Social Security's Shifting Role in Retirement Plans

Some planners assume full benefits won’t be there but others are wary this may lead to riskier investments.

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Fears about shaky Social Security finances often cause people to change their retirement plans, some financial advisers say. Experts generally support financial plans that are successful even with worst-case declines in Social Security benefits. But they caution consumers that concerns about future benefits should not lead them to make bad decisions about when to begin taking Social Security or how to invest their retirement nest egg.

[See 10 Places to Retire on Social Security Alone.]

Many experts feel that the weakness of Social Security finances has been overblown. The program is currently paying out more in benefits than it receives in payroll taxes, but it is still generating an operating surplus from the interest income on its huge $2.5 trillion surplus, accumulated before the baby boomers began reaching retirement age.

This surplus will gradually decline without changes to the program. Still, current benefits would last 27 years under present rules and even after the surplus runs out, current payroll taxes would fund 81 percent of promised benefits. Both liberal and conservative economists agree that closing this gap and restoring the program to self-sufficiency would require a mix of relatively small tax increases, changes in the program's annual cost of living adjustment (COLA), and a flattening of projected benefit increases.

However, several financial planners contacted by U.S. News agreed that their clients are worried about the health of the program, and that many have reduced their reliance on future benefits in their financial plans.

"There is a percentage of the population that looks at their retirement without any Social Security benefits," says Mark E. Boddy, a financial adviser in Richmond, Va. "They don't want to count on something that might not be there when they need it. [It's] better to systematically plan without it than be surprised when it isn't available."

[See Begin Social Security Benefits for the Right Reasons.]

"Clients who are in their 60s and older have been comfortable using full current projections [for Social Security] in their financial plans," says Lynn Ballou, managing partner of Ballou Plum Wealth Advisors in Lafayette, Calif. "Clients in their 50s tend to want to use a percentage, such as 60 percent to 75 percent. Those under 50 scoff at the notion they'll ever see a penny from Social Security and usually ask us to omit it in their planning."

A downside of this concern, she notes, involves the age at which clients begin claiming Social Security benefits. Ballou and other advisers say they normally advise clients to delay taking Social Security until at least their full retirement age, which is 66 for people near retirement age. That's because monthly Social Security benefits rise by about 8 percent each year from the age of 62 to 70, and also provide COLA protection. "Lately, however, with the crisis in confidence that taxpayers have with Washington," Ballou says, "we are seeing a move to start distributions earlier. The rhetoric surrounding potential tax increases is causing great concern that retirees need to 'use it or lose it.'"

"The level of misunderstanding about Social Security is enormous," says Dan Candura, a certified financial planner in Braintree, Mass. "Most people cannot tell you when they are eligible to take benefits. They don't know about this rolling date [the eight-year window within which they can begin benefits] even though they should ... I have to spend a fair amount of time educating people" about "the real risks to it, and what the possible solutions may be."

[See How to Tune Up Your Retirement Plan.]

Even with some financial uncertainty about the program, Candura says, "planning a retirement without any kind of Social Security is really a worst-case solution." He does include Social Security benefits in his plans. He believes they will be there and that to exclude those benefits would "be unconscionable" because it might cause clients to take unreasonable investment risks with their private savings in order to compensate for the expected loss of Social Security income.

Advisers agreed that they are spending more time with clients and potential clients discussing Social Security. "We've done a lot of talks on Social Security," says Joel Redmond, a financial consultant with Wells Fargo Advisors in Syracuse, N.Y. "When you show them the Social Security benefits and how they might fall, it gets clients to rethink their plans and do what they should have been doing more of anyway, which is saving more money now."

"The subliminal message" of all the concern about the program's future "is that you need to do more work on your own" to prepare for retirement, he says. "The government is eventually going to have to cut benefits or raise taxes" to sustain the program.

Twitter: @PhilMoeller