Delaying Social Security remains a helpful tool for maximizing retirement savings, experts said, even though the future of the Social Security system is unclear.
"At Fidelity, we say if you can afford to delay taking Social Security until age 70, you should really consider that as an option," said Kirsten Hunter Peterson, Boston-based vice president of workplace thought leadership at Fidelity Investments.
"It might be the best option for you," she said.
Many Americans are heavily reliant on the Social Security benefits system. According to the Employee Benefit Research Institute's 2022 Retirement Confidence Survey, 84% of U.S. workers said they expect Social Security to be a source of retirement income, and 94% of retirees said Social Security is currently a source of retirement income.
Yet, the system has an uncertain future, and time is running out to address impending insolvency.
According to the Social Security and Medicare Boards of Trustees, Social Security faces insolvency in 2035. If that were to happen, the system could only continue funding about 80% of scheduled benefits.
"There's a lot of uncertainty with many of these federal programs that folks plan for and rely upon in retirement, whether it's Medicare or Social Security," Ms. Hunter Peterson said.
In Washington, several lawmakers have proposed bills to overhaul the Social Security system, and some Republican candidates have floated ideas of privatizing Social Security.
According to EBRI's 2022 survey, 52% of workers and 69% of retirees are at least somewhat confident that the Social Security system will continue to provide benefits of at least equal value to those received by retirees today.
This is a major shift from the 2018 survey, when only 28% of workers and 45% of retirees believed the same.
Craig Copeland, Washington-based director of wealth benefits research at EBRI, said that confidence in the Social Security system was lower during previous Republican administrations because there was more talk of cutting benefits. However, since President Joe Biden took office, he said, people have felt more confident in government programs like Social Security.
"It seems that people still understand and believe that (Social Security) will be a bedrock of their retirement," Mr. Copeland added.
Plan sponsors are showing more interest in how employees are assembling their retirement income, which includes Social Security benefits.
"We are seeing that plan sponsors are becoming more interested, not just in the accumulation phase of saving for retirement—so that steady saving before you become retired—but also in the decumulation phase," Ms. Hunter Peterson said.
For example, "how might their employees or former employees actually pull together an income in retirement? What is the role of Social Security in that formula? And how might private guaranteed income options factor into that equation as well?" she said.
For plan sponsors that want to help participants optimize their retirement savings, then "maximizing their Social Security benefits, that stream of income, may be part of that plan," she added. "But it really needs to start with education and connecting people with education and resources on retirement timelines and horizon."
Scarlett Ungurean, Chicago-based executive director at ABA Retirement Funds, agreed that educating employees about retirement planning is the best way to prepare them for it.
"Knowing as much as you can about retirement, you can prepare better plans (and) anticipate what may happen in the future," Ms. Ungurean said.
In addition to webinars and other educational tools, ABA Retirement Funds offers their employees a Social Security tool, provided by a third party, which can give employees estimates of what their benefits would be each month depending on when they claim Social Security.
"I think that the employer is in a great position of influence to help with those conversations" around retirement planning, said Chad Parks, San Francisco-based CEO of Ubiquity Retirement + Savings, an online retirement service for small businesses.
EBRI's survey from this year shows that 37% of workers don't know where to go for financial or retirement planning advice, and 35% rely on family and friends for retirement planning.
"Ultimately, when a lot of people are taking Social Security benefits, it's because that's their only alternative at that time," EBRI's Mr. Copeland said. "There's not a lot of sophisticated planning for the majority of people."
Retirees are claiming Social Security benefits later in life than they did previously, data shows. A 2020 study from the Social Security Administration found that the proportion of eligible 62-year-old men who claimed Social Security benefits fell to 22.1% in the years 2015-2018 from 39.6% in the years 2000-2004. For eligible 62-year-old women, the proportion fell to 24.6% from 44.4%.
Andrew Biggs, senior fellow at the Washington-based American Enterprise Institute, said this is part of the reason the U.S. retirement system is doing well, overall.
"What we're seeing is people are doing the things you need to do to raise your retirement income," Mr. Biggs said. "People are participating in 401(k)s more than they did; they're contributing a bigger share of their income to their 401(k); they're working later in life; they're claiming Social Security benefits later. All of those things will help increase your retirement income."
However, a more recent Schroders' 2022 U.S. Retirement Survey found that even though 86% of workers 45 years and older know that delaying Social Security could help increase their monthly benefit, only 11% plan to wait until 70 to claim their maximum benefit.
Nearly one-third, or 32%, of workers said this is because they are concerned Social Security may run out of funds and stop making payments, while 31% said they expected to need the money sooner in life.
"With so many Americans reporting they don't have enough saved for retirement, the money generated by Social Security benefits is often their most reliable source of income and every effort should be made to maximize it," said Joel Schiffman, New York-based head of strategic partnerships at Schroders PLC, in an email.
Americans often use their current economic conditions to determine how they will do in retirement, Mr. Copeland noted. Among workers who feel less confident about their ability to live comfortably throughout retirement since the pandemic, 35% attribute it to inflation or cost-of-living increase, and 18% said it's due to negative government impact or Social Security decrease, according to EBRI's survey.
Given Social Security's impending insolvency and potential decrease in benefits, several lawmakers have proposed bills to update the system.
One such bill is Social Security 2100: A Sacred Trust, which Rep. John Larson, D-Conn., introduced in the House in October 2021.
"We drafted Social Security 2100: A Sacred Trust to make benefits more resilient to inflation by permanently improving the formula for the COLA, provide an across-the-board benefit increase and other enhancements to help our nation's seniors, children, widow(ers), and people with disabilities who need these improvements now," Mr. Larson said in a statement.
On Oct. 13, the Social Security Administration announced that retirees will see an 8.7% increase in benefits next year, due to skyrocketing inflation.
The bill provides about a 2% increase in benefits for current and new Social Security beneficiaries, changes the annual cost-of-living adjustment formula, sets the new minimum benefit at 25% above the poverty line and ties it to wage levels, as well as a number of other changes to increase benefits. It also would lift the income tax cap and apply the payroll tax to incomes above $400,000. The income tax cap currently sits at $147,000 and will increase to $160,200 in 2023.
Since its introduction, the bill has garnered the support of 202 co-sponsors. According to the Social Security Administration's chief actuary, if the bill were enacted, it would push Social Security's insolvency date to 2038 from 2035.
Another bill, introduced in both chambers in June by Sen. Bernie Sanders, I-Vt., and Rep. Peter DeFazio, D-Ore., aims to extend solvency through 2096. The Social Security Expansion Act would also lift the income tax cap but apply the payroll tax to all incomes above $250,000. It would also increase monthly benefits by $200 for current and new beneficiaries as well as adjust the COLA formula.
Other bills in Congress propose extending Social Security's solvency through differing approaches to lifting the income tax cap, adjusting the COLA formula, and modifying other aspects of the system.
