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How to Help Clients Fill the Social Security Income Gap

Posted by Lori Fogle on Wed, Aug 26, 2020 @ 12:00 PM

One of our producers mentioned that he’s been getting one question a lot more often than normal from clients.

“Is Social Security going to run out?”

That’s a valid question, one that might be on your clients’ minds as well. But there’s an even more important question regarding a potential Social Security shortfall. And you can help clients answer it with an insurance product feature you probably already have in your arsenal --


Before we get to that though, let’s talk about why clients may be concerned that Social Security could run out and what that could mean for their retirement income. Plus, a strategy you can use to help them potentially solve that problem.

As you know, Social Security is a source of income that most retirees have come to rely on and it’s something that those still currently saving for retirement believed they would get when they retired.

But that may not be the case...

And sure, we've heard about the possibility of Social Security going away for a while now, but it's still on people's minds.

So, let's talk about that.

When and why might Social Security be underfunded?

There is a possibility if nothing changes, that by 2035 (the Bipartisan Policy Center policy think tank suggests as soon as 2028), the Social Security trust fund could be depleted. Although that doesn’t necessarily mean checks would immediately stop, it does mean that a client who’s still in their saving years right now—say, in their 40s and 50s— may not get their full Social Security benefits.

If we take a closer look at how Social Security works, we start to see how this could happen…

As you’re probably aware, to fund Social Security, the government taxes both an employee and the employer, each up to 6.2% tax. Self-employed individuals pay the full 12.4%, but they can deduct half of that as a business expense. But just because you pay into it, doesn’t guarantee you’ll receive benefits when your time comes to retire.

A “pay-as-you-go” system, the money someone pays into Social Security during their working years helps provide the benefits to those receiving payments now— qualified retireees, disabled people and their survivors, dependents, and beneficiaries.

Currently, there are a couple of major factors working against the system...

According to the Social Security Administration, 90% of retirees today receive Social Security benefits, in contrast to only 69% of retirees in 1962 (Investopedia).

By 2031, the youngest boomers will have passed the Social Security full retirement age of 67 (for people born in 1960 or later), at which point there will be 75 million people over the age of 65—nearly twice the 39 million who were 65 in 2008 (Investopedia).

Bottom line: the vast number of people receiving benefits is going up while those paying into Social Security is going down— but that was to be expected.

What’s worse is that we’re in the midst of a global pandemic, which came out of left field in 2020 and caused wages to be cut, less income tax to be paid, more Social Security disability filings, and people retiring early due to unexpected layoffs.

Forbes points to yet another factor contributing to a potential underfunding of Social Security and that’s the income disparity in this country. Extreme earnings inequality and increasing health insurance premiums can be blamed for the shortfall because when someone’s earnings reach the wage/salary limit ($137,700 in 2020), they stop paying into Social Security. And as a result, “over $1.2 trillion dollars of earnings—wages and salaries, not capital income—of an economy-wide $8.4 trillion in taxable earnings escapes Social Security tax.”

What is the government doing to prevent a Social Security shortfall?

It’s for all these reasons that it’s so vital something be done to mitigate the situation and help prevent this from happening, or at least help protect your clients from the fallout of it.

There are a few things the government could do help prevent Social Security from running out in 8 to 15 years.

  • Lower Cost of Living Adjustment
  • Change benefit amounts
  • Gradually raise the full retirement age to 70
  • Bump the earliest date to receive payment from 62 to 64
  • Raise Social Security tax
  • Raise income taxes
  • Eliminate the earnings cap and assess FICA on currently tax-deductible health care premiums

The problem is, we don’t know if any of these actions will be taken. On top of that, even if those actions were taken—they may not come close to generating the trillion dollars that would be needed to help secure full benefits for future generations.

That being said, you wouldn’t want your clients to sit back and rely on any of those things happening in order to have the income they need in retirement.

Which brings us to the even more important question clients should be asking —

How will I prepare for my retirement if my Social Security benefits are reduced?

Let’s consider a hypothetical example of how a couple might be affected.

Sample Social Security shortfall scenario

To find out how much your clients are expected to receive in benefits, you’ll have them bring in their Social Security statements. As you can see on this sample statement, the anticipated amount at full retirement age (FRA) is listed at the top of the first page and you can find additional information on page 2.

We’ll assume for the purposes of this hypothetical example, that the couple’s combined household benefit is $5,000 each month. We’ll also assume a 25% reduction in benefits as per the Social Security Trustee Report speculation.

What would their monthly benefit be after this reduction?

75% x $5,000 = $3,800

So, their household income would drop by an estimated $1,200.

Here’s one way to fill the Social Security gap

You can help clients be proactive and find a way to fill this potential Social Security income gap.

But how much would it cost them today to replace that amount in 2034?

That’s trickier.

Because just having a conversation about this isn’t quite as valuable as showing your clients exactly how they can fill this income gap. Walking through the math with your clients not only answers this question but helps them see the value you’re providing and gives them a clear path to the possibilities for closing that income gap.

This situation could be ideal for some type of guaranteed income in retirement. An annuity with a lifetime income benefit rider, which often has an annual fee, might be an option they want to consider. A fixed indexed annuity can also be annuitized as a way to receive retirement income payments. 

Once you've helped the client determine how much premium would be required to generate that hypothetical $1,200 shortfall and how long they would need to grow their account value, you could discuss one possible solution -- allocating that amount to a fixed indexed annuity with a guaranteed lifetime income benefit rider.

A guaranteed income they can't outlive* means regardless of what happens with Social Security benefits down the road, their retirement lifestyle would not be impacted by it.

Get Your Social Security Income Gap Analysis Worksheet

Grab the brand new, simple-to-use worksheet that can help you and your clients easily calculate the potential shortfall and determine how to fill the income gap. Just complete the form and click the big orange button below and we'll send it to you.





Tags: annuity, Social Security, retirement strategies, income rider



This content is for informational and educational purposes only and is not designed, or intended, to be applicable to any person's individual circumstances. It should not be considered as investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action.

*Lifetime income available through annuitization or the use of a guaranteed income rider at an extra cost.


 The blog is not intended to be tax or legal advice. Financial Professionals can provide information, but not advice related to Social Security benefits. Clients should seek guidance from the Social Security Administration regarding their particular situation. Social Security payout rates can and will change at the sole discretion of the Social Security Administration. For more information, please direct your clients to a local Social Security Administrative office, or visit www.ssa.gov

This program is not affiliated with or endorsed by any governmental agency.