More Evidence Both Parties Not Far Apart on Fixing Social Security

As I wrote yesterday, when President Obama stated in last week's debate that there was not much difference between his views and Governor Romney's on how to address Social Security's long term funding problems, the Governor's "non-response" effectively agreed with the President.  They turned instead to a sharp exchange of different views over how to fix Medicare.  Why?  Because it is a much bigger problem to deal with.

Dean Baker, writing in the Huffington Post today, effectively makes the same observation while drawing a starkly different interpretation.  He raises concerns about those aspects of a potential fix that will weigh most heavily on beneficiaries, such as adjusting the cost of living formula, raising the Full Retirement Age, and adjusting (lowering) benefits for higher income seniors.  Obama has already acknowledged that some or all of these options may be on the table.  I am certain some writer on the right would make the same observation with the opposite interpretation: Romney will betray taxpayers by raising the tax rate or the tax cap.  In fact, a judicious mix of all of these fixes probably needs to be incorporated in any eventual solution. 

Sure, there will be much screaming and gnashing of teeth on both sides of the political aisle.  The point is that there is effective agreement among serious politicians on how to get a deal done.  And for all the moaning, none of the fixes will fall catastrophically on any group.  Once this is resolved, the changes - likely to implemented gradually over a long period of time - will hardly be noticed.  In 1983 they raised the Full Retirement Age from 65 to 67.  Three decades later the Full Retirement Age has moved all the way to 66 and won't get to 67 for another ten years.  Who do you ever hear complain about the fact that their retirement age is 67 while it was 65 for their parents?

Most importantly, once they do agree on the fix and implement it, Social Security will be a stable and reliable source of retirement funding as far as the actuaries can see.  Now, if we can just educate those approaching their sixties on how to make better Social Security claiming decisions...

Obama and Romney Agree on Social Security?

Wednesday's debate may have made the biggest news because of the general perception that former Governor Romney won.  However, lost in this coverage was reporting on how they clarified their differences on what to do about Social Security which - to hear politicians and pundits talk about it - is heading over a cliff.  So how did they respond when Jim Lehrer asked to start off segment three on entitlements: "First — first answer goes to you, two minutes, Mr. President. Do you see a major difference between the two of you on Social Security?"

President Obama's response:

"You know, I suspect that, on Social Security, we've got a somewhat similar position. Social Security is structurally sound. It's going to have to be tweaked the way it was by Ronald Reagan and Speaker — Democratic Speaker Tip O'Neill. But it is — the basic structure is sound."

For the rest of his comments, the President drilled down on significant differences over Medicare.  Moreover, in former Governor Romney's response he didn't mention Social Security in any substantive way, basically providing tacit agreement with the President's assertion that some tweaking needs to be done.  Of course, on the subject of Medicare there was plenty of rebuttal and counter-rebuttal.

This provides considerable support to my ongoing assertion that the problems Social Security faces over the long term can be fixed and both parties understand quite well the alternatives that will get us there - the "tweaking" to borrow from the President's words.  Sure the solutions will be bitterly argued  - isn't everything in Washington nowadays? - and some toes will be stepped on.  Still, the fact that it wasn't worth 30 seconds of time in a ninety minute debate tells us volumes about how shallow the gulf is between the parties on this subject.  Will the tax rate or tax cap be moved higher on current workers?  Will the retirement age be raised?  Will the cost of living adjustment be lowered?  All these will pinch workers and/or retirees.  However, a pinch here and there is far less painful than the massive cuts or tax hikes needed to solve our other fiscal problems like Medicare, Medicaid, and the debt.  Compared to those, the Social Security problem is worth about 30 seconds of the candidates' time.

Scarey Numbers? Social Security, meet Fiscal Cliff!

Bruce Krasting makes quite a bit out of the fact that Social Security will pay out over $65 billion in benefits this month.  Writing in Business Insider yesterday, he makes the inevitable comparison to the GDPs of various countries and combinations of states. I found this comparison particularly interesting:

"The 2012 bill for SS will exceed the cost of the military, that’s the first time this has happened."

Like that's a bad thing?  To spend more on seniors, the disabled and survivors than on the military?

