Social Security has long been known as the “third rail” of politics: American voters are so protective of the federal retirement program that they’ll electrocute any politician who messes with it. But where does that leave advisers who need to bring clients with exaggerated expectations about the program back to reality?

Survey data regularly highlights the yawning gap between those expectations and the Social Security benefits they will actually receive: To wit, the Nationwide Retirement Institute’s just-released fifth annual survey of adults ages 50 and above found the following:
· A majority (57%) of adults nearing retirement age believe they’ll be eligible for benefits sooner than they actually will,
· Three-fourths of them incorrectly identified the age at which they’re eligible for full benefits,
· They also overestimate, by an average of 30%, the amount of the Social Security retirement annuity they will receive.
· And while most older adults don’t plan to begin receiving benefits until they’ve hit full retirement age, due to unemployment, poor health or other factors, they wind up claiming a significantly smaller benefit as soon as they become eligible at age 62.

Adding to the misconceptions, the program’s complexities even bewilder some advisers—especially as it pertains to benefits eligibility and the best claiming strategies for their clients to follow. To help cut through the confusion, some take advantage of Nationwide’s Social Security 360 Analyzer, an online tool available to advisers at no charge that allows them to model different claiming strategies for their clients. It also highlights any gaps between clients’ self-declared retirement income needs and the amount of retirement income that Social Security will provide.

Social Security checks (Bloomberg News)

Mounting fear
There is also mounting fear that third rail or no, a Republican Congress will try to reduce—perhaps drastically—the payments that Social Security provides. How should advisers respond to clients asking them to handicap the odds of a future rollback in benefits?

“We’re usually saying that if you’re 50 or older, you’re probably going to get what you think you’re going to get,” assuming that expectation is in line with how the system currently works, says Harris Nydick, a founding partner of CFS Investment Advisory Services of Totowa, N.J. and coauthor of the new book, Common Financial Sense. “But,” he adds, “we tell them you’ve got to monitor it, especially if you’re younger.”

Another adviser, Steven W. Kaye, founder of AEPG Wealth Strategies in Warren, N.J., surmises that with today’s “kick the can down the road political culture,” Congress won’t try to scale back Social Security any time soon, although he believes that the program’s finances will eventually force it to act.

“We believe the fix will eventually be a means test whereby people’s benefits will be based on their income,” Kaye says, “as well as further postponing benefit eligibility.” Congress could also use net worth as a criterion for adjusting benefits, he adds, although that would be more difficult for the government to monitor and enforce.

But without really knowing what’s in store for the program, Kaye says that when his firm discusses retirement with certain clients, particularly younger ones, “we run scenarios with and without Social Security.”

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