For years, the federal government has warned lawmakers that the Social Security trust fund will be exhausted by 2034. After that point, current tax revenue will only be able to pay 75% of the expected annual benefits. That’s not easing the minds of Americans, about 45% of whom say they worry a “great deal” about the Social Security system, according to a 2017 Gallup poll.

Of course, there are only two ways to fix the problem: Either reduce future benefits or raise payroll taxes. But how do either of these two actions impact retirement timing, consumption and overall well-being?

Workers age 37 to 55 may bear the most brunt of any changes to Social Security, Dave Grant writes. Bloomberg News

A study by the Center of Retirement Research at Boston College looked at four proposed changes to the Social Security system and extrapolated how these changes would affect the retirement of millions of workers over the upcoming decades. They concluded that changes on the benefit side of the equation, like an increase of the full retirement age to 69 and a 0.5% COLA reduction, would delay the timing of retirement for many workers. In contrast, changes to the revenue side, like an increase in payroll taxes or taxing 90% of benefits, would barely change retirement timing.

The study showed that benefit-based changes led to reduced consumption in retirement, given the overall shorter length of retirement and the smaller COLA. When payroll taxes were increased, however, the expected consumption didn’t change in retirement.

How should these findings impact that advice that advisors give their clients? Given that there is no impending change to Social Security now, it might be premature to be asking clients to change their behavior.

That said, based on this research report, advisors should nevertheless be having conversations with their clients now, to counteract any changes that do come in the future.

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Retired clients: Older clients can breathe a sigh of relief. There has been no talk of retroactively changing benefits for those currently receiving benefits, and any such proposal would be a highly unpopular political move for lawmakers. Instead, the only changes that have been suggested include delaying benefits for future retirees or increasing payroll taxes on current workers. Nervous retired clients should hold onto this knowledge with some hope, and it’s our job to calm them of these fears.

Pre-retiree clients: Clients retiring in the next 10 years should also not expect any dramatic changes to their plans. If revenue or benefit changes are made, they will likely follow suit with previous changes. In 1983, for example, the adjustment of the retirement age from 65 to 66-67 was implemented over a wide timespan so that, in 1983, a worker who was 46 could collect full benefits only two years earlier than a worker who was 23. Even if payroll taxes were raised, the increase would only be felt for a short period of time before retirement.

Gen X: Workers age 37 to 55 might bear the brunt of any changes, and this is where an advisor’s guidance can offer the most value. To ward off the impact of policy changes, advisors should have discussions with these clients now. Remind them to have a looser grip on their target retirement age, should they be relying on full Social Security benefits as part of their retirement income plan. In addition, advisors should help their clients prepare for the possibility of future payroll tax increases, helping them understand that if they increase their savings rate now, there could be less discomfort in retirement. Saving more and minimizing lifestyle expenses now, can also lead to lower lifestyle expenses in the future and smooth the transition into retirement.

Millennials: Millennials make up the biggest segment of the workforce, and for them, any potential policy changes that increase the solvency of the Social Security system might offer a small glimmer of hope. After all, some benefits in retirement would be better than not receiving anything. Advisors should help millennial clients understand that they’ll likely end up paying more into the Social Security system during their careers, or they may have to wait a bit longer to receive their own benefits when they retire. Advisors should encourage them to save as much as they can now. Their retirement accounts can be part of a broader retirement income strategy that continues to include Social Security.

Dave Grant

Dave Grant

Dave Grant, a Financial Planning columnist, is founder of Retirement Matters, a planning firm, in Cary, Illinois. He is also the founder of NAPFA Genesis, a networking group for young fee-only planners.