Now, it is a lot of money by any measure, and his larger point is to underscore the shortfall of income to cover the spending: while the shortfall last October was $6.7 billion, it rises this October to about $8 billion.  And, it will continue to rise as more and more Baby Boomers claim their benefits.  He characterizes this as a slow and steady erosion of the program, like sand from a beach. 

Although the "erosion" is gradual, it is well understood by the actuaries at the Social Security Administration who understand with considerable precision how the funds will flow over the coming decades.  Most importantly, the fixes are well understood, can be implemented gradually and we have two decades to work with.  Not so scarey really. 

Contrast this with the fiscal cliff arriving in three months when the Bush tax cuts and the payroll tax holiday will expire raising everyone's taxes as much as $536 billion according to this article at CNN.com.  Couple this with the $1 trillion over 10 years of automatic cuts negotiated in the debt ceiling bill last year and you have a formula for sucking what little energy there is out of an economy that is barely limping along.  Pretty scarey!  Of course, there's nothing like a fiscal cliff to focus the mind, whether Republican or Democrat.  Hopefully they will reach a compromise that all the politicians hate.  This is usually good news for the middle of the roaders.

More Abuse of Social Security Statistics...

Making reference to the average Social Security benefit is an often used - and misused - characterization that won't go away.  Chuck Saletta of the Motley Fool writes the following at MSNBC.com:

The average Social Security payment to a retired worker currently sits around $1,234 per month -- or about $14,808 per year. For comparison, a full-time minimum wage job would currently pay $7.25 per hour -- or around $14,500 per year.

From there he goes on to argue that with such a low average benefit, the importance of savings to augment the benefit is all the more important.  Fair enough.  I am all for more savings for retirement.  However, for those nearing retirement there is limited time for the magic of compound earnings to pump up their savings.  By contrast, there is a sure-fire way to increase your guaranteed Social Security benefits: find a way to claim later!

Let's unpack the loaded 'average benefit around $1,234 per month'.  More than half of claimants start benefits at 62, the earliest possible age.  Most of the rest start within a couple more years, long before the latest claiming age of 70.  Let's suppose this $1,234 is typical of people claiming at 62 (and it is if you have a look at this data from the Social Security Administration, p. 352).  That benefit is reduced about 25% from what it would have been at age 66, Full Retirement Age currently.  If the same person waited to that age to start, the benefit would be $1,542, an amount that would be typical of an earner who made about $44,000 a year during their working career.  If the worker waits to age 70 to start, the benefit is 32% higher, or $2,035.  Now, suppose a married couple both earned that amount and are entitled to the same benefit.  Claiming at 70 their income would be $4,070 or $48,840 per year.  Harly makes them wealthy, though there are places you can live on that kind of income, especially since it would be tax free if you have little other income.  Of course, you need to get to age 70...

Social Security rules give this couple a little help to get there.  At age 66 the younger spouse can file a "spousal" claim based on the other spouse's work record and receive 50% of what that other spouse was entitled to receive at age 66 (even though both are waiting to age 70 to claim on their work records).  That's 50% of $1,542, or $762 for 48 months: an extra $36,576!  Waiting has its own reward!

Getting the Most Out of Your Social Security Investment

The Social Security Administration periodically updates its analysis of the real rate of return that benefits generate for workers, male and female, at various income levels.  In its most recent report, from July of this year, the calculated rates of return are considerable, especially for low to moderate income earners whose returns range between around 3% and 6%.  Interestingly, even if benefits are cut in 2033 (when the Trust Fund is exhausted and assuming the only payments are from current payroll tax collections, a cut of about 25%), the range of returns for these earners is 2% to 6%.

In general, the returns go down for more recent generations.  Those born in the 1920s and 1930s have by far the highest rates of return.  Also, the returns for women are higher in all categories because on average they live longer and therefore collect longer.  Still, even high earners get real rates of return above zero under all scenarios.

I became aware of this analysis from an article by Steve Vernon writing at CBSNews.com.  Mr. Vernon writes often about Social Security and excels at explaining some of the intricacies of claiming strategy.  As he points out in the article, "Looking at all the various combinations, large numbers of hypothetical workers received estimated real rates of returns of 2, 3 or 4 percent per year."  Considering there is a near zero risk on this "investment", that's not bad!

