Social Security’s power of confounding

Social Security’s power of confounding
June 8, 2018 Bob Allen

So let’s say you finally heed all this advice we’ve been hurling your way about saving more, and you sock away an additional 1 percent of your pay. And you wait 30 years until you retire.

Meantime, someone else continues to ignore that advice, doesn’t save anything extra and essentially does nothing different except, instead of retiring at what the Social Security folks call “full retirement age”—that is, the age when you can retire with full benefits—this person works an additional three to six months before retiring.

Who ends up with more retirement income?

According to a study from the National Bureau of Economic Research, they are likely to end up with the same benefit.

Yes. Thirty years of saving an extra 1 percent is the same as working an extra half a year.

This column in last Sunday’s New York Times is pretty stunning. It also contends that saving 1 percent more for 10 years is the same as working six weeks longer. Yes, six weeks.

As the writer, Jeff Sommer, distills it:

“…it suggests that retirement planning may not be focusing sufficiently on a basic truth: As pensions vanish and the stock market gyrates, Social Security remains the most stable pillar in most people’s retirement. Increasing annual Social Security income by working longer — optimally, until at least age 70 — will improve financial security more than anything else most people can safely accomplish.”

Of course, the caveat is that you want to work longer or can work longer.

Clearly, the attention paid to Social Security needs to be more sophisticated than the templated scare stories about whether it will be there when you are ready to retire. Yes, Social Security needs attention. Heck, seemingly everything meaningful to Americans that is the aegis of the federal government needs fixing.

Now for some full disclosure: Honest to god, I wrote the first part of this blog the day before this report that for the first time since 1982, the Social Security system will pay out more than it takes in and that the $2.9 trillion in trust funds are on pace to run dry by 2034.

So yes, to employ the political passive voice, fixing is needed.

Scary? Well, yeah, kinda. And you would have thought, given the popularity of Social Security, that this story would have generated more internet consternation than a video of a water-skiing squirrel. Yet how much do we really know about Social Security besides it comes once a month … for the time being (Ahem).

Be honest: Have you studied the impact on your own monthly Social Security if you decided to retire at 70? I have. It surprised me.

It also got me to thinking about the slurry of retirement programs and the widespread inability of many Americans to understand them let alone take advantage of them.

What if they only had to keep track of one retirement program? One that, even if they don’t understand the full scope of its benefits, they know what it does and what it means and has meant to so many?

What if, somehow, by a combination of employee and employer contributions and other changes to Social Security, such as the amount of income subject to FICA tax or the retirement age, the system were tweaked so that monthly Social Security payouts were, say, double what they are now? So instead of Social Security covering the current 40 percent of income needs in retirement, it covered 70 percent, even 80 percent? Sort of like Social Security plus a pension.

No, I’m not advocating this. I don’t know enough to speak authoritatively. But given all the stories about people not saving enough for retirement or saving anything, of underfunded public employee pension plans — and at this point, do I really need to link to these stories? — you tell me: What’s your plan?

Because as we learned from last week’s news about the Social Security system, we need a plan. Because failing to plan is, well, failing.

— Bob Allen

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