It's common knowledge among financial advisors and their clients that, unless changes are made to address Social Security's current funding shortfall, retirees will face a significant reduction in benefits in about a decade.
What is less understood, according to HealthView Services CEO Ron Mastrogiovanni, is just how big of a benefit cut could be in store — and how much workers at different life stages stand to lose. Industry pros have also lacked insight into the likely effect on tax burdens and benefit payments of the many different potential fixes for Social Security solvency in real dollar terms.
This is why Mastrogiovanni collaborated with Mike Daley, the director of research and marketing at HealthView Services, on a new paper exploring these questions. As the pair warned in an interview with ThinkAdvisor, the greatest impact on retirees will be if policymakers in Washington do nothing and just let benefits fall under current law.
If benefits are reduced by 21% (consistent with current Social Security funding expectations), a mass affluent couple 25 years from retirement risks losing upwards of $908,000 in future Social Security benefits. An average-income couple 10 years from retirement would face a smaller but still substantial cut in lifetime benefits of $252,000.
"The cost for individuals of addressing Social Security's funding needs will vary considerably based on which proposals are implemented and when they are put into place — but also by income, longevity and claiming age," Mastrogiovanni explained.
The good news is that modest additional contributions to retirement savings will be sufficient for younger generations to future-proof retirement plans against a range of scenarios in which benefits may be reduced, the researchers said. But that's only going to be the case if advisors and other stakeholders get the word out now.
"This paper provides working Americans, advisors and the financial community cost projection data to understand the ways in which changes to Social Security will affect retirement plans," Mastrogiovanni added. "Congress will have to make hard choices that will reduce benefits or increase tax revenue for the program — both of which have a significant cost to future retirees."
The Biggest Hits
Across the range of scenarios detailed in the paper, doing nothing will have the greatest cost in terms of dollars lost for future retirees. But there are also big potential effects when considering possibilities such as changing the full retirement age, reducing cost-of-living adjustments, raising the cap on taxable wages or lowering spousal benefits.
The paper shows the next most significant proposal in terms of dollar impact for retirees is also the most likely — i.e., changing the full retirement age (FRA). Delaying the FRA for future retirees by one year from 67 to 68 would cost a mass affluent couple retiring in 25 years, claiming Social Security at 65 years old, some $325,000 in lifetime benefits.
Under the same conditions, the report shows, an average-income couple will see benefits reduced by $249,000. If the couples delay claiming for one year, they will see Social Security reduced by $125,000 or $95,000.