One assumption used in their analysis deserves special notice from our vantage point: all calculations are based on the beneficiaries retiring at age 65.  Our own analysis shows that most of these claimants would enjoy far greater cumulative lifetime benefits if they claimed later, closer to age 70.  The result for most couples would be an increase in benefits approaching or exceeding $100,000, an amount that would increase the rate of return considerably.  Make the most of the investment you made in the Social Security system by adopting a smart claiming strategy.

Retirement in the Age withOUT Defined Benefit Pensions

A new study from the Center for Retirement Research at Boston College by Alicia H. Munnell, Rebecca Cannon Fraenkel, and Josh Hurwitz reveals just how poorly baby boomers are positioned for retirement in light of the shift to defined contribution pension plans (401(k)s principally).  According to this research, in the model a worker who reaches peak earnings of about $65,000 at retirement, and who put away 6% per year with an employer match of 3%, would accumulate about $363,000; a two-worker household with both earning the same would have double that.  Yet the Federal Reserve's Survey of Consumer Finances indicates that in 2010 a typical household close to retirement age only had about $120,000 in 401(k)s and IRAs - enough to purchase an annuity of about $575 per month.  (Presumably this is not an inflation-adjusted annuity like Social Security.)

Why the discrepancy?  First, there are a large number of businesses that don't offer 401(k) plans in the first place.  Second, of those that do off plans the participation rate of 79% is not as good as might be hoped.  Further, workers don't always maximize their participation.  For these reasons, overall only 42% of the private sector workforce participates in such a plan.  (The public sector workforce effectively has 100% coverage.) 

This data further underscores the importance of finding a strategy for waiting to claim Social Security benefits until age 70 when they are typically 76% higher before adjustment for any inflation).  Locking in the higher benefit level for life is undoubtedly the single biggest step to take to ensure greater financial security.  This is particularly so for those who are near retirement age and have few other options for accumulating financial wealth.

How Urgently is a Fix Needed for Social Security?

Charles Blahous is a public Social Security trustee.  He recently wrote a lengthy article, Is it Becoming Too Late to Fix Social Security's Finances? posted at Economics21.org, that emphasizes the necessity of acting sooner rather than later to shore up Social Security.  He points out that assuming there is plenty of time to act since the Trust Fund is not forecast to be exhausted until 2033 is a dangerous illusion that lulls too many into inaction.  If we fail to act soon, then the steps needed to right the program will be overwhelming.

He argues that the magnitude of the long run shortfall is close to 4% of the tax base (worker wages).  To put this in context, right now the tax base is taxed at the rate of 12.4% with 6.2% withheld from the employee's check and 6.2% paid by the employer.  Increasing the tax rate 4% would bring the total tax up to 16.4%.

He also compares this shortfall to the 1983 shortfall and concludes that it is about twice as severe. Moreover, he points out how politically difficult it was to agree to the changes made to fix the program at that time.  Such a degree of compromise in the current climate in Washington, D.C. seems highly improbable, in his view.

Dale Coberly responds at Business Insider to Mr. Blahous's article by arguing that such an increase (4%) isn't as mathematically implausible as it seems.  With real wages forecast to increase over time at roughly 1% per year, a 20% gain over 20 years could absorb the 4% (net real gain slightly under 16% instead of 20%).  If such an increase were implemented gradually, it might hardly be noticed.  This of course assumes the politics are overcome in order to get there from here.

I hope Mr. Blahous is incorrect about the politics and that some alignment of the stars will force the politicians to act.  However the issue is resolved it is as unlikely to be all tax increases as it is to be all cuts.  (The default solution is to cut benefits across the board around 25% in 2033.)  Simpson-Bowles had a mix of the two built in; you can view a PDF of the evaluation of the Simpson-Bowles proposal by the Office of the Chief Actuary at the Social Security Administration at a link provided in the Charles Blahous article.  I expect something along the lines of Simpson-Bowles to be closer to the eventual solution.

Social Security Privatization: Good Idea or Bad?

