(Photo: Shutterstock)

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If Congress does nothing to shoreup the Social Security Trust Fund, benefits will becut 21% when the fund is depleted, which could happen assoon as a dozen years from now if not sooner. Pre-retirees born in 1960 face an additionalrisk due to the complicated formula the SocialSecurity Administration uses to calculate benefits.

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The 21% cut would affect retireesalready collecting benefits as well as future beneficiaries,according to former Sen. Kent Conrad, D-N.D.

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"When Social Security can't meetits legislated obligation, then there will be an across-the-boardcut to match income and revenue," said Conrad, who participated ina recent webinar, "Social Security Insecurity: A New Considerationin Retirement Planning," hosted by the American College ofFinancial Services. "All ofus believe Congress won't allow Social Security to become insolventbut if it fails to act, we would face those cuts."

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A fix for Social Security is achallenge in ordinary times, but during the COVID-19 pandemic itmay be impossible.

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The pandemic and subsequentlockdowns have pushed the U.S. economy into a recession, leaving 20million unemployed Americans who, along with their employers, areno longer contributing the taxes that are funneled into the SocialSecurity Trust Fund on their behalf. 

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The Wharton School of theUniversity of Pennsylvania published a report in late May that theOld Age, Survivors, and Disability Insurance Trust Fund, whichincludes two separate trusts — one for retirees and one fordisabled individuals — could be depleted as much as four yearsearlier than expected because of the impact of the pandemic, in2032. 

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Pre-retirees born in 1960 maysuffer another blow to benefits. That's because the Social SecurityAdministration employs a complicated formula to calculate benefits,which includes using the top 35 years of a retiree's earnings,adjusted by an indexing factor. That factor, in turn, is based onthe Average Wage Index for the year an individual turns 60, whichwill be 2020 for those born in 1960. 

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Job losses and declines inaverage wages this year due to the pandemic will affect the averagewage index, which has risen almost every year since the 1950s,according to Wade Pfau, director of the RetirementIncome Certified Professional(RICP) program at the American College of Financial Services. Theindex fell in 2009 but only slightly, according to Pfau.

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"We don't know what will happenthis year but if the average wage index has a dramatic drop, thensuddenly those born in 1960 would have a lot lower benefit thanthose born in 1959," said Pfau.

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Anotherstudy fromWharton said Social Security benefits for those beneficiaries coulddecline by 13% and "smallerbenefit reductions" were possible for those born after 1960 "atleast until average economy-wide wages recover to their previouslyprojected levels." The study assumed a 15% decline in the Social SecurityAdministration's measure of average wages for 2020.

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A more immediate concern and onethat will affect all Social Security beneficiaries is theexpectation of a near-zero cost-of-living adjustment for 2021. TheCOLA, which is tied to CPI inflation, may be half of this year'sCOLA, which was just 1.6%, said Heather Schreiber,president and founder of HLS Retirement Consulting, who alsoparticipated in the webinar. The Senior Citizens League,an advocacy group to protect Social Security, Medicare and retiredveterans benefits, has reported that the recent plunge in oilprices has "all but wiped out" the prospect of a Social SecurityCOLA for next year.

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Assuming there is no fix comingfor a while, advisors need "to navigate what-if scenarios … [and]have alternative scenarios in place" because of that risk, saidSchreiber. These scenarios could include including a 25% decline inbenefits as well as no change when calculating future SocialSecurity benefits in clients' retirement plans. Schreiber addedthat there's a lack of software available for financial advisorsdoing such calculations.

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Looking longer term, Conrad, whoco-chaired the Bipartisan Policy Center Commission on RetirementSecurity and Personal Savings, said any fix to Social Securityneeds to involve increasing revenues and reducing benefits. Theconsensus of the commission was to do more on the revenueside.

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"We have such a big hole to fillthat you're probably not going to get bipartisan agreement unlessyou work both sides of the equation," Conrad said.

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The 152-page BPCreport released in 2016recommended raising the FICA rate slightly along with the incomesubject to FICA taxes and the full retirement age. It alsorecommended adjusting benefits to provide more to lower incomebeneficiaries and less to those with very high incomes and indexingthe Social Security COLA to the chained CPI, which would have theeffect of reducing the inflation adjustment. 

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"We have these big challengeslike Social Security and our representatives in Washington are notbeing sufficiently serious about dealing with these things," Conradsaid. He urged all those who tuned into the webinar to appeal totheir congressional members to work on fixing SocialSecurity.

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Bernice Napach

Bernice Napach is a senior writer at ThinkAdvisor covering financial markets and asset managers, robo-advisors, college planning and retirement issues. She has worked at Yahoo Finance, Bloomberg TV, CNBC, Reuters, Investor's Business Daily and The Bond Buyer and has written articles for The New York Times, TheStreet.com, The Star-Ledger, The Record, Variety and Worth magazine. Bernice has a Bachelor of Science in Social Welfare from SUNY at Stony Brook.