Let the annual hand-wringing over the future of Social Security benefits begin. Like other rites of the season — the first mowing of the lawn and college beach breaks in Mexico — for a few days each spring, headlines are dominated by pronouncements that the nation's retirement system is creeping ever closer to disaster.
This year is no different. The Social Security Board of Trustees said last Monday that the combined assets of the Old-Age and Survivors Insurance and Disability Insurance Trust Funds will be exhausted in 2033, three years sooner than previously projected.
The main culprits for the growing trust fund deficit are slower-than-expected growth in employee wages, which resulted in lower payroll tax receipts to fund the program, and a larger-than-expected cost-of-living adjustment for Social Security beneficiaries this year, which boosted program payouts.
But even if the Social Security trust funds run dry in 2033 — an economically and politically unthinkable event — there still will be sufficient revenue from payroll taxes to pay 75% of promised benefits.
Certainly, three-quarters of promised benefits is not acceptable to anyone — not the Social Security trustees, nor current or future beneficiaries.
“It is time for Congress to tackle Social Security reform for the long haul,” Social Security commissioner Michael J. Astrue said during a press conference unveiling the latest trust fund report.
“We don't have a lot of time left,” added Charles P. Blahous, one of two public trustees.
But don't expect anything to happen before the presidential election in November, or possibly for years after that.
However, one fact may prod lawmakers to act sooner rather than later. The disability portion of the Social Security trust fund is due to run dry in four years — two years earlier than previously estimated — at which point it could pay just 79 cents of every promised $1 in benefits.
As a short-term fix, Congress could agree to reapportion how payroll taxes finance the disability and retirement trust funds. Or if it wanted to bite the bullet, it could tackle the longer-term reforms that are needed to sustain the 75-year-old Social Security system for another 75 years.
POTENTIAL CHANGES
Possible changes include gradually raising the normal retirement age for full benefits, increasing the amount of wages subject to tax above this year's $110,100 wage base, boosting taxable Social Security benefits above the 85% maximum and scaling back on COLAs.
Some might think the latest deficit projections may be reason enough to grab Social Security benefits while the getting is good. Others, including Joe Lucey, president of Secured Retirement Advisors LLC, think that's the wrong reaction.
“My response is, you should do the opposite,” said Mr. Lucey, who deals exclusively with clients who are in or nearing retirement. “You should think about how you can maximize your Social Security benefits for an unpredictable future.”
In most cases, that means delaying collecting Social Security benefits until at least the full retirement age of 66. For some married couples, it may make sense for the lower-earning spouse to collect reduced benefits early at 62 to bring some money into the household and the higher-earning spouse to delay collecting until 70 when benefits are worth the maximum amount, ensuring the largest possible survivor benefit.AFFECTING THE YOUNG
Current retirees and even future retirees who are 55 or older probably need not worry about significant reductions in Social Security benefits. Most changes are likely to affect younger Americans, such as those college students chugging margaritas in Cancun, who will have years, if not decades, of advance notice.
But even if there were some benefit reductions to existing beneficiaries, wouldn't it be preferable — as Mr. Lucey asks — “to cut back from a higher benefit than a lower one because you started collecting too early?”"ENTITLEMENT RISK'
“These reports underscore yet another retirement risk confronting future retirees — entitlement risk,” said Cathy Weatherford, president of the Insured Retirement Institute, which represents insurers, asset managers and broker-dealers. “To ensure financial security during their retirement years, all consumers must develop a plan today that identifies alternative sources of lifetime income.”
That is where financial advisers come in. While focusing on the retirement income market presents enormous challenges, such as how to generate income in today's low-interest-rate environment, it also offers tremendous opportunities to expand business beyond traditional investment management, build deeper client relationships and boost assets.
And there are millions of aging baby boomers looking for advice.
Mary Beth Franklin (mbfranklin@investmentnews.com) welcomes your comments and suggestions for column topics.
