Wealth Planning Commentary – October 21, 2024

What You Need to Know About Social Security

The media is covering the future of Social Security, and it's no surprise that concerns are growing. While headlines often fuel fear about the program’s long-term viability, the reality is more measured. Let’s start with some good news: The Social Security Administration recently announced a 2.5% Cost of Living Adjustment (COLA) increase for benefit payments in 2025. This follows last year’s 3.2% increase. Over the past decade, COLA averaged 2.6% annually. Now, the bad news: The Social Security Trustees report published in May highlights that trust fund reserves are predicted to deplete by 2035. At that point, benefits will be automatically reduced to 83% of the current projected amount. What Does a Depleted Trust Fund Mean? Full benefits are still expected for those receiving social security payments for the next decade. Without intervention by Congress, after 2035, retirees would likely receive a reduced benefit. It can be helpful to model a scenario in your wealth plan that assumes a 17% reduction in benefits, which may put concerns at ease. Identifying gaps allows minor adjustments over time, helping weather any potential reductions. For those with more than 10 years until retirement, there’s more time to adjust and plan accordingly. Millennials and Gen Z Should Care While those close to or in retirement voice immediate concerns about Social Security, younger taxpayers—the Millennials and Gen Z—tend to view the program skeptically. According to Gallup data, only 37% of Americans aged 30-49 expect benefits, compared to 66% of those 50 and older. For these generations, it may be wise to evaluate wealth planning scenarios with varying levels of benefit: full benefits, 83%, 50%, and none. Creating a plan that avoids dependence on social security provides a greater sense of financial security. Will Congress keep Social Security Solvent? Congress may intervene to keep benefits at 100%, and there are various levers they can pull. There are also precedents for changes to benefits, like in 1984 when Congress taxed Social Security benefits for the first time, effectively reducing them. One potential policy change is increasing the payroll tax rate or subjecting all wages to payroll taxes rather than just wages up to the current cap of $168,000. These actions would strengthen Social Security’s finances. Another option could be delaying the full retirement age (FRA) from 67 to 68, which would close 13% of the funding shortfall; raising it to 69 would close 39%. Additionally, benefits for the top 70% of earners could be adjusted by growing benefits based on price changes rather than wage growth. Ultimately, minor modifications to the tax code and benefit age may be the most effective way to keep benefits intact while avoiding taxpayer resistance. In summary, Social Security is expected to continue paying benefits for decades. Still, adjustments to benefits, tax rates, or age eligibility are likely necessary to sustain the program long-term. Given the benefits' importance to many voting citizens, Congress will likely intervene. For those feeling nervous, it’s important to recognize that while concerns are understandable, the issue is often exaggerated in the media. Please reach out to your Wealth Manager with questions about social security.