Writing today in the Detroit Lakes online, Donald A. Johnson makes an interesting case against privatization of Social Security, arguing that it is "...the worst idea ever imagined."  He contrasts the longevity of this program with that of many prominent banks:

"What do Drexel Barnum Lambert, Lehman Brothers, Madoff Investment Securities, Wachovia, Washington Mutual, CIT Group, Merrill Lynch, Bear Stearns, AIG, and Citi Group, all have in common? They were all highly regarded private investment firms that were incorporated after the Social Security Administration was established in 1932 and went bankrupt or were bailed out before going bankrupt, in the last 30 years. "

He also points out that the fees and overhead of the banks that remain in operation are considerably greater than those at the Social Security Administration - no fees and overhead less than 1%. 

While I am inclined to agree with his premise - Social Security privatization is not a good idea - I think his arguments are apples to oranges.  Social Security is not an investment program designed to generate a nest egg.  Rather, it is an insurance program intended to provide a guaranteed annuity that adjusts for inflation each year.  In fact, Mr. Johnson inadvertently makes this case very well in pointing out the inherent risk involved in the financial markets, risks that have paid off rather poorly over the last ten years or so.  On the other hand, you won't find many that argue that the returns on the money paid to Social Security are very good, and they are certainly worse than they were a generation or two ago, as was reported recently in this Associated Press article.  The point is that Social Security is insurance.  For instance, it includes benefits for disability that you will not receive if you are fortunate enough to avoid becoming disabled.  It also likely won't pay off if you don't live long enough to start collecting retirement benefits (might still pay off for survivors in this case).  And, if you happen to live long enough, it might actually turn out to be a good investment after all - that's when you need it to have been a good investment, a kind of longevity insurance.

Prospective retirees of modest to moderate means need to plan their Social Security claiming strategy coupled with any other guaranteed cash flows they may have (e.g., a pension) to ensure enough income to cover basic needs no matter how long they live.  Then the other savings in the markets can be used judiciously for those activities that may enrich their lives, like travel, entertainment or leaving a legacy - uses of money that are not essential to getting by.

I came across this unusually thoughtful article on the state of the Social Security system from the editorial staff at Fisher Investments and only wish everyone would read it.  It does an excellent job of putting the numbers associated with the system's viability in context.  To wit, take them with a big grain of salt.  Due to the nature of any program providing retirement benefits, the Social Security actuaries forecast decades into the future.  Yet any such forecast is inherently unreliable and subject to enormous fluctuations over time.  As they note, "You can see this in past long-term governmentally produced forecasts, which are frequently wide of the mark—like federal government surplus projections for the next decade minted in 2000."  Don't we wish...

Yet politicians pick up on the latest projection, promote it wildly if it happens to suit their agenda, and the press often picks up their lamentations, treating them without offering much perspective.  For instance, the report of the actuaries this spring moved up the expected date of the Social Security Trust Funds exhaustion by several years, to 1933.  Only a few years ago the date was around 2049.  How could the funds be so diminished in just a few years?  Every year the actuaries update their assumptions based on recent economic developments.  Key factors this year were a reduction in long term earnings growth over the next 75 years due to (1) higher long term energy prices and (2) slower growth in work hours coming out of the recession.  In a future year (perhaps during brighter economic times) these trends could be reversed, or other trends such as unanticipated productivity gains could cause the forecast of Trust Fund exhaustion to recede once again further into the future.

In sum, a forecast indicating a shortage in the Trust Fund in 20 years should be little more than a red flag that if something isn't done, we will eventually encounter a problem.  On this score everyone is in agreement and the question is when will it be politically feasible to make the fix.  Fisher Investments is pessimistic on this score, thinking there will have to be much more of a crisis to bring this all to a head. Indeed that was the case in 1983, when the fabled Greenspan Commission did the last big fix - within about six months of system becoming insolvent!  I am more optimistic.  In the grand debt bargain that Obama and Boehner almost reached last summer to lop around $4 trillion off the long term debt, Obama put a major concession on the table as part of a broader package: move the COLA adjustment to a chained CPI basis.  That coupled with an increase in the tax cap or gradual increase in the rate and another longevity adjustment could do the trick and bring balance to Social Security for another 50 years or so.  Both parties would endure shrieking from their bases, a reasonable price to pay for Social Security security.

