7/18/2011 10:00 PM ET|
The coming Social Security shortfall
Social Security is facing long-term shortfalls, so future beneficiaries need to prepare early to maximize their benefits. And current recipients need to protect what they're getting now.
Forget for the moment whether there's the political will to tackle the financial problems affecting Social Security and Medicare as outlined in the respective trustees' reports. There's a more practical issue at hand, especially for those for whom Social Security and Medicare represent a part, big or small, of their retirement security plan.
Social Security currently runs a surplus, but that trend is expect to reverse, and by 2037, its Trust Fund is projected to be exhausted. At that point, current benefit levels would exceed the revenue replenishing the system, creating a growing shortfall. Medicare faces a similar fate in 2024. So what should current and future Social Security beneficiaries do to maximize or protect their benefits?
Don't act rashly
First and foremost, don't let media coverage scare you into rash action, said Andy Landis, a principal with Thinking Retirement and the author of "Social Security: The Inside Story." "I've spoken with some pre-retirees who say something like, 'I'd better sign up for Social Security now, before they reduce the payments. They can't reduce mine once I sign up.' That's not sound planning."
First, Social Security typically changes very slowly, with reforms announced for years and then phased in over more years, said Landis. For example, today's talk of possible Social Security cuts is generally aimed at those under 50 or 55. Second, by taking Social Security too early, you're guaranteeing yourself a pay cut for life. Stick with the plan, especially if you planned to wait for higher payments at a higher age.
Others share that point of view. The good news for current beneficiaries is that they would not be affected by any changes. "The changes will most likely be prospective," said Craig Copeland, Ph.D., a senior research associate at the Employee Benefit Research Institute.
And don't worry too much, either
Landis also advises against buying into any media-created Social Security "crisis." "Social Security is solvent for decades to come, and the glass is three-quarters full even after that," Landis said. "How many programs, public or private, can say that with confidence? Can you name one private company that can say the same?"
Others are in the same camp. "I do not think the trustees report is of particular importance," said Matthew Greenwald, president of Matthew Greenwald & Associates. "The Social Security system has some financial pressures that are not that difficult to address. It could be some affluent retirees will get less and/or that affluent workers will pay more, but these will be at the margins. Overall, I think people can and should count on the Social Security system acting basically as it does under currently enacted law."
And, Nancy Altman, co-chair of the Strengthen Social Security Campaign and chair of the Pension Rights Center, said this: "With respect to whether the benefits will be there, it is important to understand that Social Security is currently in surplus and is projected to remain so for more than another decade, even with no congressional action whatsoever. Its projected shortfall over its conservative 75-year valuation period is a manageable 0.6% of GDP. . . . The question of how large the benefits should be and how to finance them are political questions, not economic ones. All past Congresses have ensured that benefits were always paid on time, and there is no reason to think future Congresses will be less responsible."
Sure, Social Security faces long-term shortfalls, Landis said. "But the numbers we're seeing now have been expected since the mid-1980s," he noted. "It was always expected that Social Security financing, overhauled in 1983, would get us partway through baby boomer retirements in the 2030s. Later generations would decide how to steer Social Security after that. It's sort of like your next birthday -- it's hardly a surprise because you could see it coming."
Then again, face the facts
It is a reasonably safe bet that the Social Security program will be with us for a long time to come, but federal budgetary conditions may ultimately require some downward adjustments in benefits for high earners and/or increases in the retirement age, said Eric Toder, co-director of the Urban Institute's Tax Policy Center.
Given that, future beneficiaries who will likely face some sort of reform should consider, if nothing else, how to maximize their benefits under the current law of the land.
The most effective method for maximizing benefits is to continue to work as long as possible, said Copeland. "Given the actuarial adjustment of delaying retirement past age 62 and the normal retirement age, continuing to work and delaying benefit claiming would do the most to maximize one's benefit," he said.
Others, including Kent Smetters, an associate professor at the Wharton School at the University of Pennsylvania and the founder of Veritat Advisors, said Americans should work at least to their full retirement age, if not to age 70.
And Dallas Salisbury, the president and CEO of the Employee Benefit Research Institute, said, "I would tell anyone who can wait to take Social Security until 70 to do so. I tell people to assume they will get between 75% and 100% of the promised benefit. To try to build a plan that works with the 75% and view any more as gravy."
For her part, Anna Rappaport, president of Anna Rappaport Consulting, said it would be wise to keep your skills up to date and be prepared to work longer. "And be sure to have disability insurance in case you need it," she said.
