Optimizing protected income strategies beyond Social Security

Key takeaways:

• Your clients are probably worried about the future of Social Security. 
• Proper planning and education could help mitigate the fear and anxiety your clients may have about Social Security. 
• Because annuities and in-plan guarantees can provide a source of guaranteed income in retirement, they can be good options for clients concerned about Social Security’s solvency concerns and its inability to meet their income needs.

12/06/2024 — The Social Security Administration has been sounding the alarm for years: the current funding formula is broken. Without changes by Congress, benefit cuts seem inevitable. Understandably, this has 7 out of 10 Americans worried that Social Security may run out of funding during their lifetime,¹ which means some of your clients likely fall into this category. But how can you ease client worries on this topic? You can start by addressing the economics of Social Security, to give important context to the topic.

The economics of Social Security

Social Security’s primary source of funding is through a dedicated payroll tax, taxes on some recipients' benefits, and interest earned on the pool. For decades, the incoming funds were greater than the outgoing benefits and because of this, a surplus fund was created. However, since 2021, due to longer life expectancy and fewer workers per beneficiary, Social Security has started tapping into the surplus. If the system doesn't undergo changes, this surplus fund will be depleted by 2033 (or sooner). Payroll taxes, benefit taxes, and interest will still fund the program but beneficiaries may see a reduction in benefits. Additional legislative reductions to any (or all) sources of funding are likely to result in further strains on the solvency of the program.

Helpful facts to share with clients

Here’s a somewhat comforting fact you can share with clients: the latest Board of Trustees report from the Social Security Administration estimates that benefits will remain fully payable until at least 2033, with 79% of benefits payable through 2098.² So at the very least, something will be available to your clients and benefits won’t completely stop as long as Americans are working. More importantly, however, these estimates assume that nothing changes, and that no political action is taken. It’s more likely that Congress will be able to pass amendments to address the long-term funding issues of Social Security. Unless and until that happens, you can start by helping dispel common client myths about Social Security for your clients. And further, you can help them take action.

One-half of American adults (50%) don’t know what percentage of their income their Social Security benefits will replace or replace in retirement.  

Knowledge gaps about Social Security and inflation

Not only did the Nationwide Retirement Institute’s 2024 Social Security Survey find that 72% of respondents worry about funds running out during their lifetime, it also found gaps in knowledge about how inflation affects Social Security. Few correctly answered whether or not Social Security is protected against inflation. Further, inflation was listed as the top risk factor respondents wanted to learn about from their financial professional. When clients note the current inflation rate, they may not be aware that inflation can affect retirees much differently than other consumers. Things retirees regularly spend money on are impacted more by inflation, like out-of-pocket health care costs, for example. 

Knowing this, your clients are likely coming to you with more than just concerns about the future of Social Security. Inflation could put clients at risk of running out of money in retirement, and it’s important to help them get as much out of Social Security retirement benefits as they can. 

Steps to take with clients to mitigate fear and anxiety

1. Discuss retirement income needs. Start with a conversation about how much money your clients will need to cover their essentials in their early years of retirement.
2. Prepare now for reduced Social Security benefits. Investing in sources of protected retirement income can help supplement reduced benefits to cover essential income needs like food, housing or out-of-pocket health care costs.
3. Explore employer-sponsored plans. You can encourage your clients to increase their savings levels or consider tax-free savings options at work, such as Roth accounts or Health Savings Accounts, where available.

How annuities and in-plan guarantees can help

Contractual products like annuities and in-plan guarantees can provide a source of guaranteed income in retirement and could be a good option for clients concerned about Social Security being unable to meet their needs—although it’s important to note that guarantees and protections are subject to the claims paying ability of the issuing insurance company. Of course, you’ll want to work closely with clients and consider their entire financial picture to determine what option would be right for them.

It’s likely that the future of Social Security will continue to be a worry among clients until legislative action is taken to address the long-term funding issues. In the meantime, for clients who are concerned about Social Security meeting their essential income needs, you can support them through education and suggesting backup sources of protected lifetime income.