While younger clients brace for an uncertain future, Social Security fears are already pushing a historic number of older Americans to claim their benefits.
Since the start of the year, a record 1.8 million Social Security applications were submitted to the agency through May, up nearly 18% from the same period last year. The surge in claims is a result of multiple factors, but
Under the Trump administration, the Social Security Administration has cut 7,000 members of its staff, dropping employment at the agency to 50,000 workers. Call wait times at the agency also
In an informal Financial Planning survey of 40 financial advisors, roughly three-quarters of advisors said their clients are concerned about the agency's ability to maintain its current benefit levels.
The reasons behind those concerns are real, but that doesn't make them a sound basis for deciding when to claim Social Security, advisors say.
"I'm not changing my overall Social Security strategy in response to recent headlines, but I am having more conversations with clients about it,"
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Clients may also lean toward taking their benefits early for entirely personal reasons. In a
For advisors, talking to clients about Social Security can often mean addressing fallacious psychological tendencies while also engaging with the material concerns that investors are feeling about the program's future.
An aging population has led to Social Security disbursing more benefits than it collects in payroll taxes, necessitating the use of its trust fund.
That timeline could fluctuate significantly depending on a range of costs and revenue factors. To understand how shifts in those variables affect the trust fund, researchers at the agency ran 5,000 simulations, each using yearly values and general trends for the most important factors. The simulations predict a range of outcomes, showing how likely different future scenarios are.
In 90% of simulations, the Social Security Trust Fund is estimated to be depleted by the beginning of 2038. Once depleted, Social Security could continue paying roughly 81% of benefits.
Two camps form on Social Security's future
Among financial advisors, expectations about the future of Social Security's funding are even more uncertain.
While 16 of the 40 advisors surveyed said they think Social Security benefits are at risk of being cut in the next 10 years, a nearly equal number of planners said they don't think there's a risk of payments being reduced in the next 50 years.
Benefit cuts could be reduced through a variety of government measures, including raising the retirement age or eliminating the Social Security tax cap. However, implementing any solution depends on government officials successfully enacting the necessary legislation — a prospect that many advisors view with a degree of skepticism.
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Advisors in FP's survey were asked to rate their confidence in the government's ability to address Social Security's funding deficit before benefit cuts become necessary, using a scale from 1 to 5, where 1 meant "Not confident at all" and 5 meant "Very confident." The most frequent response was a 3.
Virtually every financial advisor surveyed said that they expect Social Security to be around for decades to come — numerous advisors described the program as a political imperative for government officials — but few think it will survive unscathed.
A young generation of investors bet on themselves
Advisors are quick to dismiss concerns about Social Security payouts for older Americans today. But when it comes to retirement planning for a
"I talk about this with younger clients, outlining the issues and asking them how they want to proceed," said Michelle Fait, founder of Satori Financial in Seattle, Washington. "Do they want to be conservative and assume that Social Security won't be there for them, even though that means they over-save for their goals, or do they want to assume that the issues will be resolved? Most want to not include Social Security benefits."
Advisors respond to that outlook in different ways. Charles "Chuck" Failla, the founder of Sovereign Financial Group in Stamford, Connecticut, said that he runs cash flow forecasts with and without Social Security for younger clients.
"If we have a younger client, let's say anyone under 40, certainly under 30, we're having this discussion, saying, 'Look, you see the news as much as we do. There's a legitimate chance that Social Security will not be around, at least not as we see it today,'" Failla said.
For younger clients, Failla emphasized the importance of creating a retirement plan that doesn't rely on Social Security benefits. This way, if those benefits are available when they retire in the future, it will only enhance their financial security.
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Taking that approach can build in a sizable retirement cushion for clients, but it can also require difficult financial decisions in the present.
"Let's say a plan works really poorly without Social Security. Will we start having drastic suggestions for changes to their lifestyle? … Are we so sure that this 30-year-old's not going to have Social Security that we want them to not pay for their kid's college? I don't know," Failla said. "It is a lot of uncertainty. There is no shortage of uncertainty these days, and that, unfortunately, is just another piece of it. So the best we can do as planners is make sure they're thinking about it and then give them some ownership of the decision on how to forecast it."
While many investors tend to think in a binary way about Social Security's future, most advisors say that a reduction or delay in benefits is a far more likely outcome than an outright elimination of them.
Byrke Sestok, a financial advisor at MONECO Advisors in Fairfield, Connecticut, said that while he doesn't expect benefits to be cut in the next 50 years, the Social Security Administration will likely push back the full retirement age (FRA) for younger workers.
"FRA was pushed back from 65 to 67 on the last major modification. I would not be surprised to see FRA pushed from 67 to 70 for adults under the current age of 40," Sestok said. "I would expect to see early claiming to be pushed back to age 65, too. The change of the RMD age from 70 to 73 also leaves open the possibility to [extend] the delayed Social Security bonus, changing it from age 70 to 73."
Still, even if the agency can maintain its benefit levels, Sestok said building "wiggle room" into a plan is better than heavily relying on Social Security payments.
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"I really never plan for [Social Security] to be more than 30% to 35% of income expected in retirement," Sestok said. "If somebody's planning for Social Security to be the only thing, then they need to be doing something else, and the conversation should happen sooner rather than later."
For younger investors who aren't on track to retire, having that conversation can be difficult.
"It can be very unsettling for people, especially younger people," said Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland. "Like, 'Man, I just finished paying off my loans, or I still have loans. I have a kid, like, I'm never going to stop working. I'm going to work until the day I die.'"
Having candid conversations early about a young client's path to retirement is important, but it can also have unintended consequences if the advisor doesn't approach them in the right way.
"It's not very inspiring, empowering or helpful," Cheng said. "And then people just throw up their hands and say, 'You know what? I can't do this.' And I don't want people to feel that way."
Striking the right balance is far from simple, but advisors like Failla say the Social Security conversation is "mandatory" for younger clients today.