New AP Poll Favors Shoring up Social Security

Those recently polled by Associated Press/GfK support raising taxes over reducing benefits by 53% to 36%.  Similarly, 53% were in favor of raising the retirement age as opposed to 36% who would rather cut benefits.  As the article points out, raising the retirement age is effectively a benefit cut.  However, people are living much longer than they did when the first benefits were paid in the 1940s and Full Retirement Age was initially set at 65.  Today Full Retirement Age has only moved to 66 and won't get to 67 for another 15 years.  Life expectancy back in the 1940s was closer to 65.  Today a 62 year old male has a median life expectancy of 82 and for a female it is 85. 

The poll, conducted in August, found that majorities of all parties (including Independents) favored raising the retirement age over cutting benefits.  Majorities of Democrats and Independents preferred raising taxes over cuts, while a majority of Republicans wanted the opposite.  Interestingly, similar results ran across different generations with one exception: younger people were far less likely to be confident that Social Security will be there for them (20% of voters under 35) whereas those older felt it would be there (55% of those over 65).  Overall only "...30 percent said it was very likely or extremely likely they will be able to rely on Social Security." 

Sadly, this low level of confidence in Social Security is not so surprising given the number of politicians on both sides of the aisle who are prone to make hysterical comments about the system, arguing it is a "Ponzi scheme" (Republican Governor Rick Perry) or that it's going to "fall off a cliff" (Democratic Senator Dick Durban).  Hopefully the attitudes reflected in this poll will give politicians of all stripes the backbone to step up and fix the system while such a fix can still be implemented gradually over many years, even decades.  The solution will undoubtedly lay in a set of modifications that combine benefit preservation and modest cuts - something we used to call compromise.  The sooner the better if it means that the public will come to realize that Social Security will be there for them; not just for seniors entering retirement but also for those just entering the workforce.

Social Security: A Long Term Planning Horizon Like No Other

The Social Security Act was passed 77 years ago this month.  When you consider that the planning horizon for Social Security is 75 years into the future, then the most distant horizon at the start of the program was 2010, just two years ago.  What did 2010 look like, viewed from way back in 1935?  I doubt anyone but the actuaries at Social Security gave it much thought.  Who would have imagined the relentless march of technology, television, the computer, moon and Mars travel, the Internet, iPod, iPhone, iPad?  The U.S. population growing from 127 million to 309 million?  Per capita real income growth up over 400%?  A lot can happen in 75 years...

Now let's turn and look ahead 75 years, as the Social Security actuaries do each year.  Pretty foggy looking, isnt' it?  It's very hard to gauge what that future will bring.  I think we need to keep this in mind when we digest the forecasts for Social Security solvency and the estimates of what changes would be required to return it to balance.  That's because these estimates can vary considerably from year to year based on how the economy has done in the last year.  Needless to say, with the Great Recession performance of the last few years, the forecasts have dimmed considerably and steps required to right the Social Security ship have steepened sharply.  However, over reliance on these estimates as pin point forecasts is an incorrect use of the information.  Rather, we need to use this information as general feedback to guide us in the direction to take in correcting the system, knowing that large swings in one direction over a few years can be mitigated by swings in the other direction in the future.  Remember, it was only about a dozen years ago that people were fretting over U.S. government surpluses that would lead to a shortage of government debt for bond purchasers in the not-too-distant future!  (Talk about happy days...) 

Social Security is more a like a big ship that needs occasional changes of direction supplemented with constant tweaking to keep it on a viable course for another 77 years.

Social Security Shortfall: $30.5 Trillion? $134 Trillion?

When we're talking about Social Security we are always talking big numbers - make you dizzy numbers!  A widely distributed article by Stephen Ohlemacher published by Associated Press earlier this week gave context to these numbers.  Both figures are the actuarial estimates by the Social Security Administration covering the 75 years from now though 2086.  The $134 trillion number includes inflation occurring over this time frame while the $30.5 trillion amount is in 2012 dollars, a much more practical way to think about the problem.  That works out to just over $400 billion per year over the 75 year period, so the problem is indeed substantial.

One way to address the shortfall is to do nothing.  The result?  Benefits would have to be cut across the board about 25% beginning in 2033.  Thereafter the system would remain in approximate balance.

