Three Retirement Income Crises Are Brewing. Are Your Clients Ready?

A crisis is coming. Strike that. Three crises are coming. And they’re all coming at about the same time. This trifecta will mostly hurt workers under age 50. Got any of those among your client base?

You’ve likely neither begun to warn your clients nor have altered your advice to them — in no small part because you’re probably unfamiliar with two of these crises.

Time for you to get up to speed.

You know all about the crisis surrounding the Social Security trust fund.

By 2033, it’s going to be depleted — and that means that retirement benefits for all Social Security recipients will suffer a massive 23% cut. This problem exists because baby boomers refuse to die by age 80 like they’re supposed to; they insist on living into their 80s, 90s and 100s.

Meanwhile, there are fewer workers paying FICA taxes. The result: The Social Security Administration is collecting only 77% of the revenue it needs to pay benefits to all those retirees. It’s been dipping into the trust fund to make up the shortfall, but that fund runs dry in less than 10 years. At that point, SSA will only be able to pay out what it collects in taxes — and that’s just 77% of current benefit amounts.

This is indeed a crisis, considering that half of the nation’s retirees get half of their income from Social Security.

But you already know that.

But did you know about the two other crises? The first pertains to the Hospital Insurance Trust Fund, which makes payments to hospitals. Never heard of it? It’s also known as Medicare.

The HITF is projected to exhaust its reserves as soon as 2028 — which will result in an 11% across-the-board cut in spending. That not only threatens the financial stability of hospitals nationwide but also will limit access to health care for Medicare patients.

Policy experts, including Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, a recent guest on my podcast, have created solutions to avert the crisis: reducing overpayments to skilled nursing facilities, removing inefficiencies in Medicare Advantage, eliminating the tax deduction for health insurance.

All these ideas are as pleasant as watching the Patriots play on Sunday, and for Bostonians, just as unavoidable.

Another Looming Crisis

Maybe you’ve been aware of the Medicare trust fund’s impending depletion. But do you know about the impending insolvency of the Highway Trust Fund?

Funded primarily by the gasoline tax, it faces a triple threat: First, that tax is a flat rate rather than a percentage and, despite inflation, the tax hasn’t been raised since 1990.

Second, all those new infrastructure bills have increased transportation spending without providing any accompanying revenue.

And third, we’re buying less gas than we used to, thanks to the owners of both fuel-efficient cars (who buy half as much gasoline from local Exxon or Shell stations as they used to) and electric vehicles (who don’t buy any gasoline at all). This trio of challenges has pushed the Highway Trust Fund to the brink, with insolvency projected in about four years.

When that happens, assuming Congress fails to intervene, highway funding could be cut by a shocking 50% — leading to a slowdown in current projects and a halt to all new ones.

Policy experts stress that merely borrowing from general revenues is not a sustainable solution, as that merely reduces the funding available for education and defense. And piling such large-scale borrowing onto our already massive federal debt (especially at today’s interest rates) doesn’t seem to be consistent with efforts to generate gains in GDP.

Collapse of 3 Trust Funds

As financial advisors, we must contemplate the impact that collapse of these three trust funds would have on inflation and interest rates; economic growth and the performance of the stock, bond, real estate, commodities and crypto markets; and the availability of government-provided benefits that our retired clients are expecting to receive.

By extension, we must contemplate the changes we need to make to our clients’ retirement and income strategies — because the advisor who assumes that Social Security and Medicare benefits will remain unchanged — and that income taxes, FICA taxes and gasoline taxes won’t materially rise — is an advisor who is engaged in wishful thinking, not prudent financial planning.

And as we engage in these contemplations, we must also engage with our clients, to alert them to the fact that these crises are coming. Our clients need to be made aware that their future personal financial security will depend more on their own actions (how much they save and how they invest) than on benefits they’ve been promised by politicians.

Advisors who engage now with their clients will develop the loyalty and devotion they deserve.

And advisors who don’t so engage will also get what they deserve: client cancellations and defections. Your choice.

Ric Edelman is an author and founder of RIA Edelman Financial Engines (earlier Edelman Financial Services). He now leads the Digital Assets Council of Financial Professionals.

Pictured: Ric Edelman