While some investors and even their investment advisors are downright blasé about threats to Social Security, the fact is cutting benefits of even wealthier Americans could have a significant impact on monthly income, lifestyle and the ability to achieve financial planning goals.
While many wealthier investors think a few thousand dollars a month in Social Security benefits doesn’t matter at all, “it matters quite a bit,” says Ben Gurwitz, wealth manager and chief investment officer at Financial Life Advisors in San Antonio, Tex.
Gurwitz runs computer simulations to show clients what their chances are of outliving their money in retirement. Even a 25 percent reduction in Social Security benefits would lower some of his wealthy clients’ chance of success by 15 percent or more. Doing away with Social Security benefits entirely increases the chance to 70 percent that even those with over $1 million in investable assets could take a lifestyle hit or even run out of money before they die, Gurwitz says.
“You need a lot more money in retirement than you think because there is so much uncertainty,” says Gurwitz.
While some advisors and wealth investors tend to blow off the real benefit of Social Security, it does three things that no other asset does: It’s guaranteed for life, tax-preferenced and inflation-adjusted, adds Gurwitz. “As a fall back position in case every other asset fails or is diminished, it provides a lot of security and surety no other asset can.”
Unfortunately, Social Security is in trouble and the window for fixing it with the least amount of pain is narrowing. According to the Social Security Board of Trustees' 2017 report, the program will begin paying out more in benefits than it's generating in revenue beginning in 2022. By 2034, some $3 trillion in asset reserves will be completely exhausted. In fact, Social Security prints that warning right on retirees’ 2017 statement: “Social Security benefits will only be paid at 79% of current rates unless Congress acts before 2034."
The good news for seniors is that Social Security won't be going bankrupt anytime soon, even if its excess cash is depleted, thanks to the way the program is funded. Payroll taxes on earned income accounted for 87.3 percent of the $957.5 billion that Social Security collected in revenue in 2016, meaning that as long as Americans continue to work and pay their taxes, Social Security will keep bringing in revenue that can be used to pay eligible beneficiaries.
The bad news is that the current payout schedule is not sustainable. The trustees opine that an across-the-board cut in benefits of up to 23 percent may be needed to sustain payouts to beneficiaries through the year 2091. Politically, an across-to-board cut is unlikely since three in five retired Americans rely on Social Security benefits for as much as 50 percent of their monthly income. That leaves the wealthy to bail out the system.
The solutions being floated? Taxing the wealthiest American’s income or means testing them into a reduction in benefits at certain retirement income levels.
According to the Social Security Administration, 90 percent of individuals age 65 and older receive Social Security benefits. Average lifetime benefit Americans receive is $278,000. The question is, should the wealthy be required to pay more? If you ask the public, the answer is simple: Yes, tax the “wealthy.” According to a variety of surveys, a majority of the public wants the rich pay more into Social Security.
Congress essentially has two paths it can take to "fix" Social Security: raise revenue or cut benefits. From a tax perspective, the 12.4 percent payroll tax applies to earned income between $0.01 and $127,200. This means any earned income above $127,200 is free and clear of Social Security's payroll tax. Raising the cap would only affect about one in 10 workers. That means 90 percent of working Americans are paying into Social Security on every dollar they earn. These folks are liable to favor any legislation that requires well-to-do workers to share their fate.