Another alternative would be to increase the payroll tax rate, currently 12.4% (includes employee and employer contributions), by 2.67 percent to a total of just over 15%.  This would put the system back in balance.  While that is a sharp tax increase, keep in mind that for the last two years they cut the tax rate paid by employees by 2%.  It is scheduled to go back up by 2% in January 2013, restoring it to the prior rate.  Though that will pose a drag on economic growth (2% less in most workers' paychecks to spend), no one is forecasting the end of the world.  So a 2.67% increase, especially if it was feathered in over a decade or two, is conceivable.  More likely a more modest tax increase will be combined with other modifications, such as raising the tax cap, raising (again) the Full Retirement Age since we are living longer, and adjustment to the cost of living formula.

While the numbers are big, the solution to the Social Security shortfall requires a mix of modest changes which, if implemented gradually, can return the system to solvency, not just for the Baby Boomers, but for those just entering the workforce today.

Is Social Security a Good Deal? Yes, If You Consider the Whole Package!

A recent article published by Associated Press has been picked up by numerous newspapers: "Social Security not deal it once was" is a typical headline – in this case from The Washington Post. According to the author it started out as a very good deal: "If you retired in 1960, you could expect to get back seven times more in benefits than you paid in Social Security taxes, and more if you were a low-income worker, as long you made it to age 78 for men and 81 for women." According to sources referenced in the article, this is no longer the case: "A married couple retiring last year after both spouses earned average lifetime wages paid about $598,000 in Social Security taxes during their careers. They can expect to collect about $556,000 in benefits, if the man lives to 82 and the woman lives to 85, according to a 2011 study by the Urban Institute, a Washington think tank."
We have not undertaken to analyze the underlying assumptions that drive these calculations, like discount rates used and so forth. Instead, let's grant this analysis the benefit of the doubt and consider the conclusion – that Social Security is not a good deal – from another point of view altogether. First, Social Security is not a retirement savings program. Rather, it is a mix of income insurance programs: in addition to the retirement benefits most of us associate with Social Security, the program provides income security for survivors, income to provide for dependent members of their families if they die young, disability income if they lose their ability to work through illness or accident, and supplemental income security for the very needy. All these programs are adjusted annually to protect the beneficiaries from inflation. In addition, they are progressive in design, meaning they are intended to replace a higher share of low income earners' income, and a lower share of higher income earners' income – on the assumption that the higher earners were better able to set aside other savings to complement Social Security benefits.
In other words, Social Security is a collection of insurance policies that will pay out for you, depending on your needs. Like most insurance policies, we usually feel better off if we never have to claim against them. No one pays for homeowners or car insurance, and then wishes for a home fire or car accident so they can get some money back out of their policies! Considered from this point of view, Social Security isn't a bad deal today after all: you get this broad set of income insurance coverage and, if you turn out to be an average earner couple who lives to an average age, you get most of your money back!
More importantly, asking whether Social Security is a good deal is not the most useful question to pose. Rather, the question that makes the biggest difference for you is this: Given that the system is what it is, how do I get the most out of it? We have seen over and over in our analysis of specific cases and longevity statistics that the exercise of a smart claiming strategy by an average earner couple who live to their average ages can easily put $100,000 or more in their pockets compared to the strategy most people use, claiming at age 62. Add that extra money into the case presented in the article and this couple does make some return on their Social Security tax payments. What insurance policies have you purchased that provide both the insurance and the potential for a return on your overall payments – all backed by the full faith and credit of the United States?

Your Social Security Statement Now Available Online

Notice anything missing from your mailbox the last couple of years? That would be your annual Social Security Statement. The Social Security Administration (SSA) stopped mailing them around this time last year as a cost-cutting measure. As taxpayers we can all applaud the roughly $70 million in annual savings. However, the SSA also promised that an online version would be available by year end. That target slipped as the agency wanted to ensure the security of the online system before going live, a task they finally accomplished earlier this summer. Now you can go to www.ssa.gov/mystatement, where you can set up an account and thereafter enjoy secure access to your entire earnings record, amounts you have paid into Social Security and Medicare, and the current estimate of your benefits. SSA will continue to send paper statements to those sixty and over until they retire and start their claim.

This is one of many cost-cutting measures made possible by the Web. SSA is working to move more of its interaction with the public online in order to relieve and possibly reduce the growing demand at its field offices. Already roughly 41% of Social Security claims and 44% of Medicare claims originate online. Imagine how much larger the agency workforce of nearly 70,000 would have to be if these millions of claims had to be first processed in the field offices!

