Race To Retirement
In addition to the investment and health risks that people
must weigh in planning retirement, government decisions are now
becoming a bigger part of the equation.
While Washington remains in a state of denial about Social
Security's finances -- Democrats campaigning in 2014 are calling
for increased benefits for all -- the bad news has continued to
Congressional Budget Office projections now show that the
Social Security Trust Fund will be fully spent by 2031, when
today's 55-year-olds are turning 72.
At that point, Social Security will be able to pay only about
75% of benefits, which would result in a 25%-across-the-board cut
to annual benefits if Congress doesn't act.
Assuming recipients live to the average life expectancy of 85,
that would mean the equivalent of three lost years' worth of
benefits. For those who live longer, those losses will not only
accumulate, they'll come during very old age, when seniors tend
to depend more on Social Security if health bills rise or the
other legs of their retirement stool start to seem a bit
Surely, Congress will act at some point. Yet there is only so
much it can do to change Social Security's basic math, especially
since protecting lower-income workers, the disabled and those
already retired from benefit cuts is sure to take precedence.
To the extent Washington does do something to limit benefit
cuts for the broad middle class and higher earners, you should
expect that fix to involve higher taxes.
Whether it's more tax dollars funneled through the government
or more money tucked away in a personal account, setting aside
extra savings will have to be an important part of the response
to Social Security's dwindling resources.
The other way to make up for less support from Social Security
is by working longer. At present, workers who claim benefits at
the earliest eligibility age of 62 face an early retirement
penalty that amounts to a 25% benefit cut each year for as long
as they live. (That penalty will ramp up to 30% in steps as the
official retirement age rises from 66 to 67 for people between
the ages of 54 and 59.)
Reward For Waiting
In contrast, workers who wait to claim benefits until after
the official retirement age will get an 8-percentage-point
benefit boost for each year they wait.
Thus, an extra three to four years of work could fully offset
the approximate 25% benefit reduction that would be needed to put
Social Security on sound financial footing.
More work may be the best fix for Social Security because it's
good for both government and individual finances, but it may not
be wise to depend on more work alone.
That's because, depending on one's profession and skill level,
and for reasons of health and the economic cycle, plans to work
full-time to age 70 or beyond may not be something you can take
to the bank.
For a career-average earner ($47,000 in 2014) who claims
benefits at the official retirement age, Social Security will
replace about 41% of pre-retirement income ($19,000 in 2014). As
career earnings rise, Social Security's replacement rate falls --
to 34% ($25,500) for a $75,000-earner and 27% ($31,000) for
someone earning the maximum amount subject to Social Security
While Social Security sometimes gets criticized for providing
meager returns on tax contributions, the upside is its
inflation-protected lifelong benefit.
To the extent those benefits are eroded by measures to make
the program solvent, Social Security actuaries have provided some
idea of how much personal savings would be needed to
An average earner would have to set aside 2.5% of pay each
year over a full career, investing it in Treasurys, to cover 25%
of his Social Security benefit (if the proceeds were
Because of lower replacement rates, higher earners wouldn't
have to save quite as much. Today's $75,000-earner would have to
save 2% of pay over a full career and a top earner 1.5% to offset
the same 25% benefit cut.
Yet for workers already halfway through their careers, the
necessary savings would be more than twice as high. That's why
one would expect policymakers in Washington to propose only very
gradual changes to benefits once they finally get around to
shoring up Social Security.