Social Security: Beyond the Headlines

The third story in this quarter’s PLANADVISER In-Depth considers the current state of Social Security.

Concerns over the state of Social Security have long been running rampant, and not without reason: This year, an average of 68 million Americans per month will receive a Social Security benefit that will add up to roughly $1.5 trillion for the year, according to the Social Security Administration.

The worry over dwindling benefits stems from the state of Social Security’s Old-Age and Survivors Insurance Trust Fund, which is expected to only be able to pay full benefits until 2035 by the most recent update. As if that date were not close enough, the administration updates the forecast every year, some years moving it even closer.

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The uncertain future of the benefit so many Americans rely on has some wondering: Is the sky really falling on Social Security, or are the heightened concerns a fear tactic used for various purposes, including to drum up business among retirement and investment providers?

Social Security Update

While the exhaustion of the trust fund that pays out Social Security is worrisome, it does not mean the benefit is going bankrupt. There are multiple sources of funding for Social Security, including Federal Insurance Contributions Act payroll taxes. But 2021 marked the first year that it was necessary to start drawing down on Social Security reserves, and that will continue until the fund is exhausted. After that, the program will only be able to pay 79% of scheduled benefits, according to the administration.

“Congress has a decade still to take some action,” says Mary Beth Franklin, a Social Security expert and head of RetirePro LLC. “Unfortunately, from the lawmaker standpoint, they love to keep kicking this down the road.”

The longer you kick that can down the road, the more options for the future of Social Security that go away, she adds. For instance, some of the money from the trust fund is invested in “special issues” of the U.S. Treasury, which pay about 2.4% interest. While there had been calls to invest that money in the stock market instead, if the trust fund goes to zero without action from Congress, there will not be money to invest.

Other potential changes, like increasing the age at which people can take Society Security or removing the cap on how much of earnings can be taxed, would only help a little, Franklin says. Realistically, there will have to be a combination of these—and other—moves.

How Fearful Should Savers Be?

Despite headlines that Social Security is going to disappear, experts say it likely will not. As Franklin points out, there is still time for legislators to act, and even if the reserves are exhausted, nearly 80% of benefits will continue to be paid out.

Does that mean there are some fear tactics being used so that people will put more money in their retirement plans?

“There’s no question that’s the case from our industry,” says George Fraser, a senior partner in the Fraser Group, a division of Benefit Commerce Group, an Alera Group company. “I don’t think that providers, advisers and investment managers spend nearly enough time talking about the base of Social Security and how important it is to most people in this country.”

The data backs that up: Only 13% of plan sponsors offer a Social Security optimization tool for participants, according to research by PGIM published last year.

Fraser is not alone in his belief that Social Security should be considered a fixed asset class, not a luxury for older Americans alone. Josh Cohen, managing director and head of client solutions for PGIM DC Solutions, told PLANADVISER earlier this year that Social Security is not going away and “needs to be considered part of your total retirement picture.”

Even so, the fears of Social Security being depleted are unlikely to leave the national conversation. In a recent survey, the National Institute on Retirement Security found that 90% of Americans say it is important for the next government leaders to solve the Social Security financial shortfall.

Employer’s Role in Maximizing Social Security

A recent survey from Charles Schwab of 1,000 U.S. 401(k) plan participants showed that while confidence in Social Security may be waning, participants still expected it to make up a significant portion of income in retirement: 22%, according to workers who are 10 years from retirement, compared with 37% of the income they expect to come from their 401(k)s. Younger workers—those who 11 years or longer from retirement—expect just 13% of their income in retirement to come from Social Security, compared with 45% from retirement savings.

“One of the best things people can do is have that level of planning done,” says Marci Stewart, head of client experience at Schwab Workplace Financial Services. But employers also play an important role, especially considering a significant share of workers are using health savings accounts and company stock plans to save for retirement, according to Schwab’s study.

Exploring those benefits can help people do the planning that’s necessary and cover any shortfall if there is one, Stewart says. Employers can also engage employees in financial education to provide clarity on Social Security and its misconceptions, including specifics of how benefits become diminished the earlier they are taken.

