To date we have looked at the status of the Social Security system and some potential fixes to keep the system functioning. Today, I’d like to help answer – what, if anything, should we be doing to prepare for an unknown Social Security future?
“According to a 2023 Gallup poll, 43% of current retirees expect to eventually experience a cut in Social Security benefits.” – Kitces.com. While this is possible, it remains unlikely given that the system would still be 83% funded if the trust fund itself was to be liquidated by 2035. As we discussed earlier, current benefits are paid by current workers. We are also seeing states get into the act by reducing retirement income taxes. In Iowa, for many taxpayers, taxes are not collected on any retirement income. One way we can model a potential cut in benefits is to eliminate the cost of living increases we build into our client’s plans. While this is not specific to potential cuts, it would bring benefits down over time and assist in developing contingency plans.
For working age clients, the picture is more complex. The same Gallup poll I referenced above found that only 50% of non-retired adults expects to receive ANY benefits from Social Security! What? Anyway, this is not a likely outcome, but building in more conservative planning scenarios does make sense. My personal viewpoint is that the most politically friendly approach (is politically friendly even a thing anymore?) would be to systematically raise the full retirement age. This could be math based when our demographic trends are evaluated to land on the number of workers we expect and their tax output. An additional factor could be longevity rates, which only seem to improve.
As a planner I intend to factor in the following: later full retirement ages, reduced benefits by the cost of living increases and higher payroll taxes while folks are still working. Social Security should remain part of the retirement income picture for working age adults, but we will need to build in some guardrails.
Now, for the youngsters out there, such as Will and my brood. You are toast! Just kidding – As long as there is a next generation of workers, this system will be functioning in some capacity. However, you should plan to pay in significantly while you are working. I would recommend saving aggressively in Roth buckets and other retirement saving buckets the entirety of your working career. This will give you the most flexibility and freedom to retire with dignity and on your own terms.
Social Security remains a hot political button and typically a very confusing topic. We believe it is a cornerstone of retirement planning but needs to be handled with kid gloves and realistic expectations. There will be changes and they will not likely all be advantageous. However, I believe that the system will continue to support retirees. As always, the more saving and planning we do separate from SSI will allow us a better range of retirement outcomes.
