Why Upcoming Social Security Changes Could Mean Adjusting Your Clients’ Financial Plans

The Social Security Administration has unveiled its cost of living adjustments (COLA) for the upcoming year 2020, offering an increase of 1.6% in Social Security benefits.

“The 1.6 percent cost-of-living adjustment will begin with benefits payable to more than 63 million Social Security beneficiaries in January 2020,” the SSA said in a press release, adding that increased payments to more than eight million Supplemental Security Income beneficiaries will begin on December 31, 2019.

Some financial planners feel the COLA adjustments are in line with increasing prices.

“I am happy to see the cost of living adjustments are continuing in line with the expected inflation rate. The cost of living adjustment is designed to keep pace with inflation, and we are in line with inflation at 1.6%.,” says William Brancaccio, co-founder of Harrison, N.Y.-based Rightirement Wealth Partners.

Charles Sachs, director of planning for Miami-based Kaufman Rossin Wealth says, “I think that fact that Social Security adjusts at all to dampen the effect of inflation is a real benefit. I say that because many pensions, for those lucky enough to have one, and annuities do not have any such adjustment.”

Others disagree and say the 1.6% hike is far from enough.

“We never put the increases into our equations because they are not consistent or very big. We look at it as a little bonus and we will work it into the formula during the following year,” says Jon L. Ten Haagen, founder and CEO of Huntington, N.Y.-based Ten Haagen Financial Group.

“In regard to COLA, it is never up to par with inflation, so we need to make sure our other sources of income can combat inflation,” says Allan Katz, president of Staten Island, N.Y.-based Comprehensive Wealth Management Group.

That is hard, especially on elderly clients whose living or medical expenses can weigh upon their financial plans. Some of that mismatch between adjustments and expenses is built into the design of the COLA calculations.

“A big issue here is that older folks spend much more on medical-related costs and these costs typically inflate at two to three times the CPI inflation rate used to calculate the annual increase in Social Security,” says Sachs.

“Living expenses are by far the most important variable in plans and are always the focus point of our discussions. The other pulling force is the fact that clients tend to spend less as they age, mitigating some inflation pressure/risk. Each client is different and unique, so having personalized plans is critical,” Ryan Costello, president of Leawood, Kan.-based The Retirement Planning Group.

But advisors devise financial plans to work around those constraints.

“I run a slightly higher inflation rate with a lower cost of living rate in my client’s financial plans to over-prepare for retirement,” says Brancaccio, adding that he emphasizes “relying on proper savings and distribution strategies over expectations of robust Social Security increases over retirement.”

Then there are concerns about the Social Security administration’s potential insolvency that emerged after the 2019 OASDI Trustees Report.

“As a planner, the question I get asked most often is will Social Security be there when I go to collect and will it run out. I would be more concerned around the viability of the program than if the cost of living adjustments are enough,” says Brancaccio.

Though some may not agree with that premise, the financial plans they create for their clients reflect some level of preparedness.

“I try to plan without including Social Security. Many people believe it won’t be around at some point. Although I don’t agree, I tell them we should plan assuming you will get nothing. If you get a payment, it will be a bonus,” says Katz.

Charles Sachs, CFA, CFP®, is a Chief Investment Officer at Kaufman Rossin Wealth, LLC, a Registered Investment Adviser.