Meanwhile, Bob Jennings, author of "Understanding Social Security and Medicare: Practical Answers and Planning in an Easy to Read Format," offered this advice for future beneficiaries. "There are two things to remember about Social Security benefits," he said. "First, your personal benefit is based on your highest 35 years of earnings during your lifetime. And second, if you have been married to anyone for at least 10 years, you qualify to get half of their benefit if it is higher than your own."
With that in mind, here are some simple actions Jennings advises to maximize your benefit:
- Travel around if you want after college, but start earning some decent income within five years, because you have only 35 years to build the benefit.
- Work lots of overtime while you are young. These early-life years will be adjusted for a wage index -- inflation -- when you retire and give you a potentially much greater monthly check.
- Watch the timing of bonuses. "You get no credit for earnings over the FICA limit ($106,800 for 2011), so if you are at or above that number this year and expecting a bonus, you might want to defer it to next year to get a better earnings report next year," he said.
- If all else fails, marry well and stay married for at least 10 years.
It might not come as a surprise, but Americans' knowledge of the intricacies of Social Security and Medicare is lacking. So one way to make sure that you maximize your benefits is to learn as much as possible in advance about the ins and outs of what could represent a big portion of your retirement plan.
"Individuals should be aware of what happens to their Social Security benefits so they can plan around them by increasing their savings or adjusting their retirement age," said Copeland. "Any changes that may be made to Social Security will have some effect on future workers' retirement finances. Accordingly, workers must adjust to any changes, which are fairly limited to saving more or working longer."
Greenwald said most people do not maximize their benefits because they are not tactical about when to claim benefits, especially those strategies a husband and wife can use. "In some cases, for example, a lower-paying wife should claim as early as possible and a husband as late as possible," Greenwald said. "The key is to do a careful analysis. Most people do not do that, and they should."
Getting a handle on the strategies that a husband and wife should use is critical, according to Rappaport. "My best advice to people is: Be sure to evaluate claiming alternatives and consider spouse benefits when they do. Many people will benefit from claiming later, and too many claim early."
For her part, Altman said that workers who are insured under Social Security have discretion concerning when to claim their retirement benefits. "The decision regarding the age to first claim benefits, which is an actuarially neutral decision from Social Security's perspective, turns on personal circumstances," she said.
If you're unsure of your expected benefit, get an estimate from the Social Security Administration website (you can find the agency's benefits calculators here.) Also read the National Academy of Social Insurance report "When to Take Social Security: Questions to Consider."
Save early, save often
Social Security is supposed to provide a basic floor under retirees' incomes, but it is only one source of retirement income, the others being workplace pensions and other private savings, said Toder.
"Middle- and upper-income workers have always needed to supplement Social Security with resources from other sources to maintain their living standards in retirement," said Toder. "Given the decline in the number of workers covered by defined-benefit plans and the likelihood that federal budgetary conditions and rising medical costs will compel future retirees to bear a higher share of their health costs than they do today, it is more important than ever to start to save for retirement early."
For his part, Smetters said people need to increase their savings. "People still need to save more, especially as Medicare is also in trouble," he said. "Families who are only saving in their employer-based plans are probably not saving enough."
Others agree with that advice. "The (trustees) reports are another reminder that we all need to save more, save often, essentially save until it hurts," said Michael Wilson, CEO of the International Foundation of Employee Benefit Plans. "Social Security was not intended to provide an individual's complete retirement income."
Don't rely on housing wealth
In addition, Smetters said, Americans should avoid depending too much on accumulated housing wealth. "Despite the obvious risk of fluctuating housing prices, people often decide later not to downsize as they previously planned," he said.
Current beneficiaries go back to work or keep on working
Current beneficiaries, unfortunately, cannot do much to change their benefit, said Copeland. They do have one option, though. "They could go back to work or continue work, and any earnings penalty against their benefits will lead to their benefits being actuarially adjusted upward to account for the penalty," he said. "It is somewhat of a forced savings method."
If you do go back to work while collecting, don't exaggerate the impact of the "earnings tax" on Social Security benefits, said Smetters. "For most households, the additional credit to Social Security benefits from delaying the collection of benefits fully offsets the tax, he said.
Medicare is the bigger problem
The real problem is Medicare, said Salisbury and others. "Medicare now pays an average of half, with new income-based premiums," Salisbury said. "Assume it drops over time to pay 25% and that premiums continue to rise. Plus, health costs continue at a high rate. At retirement at 65 or older, assume you need $300,000 set aside for retiree medical and $300,000 for long-term care if you do not buy a long-term-care insurance policy. This is individual, not couple. Then customize this to your family history and the like. Better to have oversaved and underconsumed than the opposite."
"The bottom line is that households need to start viewing Social Security as a backup layer of security rather than as a primary pension plan," said Smetters.
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