Younger professionals often ask, “Should I even bother including social security benefits in my retirement plan projections?” Unfortunately, it’s hard to give a direct answer. There is certainly a valid reason for concern and a strong argument to be made for not including social security retirement income in your overall plan if you are under the age of 40. Let’s dig deeper into social security to look for some possibilities about the future of the program itself.
According to the Simpson Bowles bi-partisan report of 2010, when social security was first enacted back in 1935, the average life expectancy was 64 and the earliest you could collect benefits was 65. If most people die before they are eligible to collect benefits, then the program is fairly easy to maintain. In today’s America, people are living longer (average life expectancy of 78) and they are eligible to collect benefits at 62 (three years earlier). Not to mention that in 1950 there were 16 people working for every 1 person collecting whereas today the ratio is 3 people working for every 1 person collecting benefits. Is it any wonder the social security trust fund is projected to be fully depleted by 2037?
The Simpson-Bowles report further goes on to explain that unless changes are made soon, by the year 2037 there will only be enough revenue coming in to pay approximately 75% of the benefits owed. That could mean either everyone gets their benefits reduced or some people don’t get any benefits at all.
The Simpson-Bowles Report offered solutions that could impact the sustainability of the program:
- Increase the Full Retirement Age from 67 to 68 for those born after 1970, age 69 for those born after 1980, and age 70 for those born after 1990. Also, increase the early eligibility age along with the full retirement age so that those born after 1970 would have a full retirement age of 69 and the earliest they could collect benefits would be 63. This approach seems like a very reasonable way to address the increasing life expectancy of Americans. As a young professional I’m certainly not thrilled about the idea of having to wait longer to collect benefits, but I would much rather have to wait than to receive no benefits at all.
- Get rid of the wage cap on the social security payroll tax. Currently the social security wage tax is 6.2% on earnings up to $117,000. Lowering the payroll tax to 4% and lifting the cap would theoretically bring in more revenue because you are taxing a lot more dollars at a lower rate. This approach may be more politically palatable than just simply lifting the cap and keeping the tax rate the same.
Use the chained CPI approach for cost of living adjustments rather than the standard CPI approach that is now in use. For further discussion on this subject please see the following link: http://www.advisorperspectives.com/dshort/commentaries/Chained-CPI-Overview.php
Certainly there are other ways to fix the system, and hopefully lawmakers can all agree that it’s a useful program and it is worth fixing. So what’s my answer when a young professional comes to me and says, “Matt, should I or should I not include social security retirement benefits in my retirement projections?” I say that there seem to be strong indications that the program will probably be there in some fashion. It’s unlikely that you will be able to collect a full retirement benefit at age 67, and it’s also unlikely that you will be able to collect at age 62. To be cautious, it may make sense to plan on collecting a reduced benefit at age 70. If the program is healthy and you are able to collect sooner, then your plan will work out even better.
Matthew Trujillo is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.
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