Don't Lump Social Security and Health Care Together

I am all for dealing with our national debt in a timely manner.  However, whenever the topic is raised by serious policy makers, the opening statement goes something like this: "If we don't deal with the twin entitlements of Social Security and health care, they will gobble up an ever-growing share of our GDP, crowding out investment and crippling growth..."  If only these folks would take a look at the facts before they speak.

I was relieved to see this article by Dylan Matthews in The Washington Post: "Health care is crowding out everything.  Social Security isn't."  It includes a terrific chart from the Congressional Budget Office showing that while Social Security commitments will rise from around 5% of GDP to 6% through 2051, health care spending rises from 5% to 12%.  Health care spending is the 800 pound gorilla in the room where the deficits and debt reside.  The relatively minor problems posed by Social Security can be fixed with minor changes to the program's components, phased in gradually.  I wish the same could be said for health care spending.  In any case, let's stop lumping the two together in the same breath as if they share equally as causes of our debt woes, because they do not.

Academic Research: Usually Better to Claim Later

Another study from the National Bureau of Economic Research provides yet more compelling evidence that most people will be better off waiting to claim their Social Security benefits later, especially married couples.  The report, titled When does it Pay to Delay Social Security? The Impact of Mortality, Interest Rates, and Program Rules, is authored by John Shoven, an economics professor at Stanford University, and Sita Nataraj Slavov, a researcher at the American Enterprise Institute.  From the Abstract:

We find that at real interest rates close to zero, most households – even those

with mortality rates that are twice the average – benefit from some delay, at least for the primary earner.

Essentially, twice the average mortality means they are talking about 75% of households.  Yet in fact, 53% of beneficiaries start benefits right at age 62 and 83% have started before reaching age 66, Full Retirement Age currently.  Therefore, the vast majority of these folks are getting it wrong, and would be far better off claiming later, for some couples, according to the study, adding upwards of $250,000 to their cumulative benefits.

You can follow the link above to the abstract where you can purchase the full study for $5.  Or, for a good overview of the study, Robert Powell, publisher of Retirement Weekly, had this article in yesterday's Wall Street Journal: RETIRING: With Rates Low, it Pays to Delay Social Security.

Wake Up Call to Gen X on Social Security!

Kristin Maschka, author of This Is Not How I Thought It Would Be: Remodeling Motherhood to Get the Lives We Want Today, calls in her blog at Huffington Post for Gen X to lose their skepticism and cynicism about Social Security.  She points out the facts that while the system faces a shortfall (in about 20 years), this is one "very fixable problem".

It is disheartening to hear Boomers declare their intention to sign up to start benefits at age 62, "...before they run out of money."  For most Boomers this is costly mistake, resulting in a decrease in lifetime benefits that can easily exceed $100,000 and much more for a married couple.  Even more disheartening, post-Boomers commonly state their belief that "Those benefits won't be there for me at all."

In fact the benefits will be there, in all likelihood in full as scheduled, since the required fixes are relatively mild and pain free.  I applaud any effort by thought leaders like Kristin to get out the word!

Social Security will be there for young workers!

Mark Miller's excellent article today on Reuter's chronicles the widespread pessimism common among younger workers about Social Security:

Some 76 percent of young Americans don't think Social Security will be able to pay them a benefit when they retire (Gallup); 86 percent would like to divert the taxes they pay to Social Security into private accounts (Pew Research Center); 48 percent of Americans under 40 think the system is in crisis and about to go bankrupt (Lake Research Partners).

I hear this from younger workers (under 40) all the time:  "Social Security?  That's not going to be there for me..."  Not surprising given that so many of their parents have the notion that they need to start their benefits right away at age 62, "...before they run out of money."  Just as two wrongs don't make a right, two incorrect perceptions don't make a truth.

Fortunately, Mr. Miller steers us to a thoughtful report, A Young Person's Guide to Social Security, by  Kathryn Anne Edwards, Alexander Hertel-Fernandez, and Anna Turner.  This thorough document carefully explains the Social Security program, addressing both its strengths and weaknesses.  They review the many fixes that can reasonably be implemented to stabilize the system - including for those who are just now entering the workforce.

Whether a Baby Boomer or a twenty-something, the smart financial bet is that Social Security will be there for you when you start your benefits, so you should plan accordingly.