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Should clients prepare for Social Security benefit cuts?

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With all the fiscal problems facing the Social Security system, should advisers counsel clients to expect a reduction in Social Security benefits?

Advisers say that many clients are asking that question, but the answers are mixed.

Accountant Richard Rampell doesn’t think that benefits will be reduced.

“It would be political suicide for any elected official to reduce Social Security benefits. That’s the third rail of American politics,” says Rampell, a CPA and principal-in-charge at Morrison Brown Argiz & Farra in Palm Beach, Florida.

President-elect Donald Trump has pledged to avoid cuts, Rampell says.

But Rampell and others agree that clients should hedge for the possibility of benefit decreases anyway.

The numbers indicate that something has to give on Social Security.

There are 2.8 workers contributing to Social Security for every beneficiary, down from 5.1 in 1960.

The Social Security Administration anticipates that the number will drop to 2.2 by 2035, with the birth rate decreasing, the number of retirees climbing and their life expectancy increasing.

As a result, benefits are expected to be payable in full only until 2037, when the trust fund reserves are projected to disappear. At that point, continuing taxes are seen being enough to cover just 76% of scheduled benefits.

But that assumes that no changes are made to the system.

Experts have suggested a number of reforms to avoid a reduction in benefits.

One is to increase the retirement age, which is 66 and will rise to 67 for those born in 1960 and afterward.

Another is to create a means test, so that workers whose income passes a certain threshold would receive either reduced benefits or none at all.

Third is to increase the income ceiling above which workers no longer have to pay Social Security taxes. That level is $118,500.

“We do believe Social Security will be around in 75 years, and we believe changes will be made to maintain benefits,” says Tiffany Benigni, an associate adviser at D.B. Root in Pittsburgh.

But just in case, the firm is advising younger clients not to count on Social Security being fully there for them.

“They’re prepared for a reduction or elimination of benefits,” Benigni says.

For middle-age clients, D.B. Root recommends planning for the possibility that they will only obtain 50% to 75% of expected benefits.

The firm tells clients who are about to retire or already retired to expect no benefit cuts.

This story is part of a 30-30 series on Social Security.

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