Social Security Solvency: A Worry for All Ages

You'd be excused for thinking that Social Security was a conversation topic exclusive to older people. After all, this long-standing governmental safety net is literally designed to benefit Americans age 62 and up.

But as the spotlight on Social Security's funding problems becomes brighter, a growing number of people from every age group is starting to pay attention.

That's encouraging. Because as we're about to discuss below, when it comes to this vital source of retirement income, the sooner you become familiar with Social Security and how it relates to your long-term financial plan, the better off you'll be—for a number of reasons.

The Tea

First, for those of you who don't know about Social Security, let's get you up to speed.

President Roosevelt willed this important social safety net into existence in 1935, when he signed the Social Security Act, which itself was part of Roosevelt's New Deal.

Social Security is technically a federal insurance program—one that's designed to help Americans (and their dependents) replace lost income from becoming disabled or, more commonly, retiring because of old age. If you have a job, you're likely paying for your Social Security benefits as we speak—a portion of payroll taxes are taken out for Social Security, which qualifies you for benefits once you need them.

WealthUp Tip: Looking to avoid taxes on Social Security benefits? Check these ways out.

Social Security pays each beneficiary a set amount each month that's determined by a formula that takes into account what they earned while employed. And every year, Social Security payments are adjusted for inflation to help beneficiaries deal with rising prices.

According to the Social Security Administration, in 2023, 67 million Americans will receive monthly Social Security benefits, which will total some $1.4 trillion paid throughout the year. It's a massive, critical source of income for most people age 65 and older.

And that income is in danger. From the Social Security Administration:

"As a result of changes to Social Security enacted in 1983, benefits are now expected to be payable in full on a timely basis until 2037, when the trust fund reserves are projected to become exhausted. … At the point where the reserves are used up, continuing taxes are expected to be enough to pay 76% of scheduled benefits."

This is out of our hands—only Congress can make changes that would keep Social Security fully solvent. Proposed solutions involve anything from raising payroll taxes to reducing benefits, and a lot of other ideas in between.

But as of today, Washington is deadlocked on the issue, heightening the chances that Social Security could indeed run out.

The Take

If that sounds pretty alarming to you, hey—you're not alone!

According to Nationwide Retirement's 10th annual Social Security survey, Americans of all ages are taking notice. Among some of the most noteworthy findings:

• 75% of adults age 50+ say they believe Social Security will run out of funding in their lifetime. (Up from 66% in 2014)
• 76% of Gen Zers and 76% of Millennials believe they will need to keep working in retirement because Social Security will not pay enough.
• 43% of Gen Zers and 39% of Millennials say they plan on asking a financial professional about Social Security benefits. (That compares to just 22% of Gen Xers and 6% of Baby Boomers.)
• 21% of adults age 50+ say they have no source of retirement income in addition to Social Security.

Heightened awareness is encouraging, but that needs to translate into education. One of the more stunning findings of Nationwide's survey shows that while 49% of U.S. adults 18+ say they know how to maximize their Social Security benefits, only 8% correctly identified all the listed factors that determine the max Social Security benefits they can receive!

WealthUp Tip: Deciding to get ahead of a Social Security shortfall by investing? Here are the best stocks for beginners with little money.

This week, we talked to Tina Ambrozy, SVP of Strategic Customer Solutions at Nationwide, about this disconnect, other findings from the survey, and what people of all ages should know about their Social Security benefits.

Young and the Invested (YATI): I wanted to start with the stat that stuck out to me most: 43% and 39% of Gen Zers and millennials, respectively, plan to ask a financial advisor about Social Security benefits, compared to just 22% of Gen X and 6% of Baby Boomers. The disparity is shocking. Any insights about that?

Tina Ambrozy: We've been doing this survey for 10 years and watching these trends. Younger generations are more interested now than they ever were in the past in saying that they would go to a professional for advice about how Social Security works and how it works in a broader portfolio. That research also shows younger generations are more pessimistic than they once were about [Social Security's] viability.

It's fascinating because Social Security is so far out for them, you'd think they'd be less concerned. But there's so much going on today that there's a heightened concern.

YATI: Are financial advisors "giving the people what they want" and talking more to their clients about Social Security?

Ambrozy: We're really pleased with seeing in the survey results, relative to previous years, just how many more financial professionals are giving advice to and talking about this with their clients. Years ago, we were seeing much less of this, maybe because of the complexity—you understand how complex the Social Security guidelines are.

