Help your clients feel more secure about Social Security
A recent report says Social Security will be spending more than it’s taking in by 2020. And by 2034, the assets in its trust would be depleted.
Sounds bleak. People are worried. Your clients may be, too.
But the scary headlines don’t paint a full picture of our national retirement trust. And you can help them plan for its ups and downs.
How important is Social Security?
It’s got a huge reach in the United States. According to the Social Security Administration, as of June 2018, there were nearly 175 million workers paying Social Security taxes and about 62 million people receiving monthly benefits.1
Social Security taxes on people working now help pay people who are currently retired and collecting Social Security benefits. You may hear this called a “pay-as-you-go” system in the news.
That’s how Social Security works, but it’s the source of some challenges.
With the huge generation of Baby Boomers entering retirement, demographics are shifting and there likely won’t be enough current workers replacing them to pay their full benefits. And workers contributing to the system now are likely being paid at lower wages than the retirees they’re replacing, which affects the Social Security taxes supporting the program.
How does Social Security fit into retirement calculations?
A Gallup poll showed that 57% of retirees felt that Social Security is a “major” source of retirement income. But only 33% of people who weren’t retired thought that Social Security will be a major source of income by the time they retired.
Here’s the thing: Social Security was never intended to be the sole source of retirement income. Since its creation in the 1930s, Social Security was meant to supplement other sources like personal savings, employer-sponsored pension plans, and individual retirement accounts (IRA).
Still, your clients might wonder if they can even depend on Social Security to be a small part of their plans for retirement.
Some good news.
- There should still be money to pay benefits. According to the Social Security Trustees’ report, even if the trust is depleted, the system should still pay benefits—likely about 80% of what’s scheduled. And that’s if the government doesn’t step in with a fix.
- We’ve been here before. In the early 1980s, Social Security spent more than it was taking in and people were worried. The government passed reforms to keep it running. The most likely saves this time would be reduced benefits, increased payroll taxes, or a combination of both.
- Social Security is popular with voters. A poll from Pew Research said 74% of Americans thought that Social Security benefits shouldn’t be reduced at all. And a Marist poll from 2018 showed that 6 in 10 Americans would rather get rid of 2017’s tax cuts than chop programs like Social Security. If something’s popular with voters, it tends to be a priority for politicians.
Help your clients prepare.
The Social Security Administration’s website is packed with information about retirement planning. It’s a good place for your clients to start, but they’ll still have questions.
“People are anxious because they’re unsure about a path forward. You’re there to help them figure out how to work Social Security into their retirement plans,” DeHaan says.
Remind clients that Social Security is only part of a total retirement picture. They likely need other sources if their goal is to replace around 75% of their pre-retirement income.1
“A personal strategy for dealing with Social Security depends on how much uncertainty your client’s comfortable with in their financial planning,” says Tyler DeHaan, director of business development—retirement solutions for Principal®.
DeHaan suggests a range of ways your client could think about Social Security uncertainty, and how to incorporate them into their planning:
Assume that the government will find some fix between
Shows a positive attitude. Risks falling short of income.
Assume nothing gets fixed, and Social Security benefits
A realistic approach. Slight risk of an income gap.
Assume benefits pay more than 0, but less than the
The more you reduce that assumed benefit, the more
Remove most of the uncertainty and ignore Social Security altogether.2
Leaves a big income gap, so other potential sources of
Encourage clients to look at their retirement picture holistically. Show them this graphic to find out where their mindset is, then use that as the basis for a personalized plan.
“Much of the anxiety about Social Security comes from not feeling in control,” DeHaan says. “You can help clients understand what they can control—and how to help maximize their savings.”
What you can do next
Clients may need your help to sift through their Social Security options. Find tips to start the conversation, and resources you can use with clients, at Principal.com/prepare.
1 75%, Based on our industry experience and GAO Retirement Security Report to Congressional requestors. The estimated average total spending for post-retirement households was about 77 percent of the spending levels for pre-retirement households. GAO, 2013 CE Data; 16-242, Retirement Replacement Rates. The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
2 Based on SSA and first becoming entitled to full or unreduced retirement benefits - Full Retirement Age.
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