The Insecurity of Social Security Benefits: How Did We Get Here?

The American College of Financial Services
July 27, 2020

We've been hearing it for years: the Social Security Administration and the retirement income benefits it provides to millions of Americans are in trouble. With more people in the United States at or near retirement age and set to receive the monthly benefit than ever before, Social Security's insecurity has been increasing for some time right under our nose. Recent updates on the status of Social Security from its Board of Trustees show that next year, the fund could start shrinking for the first time since its creation, and Social Security benefits could see significant reductions as early as 2035.

To understand the impact of wavering Social Security income on retirement planning, advisors, and recipients, however, it's first important to understand the key factors that have driven Social Security to this point.

Many of the issues facing Social Security are based on demographic changes: first and foremost among them, increased longevity among Social Security beneficiaries. People are just living longer these days, both in the United States and across the world, thanks to improved medicine and technology. That's a very good thing, but it also means Social Security benefits have to be paid out much longer than lawmakers ever intended when the program was created in the 1930s.

This age problem is coupled with lower birth rates: Social Security was designed from the start to be supported by contributions from young workers, who were incentivized to prop up older Americans by the knowledge that one day, the next generation would be supporting them, too. But with fewer and fewer people being born, the number of recipients for Social Security has begun to outpace the number of people paying into the fund, a classic supply and demand problem.

Beyond specific policy disagreements on related issues, political inaction overall has played a significant role in uncertainty about the future of Social Security benefits. While the Trustees of the fund have been sounding the alarm for decades, Congress has been slow to develop a meaningful response to the issue. Partisan divides on proposed solutions, from raising taxes to cutting benefits, have resulted in reform gridlock that seems unlikely to be resolved anytime soon.

Another critical factor are major market disruptions, like the COVID-19 pandemic: while the Trustees' recent report isn't overly optimistic to begin with, it doesn't include the devastating impact of COVID-19 on financial markets, which could easily accelerate many existing problems: even lower immigration and reduction in the payee pool, loosening monetary policy and cutting interest rates, and so forth. On the flip side, however, increased mortality among those at or near retirement age due to the harsh medical realities of the pandemic could soften the blow.


Building a Foundation During Unstable Times


The fact is that an ever-growing number of Americans at or nearing retirement age, and even those far down the road, are relying on Social Security benefits as a pillar of their retirement income strategy: however, the possibility is also very real that recipients could see their benefits cut in the near future and their portfolio jeopardized as a result. Advisors need to take this into account when engaging in retirement planning.

For more information on how to navigate Social Security insecurity and its effect on retirement income, download our guide, "The End of Social Security as We Know It?" Arm yourself with the knowledge you need to address retirement planning clients at all stages of life with confidence.

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