Social Security is still retirement ‘cornerstone’

The Bakersfield Californian
July 8, 2011

AARP, the powerful nationwide organization that advocates for older Americans, recently sent shock waves through the ongoing, divisive debate over the future of Social Security. Long an opponent of any change, AARP announced that it would consider “modest” reductions in benefits to keep the program solvent for generations to come.

A couple of days earlier, Texas Republican Sen. Kay Bailey Hutchison introduced her version of Social Security reform — raising the retirement age to 69 and cutting cost-of-living adjustments for benefits. In April, a trio of senators — Rand Paul of Kentucky, Mike Lee of Utah and Lindsey Graham of South Carolina — proposed pushing the retirement age to 70. President Obama’s National Commission on Fiscal Responsibility and Reform also called for long-range benefit cuts, higher retirement ages and lower cost-of-living adjustments.

The clamor for reform has become so loud that many younger Americans are losing faith in Social Security. A Gallup poll last year found 60 percent of Americans don’t expect Social Security to pay them benefits when they stop working. This belief jumps to 77 percent in the group of 18- to 34-year-olds surveyed.

Social Security is far from being insolvent. But as the baby boomers retire, the trust fund’s surplus is evaporating. Presently, the system is taking in less than it is giving out in benefits. This was always expected. The large population known as boomers created the surplus by pumping money into the system when they were working. Now these same workers are drawing out retirement benefits from the surplus.

It is impossible to look into the future — three, four or more decades from now — and predict the impact of all this “reform talk.” But we do know that Social Security today is the cornerstone of most Americans’ retirement incomes.

And because it is important to plan for what you know — and not just for what you fear — I focus a great deal of attention on Social Security in the course I teach for Bakersfield College’s Levan Institute for Lifelong Learning. It is also a critical component in my retirement planning strategy for clients.

Every day, retiring boomers make a choice that can end up costing them tens of thousands of dollars in Social Security benefits over their life. Regrettably the choice often is made without adequate knowledge.

Workers should consider Social Security and pensions to be the cornerstones of their retirement income plan. Generally these are incomes that are “guaranteed.” The same “guarantee” cannot be expected from the volatile stock market and most other investments. With interest rates at historic lows, it is difficult to create a substantial retirement income on dividends alone.

Perhaps the choice and the analysis process can be best understood by considering the situation of one of my clients, who works for a major international oil company that provides a good pension plan for its employees. As he nears retirement, my client is weighing the choice of receiving monthly checks, or receiving a lump sum payout from the pension plan.

I developed several scenarios for my client based on the specifics of the plan, his desired age of retirement, and the potential for him to live to age 95. I compared the monthly pension option to taking the lump sum option and reinvesting it. In every instance it made sense for my client to receive monthly pension checks. I calculated that for him to take the lump sum payout would result in him running out of money at least six years sooner (at age 89) than if he had taken the pension. An “exception” would be if he bet big on the stock market and won.

I then evaluated the impact for my client of taking Social Security early (at age 62), at full retirement age (66) and at 70. In order to defer taking Social Security, the client would have to spend down his other retirement savings, such as his 401(k), to generate income until his Social Security checks began to arrive.

In every scenario, it made sense for him to spend down his savings to draw more from Social Security later. In the end, it will be his decision to make about how to handle investments and when to begin receiving Social Security. But he will be able to make an informed and educated decision.

Boomers going into retirement should:

  • Plan on Social Security being what it is today, until we know what, if any, changes are going to be made.
  • If Social Security pushes the full retirement age back, plan on working longer if you can.
  • Plan on deferring Social Security as long as you can. That way you are not dependent on drawing it early. Some reformers are suggesting the elimination of “early retirement” at reduced benefits.
  • Invest some of your money in the stock market or real estate if Social Security cost-of-living adjustments are capped at ridiculously low levels, or eliminated altogether. While some people may resist investing in high-risk options, some hedge will be needed to cope with inflation.
  • Pay off debt — car payments, mortgages, credit cards, etc. A debt-free retirement will stretch limited revenue sources.

The ultimate problem is that we don’t know what will change. All we can do is plan for today and make adjustments going forward. Boomers are encouraged to learn as much as they can about Social Security and investing — through books, classes, magazines or the advice of a qualified financial planner.