WealthUp Tip: Even Social Security benefits aren't exempt from the tax man. Here's what you need to know.

It's terrific that financial advisors are providing more advice. (75% of Millennials say their financial professional has provided advice on how and when to file for Social Security benefits. Those numbers are 55% and 56% for Gen Xers and Baby Boomers, respectively.)

YATI: So, if more people are talking to their financial advisors about Social Security, it must mean that people are becoming a lot more knowledgeable about it?

Ambrozy: One thing we've seen over many years of surveying: There's a really significant gap in understanding Social Security and how it works. And that's across all generations—that's not unique to 50-plus.

Our survey shows that very few Americans understand all of the factors that go into how to maximize their Social Security benefit or how it's calculated, and what age they're fully eligible for full retirement benefits.

For instance, half of the adults surveyed said if they filed for benefits early, they'd automatically get a step up to their full benefit amount once they reached full retirement age. They don't realize they're locking it in and it won't increase from that point.

YATI: Right. The study says that only 8% of U.S. adults age 18+ correctly identified all the listed factors that determine the maximum Social Security benefits an individual can receive. We'll call a spade a spade: That's awful. How do we get that higher? How do we get people to understand their Social Security situation better?

Ambrozy: One thing that jumped out is how many people rely on Social Security as their sole source of retirement income. It's quite alarming. Social Security is part of an overall retirement solution. It's not meant to be the full solution.

Younger Americans shouldn't wait any longer to understand what the outlook on [Social Security] is. Don't be someone who's relying on Social Security to cover all the expenses, and get to that point where you can't make a different choice or do something to enhance your retirement income. Work with a financial pro, and ask that financial professional about what you can do. There's so much power when you start investing young, and investing often, that your opportunity for success is greater.

YATI: It seems like there's a high level of concern about Social Security's solvency across the board. Why is there so much fear over it?

Ambrozy: If you consider when Social Security was established, it was a short-term gap between working and end-of-life. And as people are retiring earlier, and as defined benefit plans are further declining, people are drawing Social Security for much longer than it was designed for. They're drawing out more. And they think, "I contributed; that's my money." But most retirees are pulling out more than they contributed, which is putting more strain on the system. That's why the conversation about reform is so important.

WealthUp Tip: Everyone has to pay federal taxes on Social Security benefits … but certain states tax Social Security, too.

1 in 5 people say Social Security will be their sole source of income in retirement. 1 in 4 say they think Social Security should be enough for retirement, but they still don't know how much it's going to be. There's a huge gap in understanding/awareness about how the system works and in overestimating how much they're going to receive.

YATI: A quick follow-up: The quarter of adults saying they "won't see a dime" of Social Security benefits – overreacting or legitimate fear?

Ambrozy: We won't necessarily speculate on "will it or won't it." We have a strong belief that Social Security is not going away—though it could be reduced.

Something we did see in all generations is they believe change is needed, and there's a lot of support for proposed changes—taxing high-income workers, raising tax rates for employers, lowering tax amounts for those who aren't claiming Social Security benefits.

We won't politicize it—we need a collaborative approach across all age groups, who all know that Social Security reform is needed. It'll require a lot of people working together in Washington and businesses to figure this out and to make sure we're addressing the challenges.

Let's say you decide to see a financial adviser. At what age does Social Security start really factoring into the planning picture?

Ambrozy: There's a little bit of a "we'll wait and deal with that later" factor with advisers. We would say not to wait. The earlier you start planning, the more opportunity you have to influence your outcomes.

My brother-in-law retired a couple years ago, and early in my sister and BIL's marriage, he was afraid to know [his financial situation]—he was so worried because he was previously married and divorced and felt like he'd never be able to retire, so he was afraid of knowing. She talked him into going to a financial planner, and the weight was lifted off his shoulders because he had a plan.

I think sometimes we're afraid of knowing. There's something to be said for dealing with it, building a plan you can follow—there's so much power and confidence when you do that.

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Thank you for stopping by this week! If you're curious, Halloween reports across our crew found high levels of classic chocolate candy bars (Snickers, Mars, Hershey's), a significant increase in chips and other bagged snacks, and a disturbing shortage of Nerds.

Riley & Kyle

Young & The Invested (Soon to be WealthUp)

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