Page 35 - Investment Advisor March 2021

income taxes on future required minimum distributions. while paying attention to tax brackets.
Estimate a sustainable annual retirement spending Keep in mind, waiting until age 70 may not be the optimal
path given the client’s current wealth and make a plan claiming decision for everyone.
to withdraw funds from a traditional individual retire-
ment account to bridge lifestyle expenses before Social Jason Fichtner is the associate director of the Master of
Security begins. International Economics and Finance Program at the Johns Hopkins
Explain that by withdrawing the IRA assets when their School of Advanced International Studies. Michael Finke, Ph.D.,
income taxes are lower, this allows for a reduction in the tax CFP, is a professor of Wealth Management and Frank M. Engle
impact of required minimum distributions later in life; with- Distinguished Chair in Economic Security at The American College
draw more before age 70 and less after Social Security begins, of Financial Services.

the economic effects of the current COVID-19 pandemic could Social Security Reform
be taken into account. The 2021 report is not due out until There are, however, many reform options that will help achieve
April 2021. sustainable solvency and do not raise taxes. For example,
Using the 2008 financial crisis as a proxy, the Bipartisan Congress can increase the retirement age, link benefits increas-
Policy Center estimates that if the financial impact of the pan- es to longevity, and better account for automatic adjustments to
demic is similar to that experienced as a result of the 2008 the benefit formula for changes in price inflation.
Great Recession, the Social Security OASI trust fund depletion It is likely, however, that the government will be forced to
date would hasten to 2030, while the DI trust fund depletion institute some combination of tax increases on higher-income
date would be dramatically sooner — moving up to 2024 to workers and reduced benefits (or, more likely, a decrease in
from 2065. benefit growth).
On top of the drop in payroll taxes from increased unem-
ployment, President Trump signed an executive order to The Role of Financial Advisors
“defer” payroll taxes until the end of 2020. Social Security’s Financial advisors will need to help clients navigate the uncertainty
chief actuary estimated that failing to reinstate payroll taxes and risk associated with the impact that the impending depletion
would deplete the trust fund by 2023, although the tax will of the Social Security trust funds will have on retirement security.
likely be reinstated and the deferred taxes collected in 2021. While most Social Security experts doubt that Congress will
However, it is now very possible that the Social Security trust let benefits be reduced by 25% once the trust funds are deplet-
funds will be depleted within the next decade, thus forcing ed, it is very likely that both current and future beneficiaries will
congressional action. face meaningful reductions in lifetime benefits that could affect
financial security in retirement.
Is the government “raiding” Social Security? Not technically. It For those people who are very risk averse, or for younger
is true that the federal government has spent the tax revenues people whose retirement is still decades away, financial advi-
allegedly collected to pay for future benefits. But the Treasury sors may want to consider planning advice to account for a
bonds are guaranteed by law. potential 25% reduction in future benefits as a baseline worst
This means that beginning in 2021 when Social Security case scenario.
starts redeeming Treasury bond holdings in the trust funds It is likely that more of the burden for paying for the trust fund
to pay scheduled benefits, the government will have to bor- depletion will fall on higher earners. Those currently making
row from the public, raise taxes or cut spending to finance more than the wage limit may be subject to additional income
those redemptions. taxes during their working years.
Starting in 2021, it is likely Social Security will begin to Retirees may face higher taxes on earnings, and may also be
redeem the trust fund bonds, at which time the government will asked to pay for a greater share of health expenses. Younger
have to borrow even more from the private markets. high-income workers face the possibility of a triple whammy of
Though the borrowing need will increase gradually, the need higher payroll taxes before retirement, lower retirement ben-
to borrow an additional $2.9 trillion, the value of Social Security efits, and higher costs.
trust funds at the end of 2019, from the private market will be Strategies that shelter savings from income taxation, for
harder and harder over time. example through the use of tax-exempt Roth accounts and
The Medicare program also faces a funding shortfall, with the health savings accounts, could become even more valuable
most recent estimates suggesting that the HI trust fund could when the tax bill for funding promised benefits comes due.
be depleted in 2026. —Jason Fichtner and Michael Finke

MARCH 2021 INVESTMENT ADVISOR 33