Page 34 - Investment Advisor March 2021

Cover Story

In a negative real interest rate environment, these expected Helping Clients Make Better Choices
benefit payments for a surviving spouse can have significant Many retirees suffer from a behavioral phenomenon known
value. The calculations move from a single mortality table to as narrow framing. They aren’t easily able to disentangle the
a joint mortality table in which the increased Social Security decision to claim Social Security from the decision to retire.
earnings continue until the death of the surviving spouse. Many also express discomfort at the prospect of spending
There is about a 50% chance that a spouse in a healthy down savings in order to fund early retirement expenses
opposite-sex couple will still be alive at the age of 95. before Social Security kicks in.
Benefit increases tied to delayed claiming are spread over One way to encourage clients to accept Social Security
a greater number of expected life years, further increasing deferral is to focus their emotions on something they may
the present value. dislike more than spending down savings — paying higher

The Social Security Trust Funds, Explained

Is the Social Security trust fund in trouble? Yes. The govern- 12.4% (6.2% each by employers and employees), on covered
ment has spent excess payroll taxes to cover current federal wages up to $137,700 for 2020 and $142,800 for 2021. Of the
spending for decades. 12.4%, 10.6% goes to the OASI trust fund and 1.8% to the DI
trust fund.
Does this mean that retirees won’t receive a Social Security The trust funds receive additional revenue from income taxes
paycheck? No. Retirees will continue to get paid as long as on benefits (a backdoor type of means testing) and interest
there are workers making contributions. paid on the bonds held in the trust fund (a form of intragovern-
mental transfer).
Is there a possibility that promised income payments will Total revenues into the trust funds in 2019 were just over
receive a haircut in the future? Yes, but the cut is unlikely to be $1 trillion, with $944.5 billion from payroll taxes, $80.8 billion
as big as many pessimists imagine. from interest earned on trust fund assets, and $36.5 billion on
the taxation of benefits.
Are increasing payments to Social Security going to impact It’s important to keep in mind that while the Social Security
the federal budget? Absolutely, and advisors should understand payroll tax rate is 12.4%, the total payroll tax rate is 15.3%
the consequences for expected taxes for workers and retirees, when the 2.9% Medicare Hospital Insurance tax is included.
and for other benefits that may be reduced for high earners.
When will the Social Security trust funds run out?
Trust Funds and Their Financing According to the Social Security Trustees, the combined
It is important to note that the Social Security program has two OASI and DI trust funds face a financial shortfall of $16.8
legally separate trust funds. trillion in present value through 2094 and $53.0 trillion over
The Old-Age and Survivors Insurance (OASI) trust fund pro- an infinite horizon.
vides benefit payments to retired workers, their spouses, some Further, the Social Security trust funds will be depleted and
children, and the survivors of deceased workers. unable to finance full benefits in 2035. Separately, the OASI
The Disability Insurance (DI) trust fund provides benefits to trust fund will be depleted in 2034, but the DI trust fund will
disabled workers and their spouses and children. run out in 2065.
Social Security paid out $1 trillion in benefits during 2019, Although the date of depletion for the combined trust funds
almost one-quarter of the entire $4.4 trillion federal budget. Of varies somewhat from year to year based on economic condi-
these benefits, 86% came from the OASI trust fund and 14% tions, for the last 20 years the Trustee reports have consistently
from the DI trust fund. estimated that the combined trust funds will be exhausted
The size of the Social Security trust funds is the value of between 2037 and 2042.
these trust fund bonds. At the point when income is no longer Unless Congress takes action to reform Social Security, the
sufficient to cover full benefits, the bonds in the trust funds are program will only be able to pay approximately 75% of esti-
redeemed in order to continue paying full benefits. mated benefits when the OASI trust fund runs out of assets in
When all of the bonds are redeemed, and the trust funds are 2035. For DI, trust fund exhaustion in 2065 will reduce the pay-
depleted, Social Security only can pay out in benefits what it out to about 90% of scheduled benefits.
receives in income from Social Security payroll taxes. There’s a very large caveat, though, with respect to the
The trust funds are primarily financed by a tax, currently 2020 Social Security Trustees’ report; it was finalized before

32 INVESTMENT ADVISOR MARCH 2021 | ThinkAdvisor.com