Because there are ways to maximize Social Security so that—shortfall or no shortfall—savers can make the most of it. The first step is to make savers understand what their checks will actually look like, Fraser says. You can check the estimated amount of your benefit via the Social Security Administration’s website, multiply it by 12 to see what you will receive in a year and multiply that by 20 to see how much you can expect over a 20-year retirement. This provides a baseline; then you can start making practical changes to a plan as needed.

“Married couples have the most options,” Franklin says. “They should think of claiming Social Security as a household decision, rather than two individual decisions.”

She usually tells married couples that the spouse with the bigger benefit should wait until age 70 to claim their benefit while the other spouse claims reduced benefits early to bring some income into the household.

For some people, it can also make sense to draw down on their 401(k) or individual retirement account first, so they can snag a bigger benefit later, Franklin adds.

More on this topic:

Who Is Most at Risk for Retirement Shortfall?
How to Contribute Amid Retirement ‘Challenges’
Define ‘Crisis’
2025’s Tax Sunset and DC Plans

Cybersecurity Insurance Considerations

Expert Steve Taylor gives his views on cybersecurity insurance, as breaches proliferate in financial services.
Cybersecurity Insurance Considerations

The risk of companies being hit by a cyberattack has increased substantially since 2019, according to research from the International Monetary Fund. Within that grouping, financial services firms are particularly vulnerable.

Most plan sponsors, responsible for large sums of participant assets, will likely be very aware of the threat of breaches. Many receive regular updates from advisers and service providers. Some may have, or be considering, cybersecurity insurance to help cover any costs, should a breach occur.

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But while cybersecurity experts may preach the value of insurance, plan sponsors and their advisers are often choosing between a variety of plan-related costs.

To help explain cybersecurity insurance for plan fiduciaries, we turned to Steve Taylor, the cyber risk director at BDO USA PC, the U.S.-based division of global accountancy BDO International Ltd.

PLANADVISER: What does cybersecurity insurance offer to a plan sponsor?

Taylor: Cyberinsurance offers plan sponsors with a wide range of benefits, including: data breach coverage; compensation for income lost to a cyberincident; cyber extortion assistance and negotiation services; investigation assistance; and coverage toward legal defense costs.

More importantly, cyberinsurance offers plan sponsors with a sense of security by ensuring financial stability in the event of a cyberincident.

PLANADVISER: What are the advantages to having this insurance?

Taylor: In today’s digital world, cyberthreats are rapidly evolving, and an increasing number of organizations are impacted every day by cyberincidents. At this point, it is no longer a matter of “if,” but rather “when” will a cyberincident occur?

Cyberinsurance provides organizations with financial security against damages caused by cyberincidents, which can go beyond revenue loss and include investigation expenses and credit monitoring. Cyberinsurance also provides organizations with legal support during the aftermath of a data breach or privacy violation and underscores a commitment to clients in safeguarding their data.

PLANADVISER: What does cybersecurity insurance NOT cover that people should be aware of?

Taylor: Cybersecurity insurance typically does not cover physical damage, intentional acts such as fraud, theft of intellectual property, or loss of future revenue resulting from cyberincidents. Prior known cyberincidents and those caused by outdated or unsupported software may also be excluded, along with remediation costs to mitigate the likelihood of future incidents.

PLANADVISER: Have costs gone up as cybersecurity threats have risen?

Taylor: In recent years, the cost of cyberinsurance has gone up due to the higher frequency of cyberattacks (particularly ransomware) and a rapidly evolving threat landscape. The cost of cyberinsurance for plan sponsors can vary significantly and is heavily influenced by factors such as their revenue, claims history, coverage limits and existing security measures to mitigate cyber-risk.

PLANADVISER: Finally, should plan advisers be a good resource for plan sponsors? What questions should advisers be prepared to answer on this issue?

Taylor: Yes, plan advisers and consultants are a great starting place to explore cyberinsurance coverages and costs.

Questions to consider:

  • What are the industry-specific considerations for plan sponsors?
  • What types of incidents are covered by the policy, and what are the policy exclusions?
  • What type of coverage does the policy provide for cyberincidents caused by third parties?
  • What are the notification requirements for plan sponsors?
  • How should plan sponsors report prior known incidents?
  • What specific security measures does the policy require? and
  • What type of evidence are plan sponsors required to share and how often?

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