Your Thriving Practice

Social (in)Security: 3 things every client in their 50s should know

Quickly cut to the core of the Social Security issue

Some pundits think Social Security is in trouble as it is currently structured. Based solely on basic math, it is believed that the program cannot continue indefinitely because it currently pays out more than it takes in. Until a plan to keep Social Security solvent is enacted, there are three key facts that clients in their 50s should understand in order to chart their own path forward through what might end up being a bit of a retirement minefield in the coming years.

What your clients should know

1. The Social Security System as it is currently structured pays out more than it takes in. Why?

Monies collected through payroll taxes on the current US workforce provide the benefits to today’s retirees. However, the worker-to-beneficiary ratio is imbalanced at the moment because the Baby Boomer generation (currently in or entering retirement) is bigger than the generation behind it.

Hold on though…retirees are still getting their benefits. How’s that happening, you wonder? In addition to current inputs from payroll taxes, Social Security has a “trust fund” from which it can draw. Because of the present shortfall, some of the funding for Social Security benefits is currently being withdrawn from that “trust fund.” Without a solution, that “trust fund” is projected to run dry by 2034.

2. Inflation has caused a hike in Social Security benefits

As this earlier article from Your Thriving Practice covers, recent record-inflation triggered an increase in Social Security benefits. This 8.7% increase — the largest such boost since 1981 — came in response to the higher cost of living. So, now we have an expenditure increase coinciding with a funding deficit.

Cost-of-living adjustments (COLAs) such as this are a bit controversial in their own right. In “How to Fix Social Security?,” a recent article published by Princeton University, Professor R. Douglas Arnold made the point that “Legislators could change the way benefits are adjusted for inflation. They are currently adjusted with the consumer price index. Some economists think this index overstates inflation. They suggest using an alternative index called the chained price index. If you switch to that index, you would solve one-fifth of the long-term deficit.” No matter how they’re calculated, COLAs will have to happen, and any additional uptick in outflow in the short-term will still occur simultaneously with a shortfall in contributions.

"the worker-to-beneficiary ratio is imbalanced at the moment because the Baby Boomer generation (currently in or entering retirement) is bigger than the generation behind it..."

3. Longer retirements create greater strain on the system

People are living longer. That’s a great thing! They’re also requiring more benefits to carry them through retirement. 

That’s less good, especially when combined with the two pressures outlined above.

In the 1930s, when Social Security was created, the average American life expectancy for men was 58 and 62 for women, and retirement age was set at 65! Today, the average life expectancy (for men and women combined) is 79 years. The people who built the Social Security system could not have foreseen this positive development, which has arisen from improved medical treatments combined with an overall better understanding of the ways diet, exercise and other lifestyle choices can contribute to longevity.

This is a good problem to have. But it is still a problem in the context of sustaining Social Security.

What could happen?

Assuming Congress doesn’t simply let Social Security fail (an assumption not everyone is ready to make), there could be three alternatives: increase payroll taxes, cut benefits, or raise the retirement age. None of these options may be attractive, or in any way directly beneficial, to your clients. The potential downside is particularly pronounced for clients currently in their 50s who may have to weather the immediate implications of whatever solution is implemented.

What might be done

If you put these problems in front of a client, you may want to offer some potential alternatives. In looking at possible ways to counter the current Social (in)Security challenges, it’s probably worthwhile to keep in mind what Social Security was intended to accomplish in the first place: The point of Social Security is to provide a “retirement paycheck” that lasts the lifetime of the recipient. In looking at alternatives, the ideal scenario would probably be to establish some manner of income-generation that mimics Social Security in that it does not deplete the individual’s capital. The many ways to accomplish this include interest from bank deposits, stock dividends, rental income from real estate investments, and more. Each of these can provide a cash flow that does not require the consumption of capital. But each of these comes with its own challenges.

"People are living longer. They're also requiring more benefits to carry them through retirement..."

A source of guaranteed lifetime income — with the opportunity for additional benefits

Given the issues currently confronting Social Security, and the potential “rough waters” that may lie ahead, some clients nearing retirement may be interested in incorporating an annuity into their retirement savings plan.

According to Paula Nelson, Head of Strategic Growth, Individual Markets at Global Atlantic, “Annuities can provide a sound option for some people who don’t think Social Security or pension income, if applicable, will provide enough to meet their basic expenses in retirement. There are many factors that go into this, but for certain individuals, annuities can be a viable way to create their own ‘retirement paycheck.’”

Much like Social Security, an annuity can help some clients replace their paycheck, cover certain essential retirement expenses, and may help them maintain a desired lifestyle. Certain annuities can also deliver benefits that Social Security cannot — even when Social Security is working perfectly.

To find out more about how Global Atlantic annuities can help you meet your clients’ needs, visit our product pages from the main menu above.

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