In the future, your clients will need to be realistic about what they will receive from America’s crown jewel entitlement program.

Social Security won’t likely die, advisors say. It will be there for the client in the next decades. But it will also likely have to change, and that means so will the retirement plans of clients with either a little or a lot in private savings. The most likely kind of change will be more cuts.

Retirement clients, especially those with considerable resources, should expect means-testing in the future and likely cuts in the program. (Some cuts have already occurred.)

While advisors at one end of the spectrum are warning their clients that they should plan on getting nothing from a system they’ve paid into for decades, at the other end, clients with fewer resources are likely over-relying on what they will receive. In some cases, advisors say, clients should expect to receive no more than 10 percent of their retirement income from Social Security. Others say 5 percent.

“Both current and future retirees are concerned that the Social Security benefits they’ve been promised won’t be there and should be excluded from financial plans,” said Mark Friedenthal, the founder and CEO of Tolerisk, a Marlton, N.J.-based firm that makes software for advisories.

Friedenthal and others offering retirement planning say advisors should proceed cautiously with the Social Security element of retirement planning, especially with those well prepared for retirement.

Though it’s a conservative approach, “it may also be prudent to exclude Social Security for those [clients] with likely taxable income of $250,000 [present value] or more in retirement,” he says.

“This is likely a client with $10 million-plus in taxable assets or $5 million-plus in traditional IRA/401(k) assets,” he says, “or substantial defined benefit pension income or other taxable income sources.”

Clients Spooked

Adjustments are needed in part because many clients are spooked. Some 59 percent of those recently surveyed by the AARP said it was only “somewhat likely” or “not at all likely” that the combination of their savings, investments and Social Security benefits would be sufficient to cover their financial needs through retirement.

The system, according to the latest Social Security trustees report, is running in the red for the first time since the 1980s. If current trends continue, it would have to start paying less than promised benefits in about 15 years.

“Today’s report,” the trustees wrote, “shows that, as a whole, Social Security is fully funded until 2034, and after that it is about three-quarters financed.”

For those advisors fearful that this will lead to means-testing Social Security, Michael Kitces, a CFP with his own firm in Columbia, Md., has a message: It is happening. There is already a means test, he says, “fully included in how Social Security benefits are calculated today.”

He says his assumptions are based on trustee reports that, even without fixes, 70 percent of the promised benefits will still be paid because they don’t depend on the trust fund, but on money now coming into the system through payroll taxes.

“We project Social Security benefits to grow at 1 percent less than the general rate of inflation,” he says, “as a way to slowly temper benefits over time in case some level of future benefits reductions are applied, if only by extending the current means-testing system on benefits.”

Over 30 years, he notes, a 1 percent a year reduction in real benefits “amounts to a 30 percent cumulative haircut over time, and is consistent with the projection that Social Security benefits would have to be reduced by about 30 percent in the future if we do nothing to fix the system.”

Fixes will also be needed over the next few years because not enough people are paying in to support a growing population of recipients.

“The number of retirees is projected to grow faster than the number of workers, due to demographic changes, unless we significantly boost immigration,” according to Stephen J. Entin in a new report on Social Security for the Tax Foundation.

He says the system can be fixed by changes in benefits formulas. However, until reforms are enacted, not enough American workers are entering the system to keep promises made to Social Security recipients.

“The native population fertility rate is well below replacement levels,” Entin writes. “The replacement rate is an average of 2.1 children per woman over her lifetime. The current fertility rate is under 1.9. The Social Security actuaries are hoping and assuming it rises to 2.0 in their best-guess assumption set, but that may be wishful thinking.”

Advisors must take Social Security’s problems into their calculations.

“The demographics and the promised real benefit increases are why the system is projected to run larger and larger deficits,” Entin writes. “There are just not enough future workers to pay into the system to maintain that pace of real benefit growth.”

The well-off, those with significant retirement income, are an obvious target for future cuts. But another advisor says unrealistic expectations about Social Security could also hurt those at the other end of the scale. Those without significant private retirement savings are running a big risk.

“Generally, I don’t want to see someone have more than 20 percent of their retirement incoming from Social Security,” says Charles Hughes, a CFP in Bay Shore, N.Y. “Some actually are depending on 50 percent of their income to come from Social Security.” That’s a figure he finds unrealistic.

“When people tell me they expect Social Security will be half of their retirement income, our discussion takes a different tack,” Hughes says.

“I tell those people that they will have to consider a lifestyle change; that [it] is very difficult to construct a retirement plan when so much is dependent on Social Security.”

Hughes fears that, with Social Security deficits continuing, some years there will be no cost-of-living adjustments.

Advisors need to anticipate problems with the program in the next decade, he adds. These problems could change the assumptions of retirement planning, according to Hughes.

“If Social Security is reduced,” he says, “we may well have to re-examine our assumptions about an initial 4 percent withdrawal rate in the first year of retirement.”