The other option for reducing the Social Security’s funding gap is to “means test.” Means testing would reduce benefits for higher-income recipients and could even eliminate benefits altogether for the highest-income households. GOP proposals being floated begin to phase out benefits at $60,000 for individuals and $125,000 for couples. Unlike the option to reduce benefits for higher earners, which uses a measure of career average earnings to reduce benefits, means testing would reduce benefits based on the full range of current income. Who would be affected and by how much depends on how the income thresholds are defined.
“Absolutely this would impact our clients,” says Lazetta Rainey Braxton, founder and CEO of Financial Fountains LLC in Baltimore. “You’re talking about an income stream that would not be available to them. Those who receive Social Security are already commenting on not getting raises. For my younger generation of clients, I tell them they have to see Social Security as a bonus, which means we really have to max out on every other form of investment possible, including 401(k)s, IRAs and, even in the case of clients who marry and can’t or don’t sell one of their homes, rental income."
Todd Wilhoit, president of Chesapeake Investment Planning in Stevensville, Md., says he gets calls all the time from clients who are concerned that their Social Security benefits will be eliminated. “Every one of our clients who are nearing or in retirement are worried about their benefit and what’s going to happen. For retirees on fixed budgets, any kind of a hit would affect how they live and the decisions they make day to day,” says Wilhoit.
Joe Breslin, a planner with Armstrong, Dixon in Baltimore, tries to take politics out of the equation for clients so they can focus on the business of planning. “Very frequently our clients ask us if Social Security is going to be there for them,” he says.
Too often, the clients are framing the conversation to make a political point, he says. "Our responsibility as CFP professionals is to identify the political biases and set realistic expectations for the clients,” says Breslin. “Yes, the Social Security system has financial issues to be addressed, but no, Social Security is not going away. It is likely we will see changes to the system over the next decade to address the shortfall.”
The changes may be a combination of increased payroll taxes, increases to the wage cap, raising of the full retirement age, changes to the COLA and/or a means test, says Breslin.
“We counsel our clients to control what they can control. If benefits would be reduced for higher income workers in the future, clients need to amend their plans through increased savings, delayed retirement and/or decreased spending in retirement. The planning implications for clients are doubtful to be as dramatic as suggested,” Breslin adds.