Come 2034, incoming revenues will be enough to pay about 76% of scheduled Social Security benefits, a 2020 Social Security Administration trustees report predicts.
Given that, how might different generations plan for this? Should they plan for a 24% decline in their scheduled benefit? Should they not factor Social Security benefits into their retirement income plan at all? Or might they do something else.
“Though I think it far more likely that some combination of reforms will eliminate the need for cuts of the magnitude the trustees report suggests, people should be aware of the impact a cut would have on their overall financial situation,” says Joe Elsasser, a certified financial planner and president of Covisum.
What are some of those reforms? Tax increases, benefit cuts or a combination of both are the oft-mentioned reforms. But to date, there seems little to no interest on the part of lawmakers to tackle the coming shortfall between incoming revenue and scheduled benefits.
What to do then? “The implications with Social Security’s solvency tend to fall on generational lines,” explains Marcia Mantell, a principal with Mantell Retirement Consulting.
She agrees with Elsasser that Social Security beneficiaries and would-be beneficiaries ought to consider the following actions:
Baby boomers: On target
Social Security benefit estimates for those born 1946 through 1964 should be on target and will be unlikely to be reduced if Congress fails to put a solution in place to shore up the reserve account within the overall trust fund, or fails to increase payroll taxes to support the commitments made to these retirees, says Mantell.
Elsasser agrees but suggest taking some precautionary measures. “Baby boomers should plan for benefits as they are projected, but stress test for a benefit cut,” he says. “Historically benefit cuts have been phased in over time.”
For instance, the last solvency crisis of this magnitude occurred in 1983. “And some of the reforms that were put in place are still being phased in today, such as the increase in full retirement age from 65 to 67,” Elsasser notes.
According to Elsasser, stress testing allows you to practice what you would change in your plan if the full cut materializes. “If the cuts to your plan are too painful to bear if they do materialize, then make smaller changes now and monitor the situation,” he says. “Smaller cuts to your lifestyle sooner will hurt less than larger ones later.”
Covisum has a benefit cut calculator that allows consumers to identify how benefit cuts would impact their break-even ages.
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Gen X: Plan on a 10% reduction
If you were born 1965 through 1980, planning for your retirement income becomes more important than ever, warns Mantell.
Elsasser recommends planning on a 10% reduction in your Social Security benefits and doing retirement projection that includes a reduced Social Security amount to balance your lifestyle today with the lifestyle you’d like to live in retirement.
The good news about this bad news? “For the 65 million of you who are between the ages of 41 and 56, you are in your peak earnings years,” says Mantell. And that means you can and will need to ramp up your personal savings.
“You’ll be well-served to rethink, rebudget and redesign your spending and your savings strategy in case Social Security delivers less in income than currently projected,” she cautions. “You have time on your side, and every $1,000 or $2,000 or $5,000 you can sock away now will increase your income for retirement and balance out the trade-offs that you may have to make.”
And what’s the worst-scenario if you ramp up your savings and there’s cut in Social Security benefits? “You end up with more than you need,” says Elsasser.
Gen Z and millennials: Too early to tell – or worry
Experts say it’s too early for millennials and Gen Zers to worry about Social Security cutting benefits.
“You are too young to confidently guess how Social Security will pay benefits,” notes Mantell. “Half of you don’t even yet have your 40 credits for eligibility. So, your focus will be well-served to be on you.”
Elsasser shares that point of view: “Though it’s important for everyone, particularly if you are under 40, your focus should continue to be on improving your skills, education and training in order to maximize your earnings potential through your peak earnings years,” he advises. “Saving consistently in vehicles you won’t touch until retirement is important as well. At minimum, be sure to take advantage of any company matches or incentives.”
The best-case scenario
All this planning for a potential cut in benefits might be much ado about nothing, according to Michael Finke, a professor at the American College of Financial Services.
“I don’t know any expert in Social Security who believes that Congress will allow a significant cut to beneficiaries,” he says. “Politicians face a no-win situation where making changes today to shore up Social Security is painful, because it will either mean higher taxes or lower benefits, but the alternative to making no changes is worse – having a big block of voters see a cut in their retirement income.”
And this, he predicts, will motivate Congress to increase payroll taxes, increase the claiming age or change the inflation adjustment.
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