Social Security is one of the most complicated topics in America right now. On one hand, those drawing benefits are very skeptical of any claims to “reform” the program via privatization or changes to payouts. On the other, the Social Security Administration admits that it’s only a matter of time before the fund goes bust — with the latest forecast showing Social Security becomes unsustainable in its current form by 2033.
Understandably, many investors and future retirees have big questions about Social Security and their future benefits. So, I caught up with an expert on the topic to get some answers.
William Meyer is the founder of Social Security Solutions and is committed to helping baby boomers make the most of their retirement savings. Bill held jobs at Charles Schwab and H&R Block, with an MBA from the Anderson School at UCLA, and is intimately acquainted with the needs of investors, whether they have $1,000 or $1 million in the bank.
I posed some tough questions for Bill recently, and his answers should shed a lot of light on how you should view Social Security — and how you should plan for retirement accordingly.
Q: How “solvent” is Social Security, based on current retirement ages and payout rates?
A: There is no doubt that the system will have to change in the future. The key is predicting when changes will be implemented and who will be impacted.
The 2012 Trustees Report revealed that Social Security is solvent until about 2033, but the system will face a shortfall if no changes are implemented. Social Security had a surplus of almost $70 billion in 2011, and reserves are projected to grow to $3 trillion by 2020. But if no action is taken by Congress, reserves would have to be drawn down to pay benefits.
In the unlikely event that Congress does not act, the reserves will continue to be depleted, and revenue from workers and employers would cover only about 75% of scheduled benefit payouts. The last two changes were in 1977 and 1983, which took 7 and 17 years, respectfully, to implement. In our book Social Security Strategies, we tell people approaching retirement and those over 55 years old to use the existing rules to figure out a claiming strategy.
This view is also shared by other experts like the Center of Retirement Research at Boston College. The good news is that moderate changes to Social Security can mean a long-term fix for the system.
Q: What do you think the likelihood is of some change to that metric in the near future, if not for all retirees, at least for those who are not yet eligible?
A: There are a number of proposals on the table to “fix” Social Security — somewhere around 100 of them have been issued by the SSA Chief Actuary. These proposals range from raising the earnings cap to implementing a means test.
It is our opinion that most of the proposals are not likely to come to fruition — such as the implementation of a means test. With that said, it’s clear that some changes must occur to keep the future of Social Security strong beyond the mid-2030s. We believe the most likely changes will not impact Americans who are within a few years of retirement age — in other words, they’ll be grandfathered into the current rules.
Changes that have been made in the past have either not impacted those approaching retirement, or they provided a number of years before the effective date so that consumers had ample time to prepare.