Benefits could also be reduced by lowering or eliminating the key levers in claiming strategies: delayed credits, restricted applications, and the ability to file and suspend. That would certainly put a wrinkle in some plans. Though President Obama, recently suggested changes to spousal claiming rules, there is no momentum for this, today. One reason for the lack of interest is the dollar amounts affected by the claiming strategies are tiny relative to the scope of the funding issue.
Changes to the funding side of the trust fund equation seem more likely. This has been done many times in the past. Extending the start dates for benefits by a year or two, an increase in the payroll tax rate, an increase in the cap on wages subject to payroll taxes ($117,000 in 2014), or a combination of these would bring back balance. It wasn’t popular at the time, but Congress did this in 1983 and those changes pushed solvency out 50 years.
What am I telling clients about Social Security and how do I incorporate Social Security into their planning? First, I remind clients that neither they nor I nor anyone else can know the future. Planning is about preparation, not prognostication.
Second, I am comfortable admitting I do not like the current state of affairs. It stinks. The trust fund is exhausted just before my full retirement age, but more concerning is that my children and their cohorts may face a more substantial burden.
Nonetheless, I tell them that we must proceed with the way things are and I go over all the facts and theories about Social Security. What I don’t do is use the same misinformation about the system being bankrupt or rhetoric about IOUs. What I want is a rational discussion focused on each family’s circumstances.
For clients receiving benefits or soon to receive benefits, I am comfortable assuming that their benefits will be close to what they have been promised, if not all of what was promised. The older they are, the more comfortable I am with a full benefit assumption. The most likely change is more taxes on Social Security for higher-income retirees, but that is not imminent. Changes to claiming strategies are probably irrelevant to anyone in their late 60s. Probably.
For younger people, I will gladly work with an assumption that payroll taxes will be higher than today’s arrangement and benefits will be lower than currently promised. However, assuming no benefits will be there is overly pessimistic, in my view. Most clients don’t assume more than 25-30 percent less than current benefits.
Of course, planning is a process, not a one-time event, so we will revisit these assumptions and adapt to whatever changes may come.
What are you telling your clients?
Dan Moisand, CFP, has been featured as one of the America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at [email protected].