Monday, March 11, 2013

Reduced Social Security Benefits in the Future for Today's Workers

We hear a lot of talk these days about the solvency of the nation's Social Security system. We even hear lots of scare mongering about whether the system will even exist in the future. Let's discuss the reality of what's going to happen and what today's workers need to do to prepare for it while there's plenty of time to do so.

While Social Security will definitely continue to exist, the benefits received (relative to the inflation adjusted benefits paid currently) by future retirees will be substantially less. It's simple math at work.

And even as those future benefits are reduced in real terms, employee contributions will likely be much greater than they are today. And to top it all off, the normal retirement date for receiving benefits probably will be moved back to an older age.

In order to make the system viable in the long term, the future will probably be a combination of all three --- lower inflation adjusted benefits, higher contributions and a later retirement age. And to repeat, it's not ideology. It's just math.

And that means individuals will become more responsible for saving and investing properly to help meet our income needs in the oldster years. That need not be a bad thing for those who prepare themselves for that future. So let's do just that.

What a Social Security crisis could cost you says this about the situation:

"No debate over the federal government’s long-term budget woes is complete without anxiety over the solvency of Social Security. (The growing cost of Medicare is potentially a much bigger fiscal problem, but let’s put that aside for now.) As they weigh the costs of reform and the costs of doing nothing, the players in the debate tend to focus on big-picture numbers – for example, using a “chained” consumer price index would theoretically save the system $20 billion a year – but they tend to steer clear of calculating what any scenario would cost individual households.
So it was refreshing to see Mark Miller, author of the Retirement Revised blog, running the numbers to figure out how one possible outcome might affect . . . two boomer households, one upper middle class and one more affluent, whose members were born in 1960 and who plan to retire with full Social Security eligibility in the year 2027. The affluent couple retires with a nest egg of $1.6 million; the upper-middle -class family has $492,000. . . .

Miller . . . focus(es) in particular on a “no reform” scenario, under which the law goes unchanged, the Social Security trust fund runs dry in 2033, and the program is able to pay out only 75 percent of current projected benefits. “The results,” Miller writes, “are ugly, because Social Security provides a guaranteed income stream that outlasts savings.” The hypothetical middle-class couple, who would have depleted their savings by age 85 without Social Security cuts, now runs out of money at age 80, at which point they have to cut their annual spending by 45% in order to live on Social Security alone. The more affluent couple runs out of money at age 82 instead of 85, but faces a more severe spending cut, with their income dropping 61%.

Miller acknowledges that this do-nothing outcome isn’t a likely one. But his larger point is still sobering: In any scenario where future Social Security benefits are less valuable than present ones, retirees face more pressure to pump up their savings, slash their spending, or both. Good discipline, perhaps, but a disruptive change in expectations for many.

Miller also discusses a second possible scenario: One in which a reform compromise raises the full retirement age. (Various policy proposals currently on the table recommend setting that level at 69 or 70.) Here, Miller . . . cite(s) some stark numbers regarding the last increase, which was enacted in 1983 and raised the full retirement age from 65 to 67. For Americans currently in their early 50s, Miller reports, that two-year increase will mean a cut of about 13% in their total lifetime benefits compared to what they would have gotten before the 1983 reform, “because it raises the bar on how long they would need to wait to receive a full benefit.”"

Summing Up

When it comes to the future of Social Security, those predicting a gloom and doom scenario and engaging in needless scare mongering are doing no good for anybody.

But spreading gloom and doom is entirely different than discussing the system's probable future and then preparing for that future while there's still plenty of time to do so.

In the end reality is reality and facts are facts.

And the facts about Social Security's future are clear -- something's gotta give -- in fact, several somethings.

It looks to me like three things are near certainties: (1) lower benefits relative to today's inflation adjusted amounts; (2) higher employee contributions while working; and (3) a later retirement age.

As a result, Americans must do a much better amd more thorough job of retirement saving and investing than my generation did.

It's not an impossible task, but greater knowledge about our individual financial lives is an important habit to acquire and be developed over time.

And 401(k) plans will play a more prominent role in providing more of the retirement income for future retirees. It's just that simple.

So if there are still some "non-believers" out there who haven't yet begun planning, saving and investing to reflect that future reality, the time to start doing that is now.

That's my take.

Thanks. Bob.

No comments:

Post a Comment