We maintain that the Social Security System will be a significant source of retirement income for anyone over the age of 40. And it most likely will continue for decades, provided it gets tweaked and changed along the way. But that’s an important caveat. It needs to be changed.
Any system that spends more than it earns for a sustained period is flirting with disaster. (Just ask Greece). But the U.S. Social Security system began paying out more than it takes in just three years ago. There is time to make the necessary changes so it will be a self-sustaining system once again. But since Congress has developed a habit of playing brinksmanship on major financial issues—some even bigger than this—we probably should not expect miracles anytime soon. Especially when the results of any major changes can be damaging to a politician’s career. Social Security may be slowly losing its “third rail” status, but few politicians still want to be viewed as the one making things difficult for elderly people.
Still, the facts are hard to ignore. Americans are living longer, and more are drawing from the disability component of the system. Plus, the ratio of workers funding the system vs. retirees drawing from the system is declining as our society ages. So what are the potential solutions? There are several possibilities, and after conferring with high-level sources in the industry (who wished to remain anonymous) we offer three.
1. Raise the full retirement age for benefits. When Social Security began (and when Ida May Fuller began receiving benefits), the full retirement age was 65. But average life expectancy was just 62 in the United States. Now, life expectancy is 78 and the full retirement age is 67. It was changed in the 1980s, but it’s not enough.
2. Another possible solution would be to “means test” for benefits. That would involve scaling back the growth in benefits for higher-income people, while maintaining the growth rate in benefits for lower-to-middle income beneficiaries. Some have gone even further to suggest eliminating benefits to the highest-income recipients. That would effectively change the system from one of social security to a transfer payment, which would be a hard sell. Since the beginning, this system has been viewed as an entitlement (I use “entitlement” in the general sense; that is, you’ve paid in, and now you’re entitled to get something back.)
3. A third possible solution would be to change the cost of living index. Today, benefits are tied to the Consumer Price Index. Some proposals call for a “chained CPI.” That simply accounts for the fact that real-life buying decisions change as prices increase, whereas the basket of goods that make up the CPI remain constant. So as the price of beef increases, you buy less beef and more chicken. So the real cost of living does not increase at the same rate as the published CPI.
The most likely solution, at least in the near-term, unfortunately, will be to do nothing. Congress has become a study in short-term solutions and is not about to tackle an issue this thorny when it sees the year 2033 as the point of insolvency. So until Congress act, whenever that is, advisors and their clients owe it to themselves to become as educated as possible on this system that can be a significant source of retirement income if handled correctly.