking about solutions. They are still trying to figure out what problem they hope to solve. Republicans on the other hand have not put forward significant legislation related to the program in nearly a decade.
Off the record, some members of the GOP have suggested that they would be willing to look at increasing the retirement age to 70. In its most draconian form, that solution represents a 19.5% reduction in benefits and would address less than half of the problem. In other words, the off-the-record solution means that people in their 50s would experience a 40% reduction in benefits, so that existing seniors would experience none. Good luck selling that idea to someone who is 55.
The reason that Washington has taken a detached view of the program is because of voter apathy. The issue of Social Security sits on the fringe of political obscurity because checks go out every month – even when the rest of the government skids towards bankruptcy. According to Gallup, fewer than 0.5% of Americans believe that Social Security is the most important problem facing the country. A poll for Newsweek found that the program did not fit in the top 19 priorities of voters.
The issue exists in a political netherworld where voters today are satisfied that a solution is nothing more than a mix of tweaks chosen from an abundance of policy options. Time is going to bring more clarity.
The risk that you must explain to the client is that no one has a gauge on how voters might respond once they awaken. The only thing that you can assure them is that there will be politicians willing to serve them.
Brenton Smith is a policy advisor for The Heartland Institute, an Illinois-based think tank.
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