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Business Insight: Don't count on Social Security to save the day

Published April 24, 2013 10:20 pm

Save and plan now to avoid money crunch in retirement, adviser says.
This is an archived article that was published on sltrib.com in 2013, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

Salt Lake consultant Sean P. Lee, president and founder of SPL Financial Inc., says success in retirement is determined by your actions when you're working. Save diligently and carefully plan your income for the golden years so that you can have a financially stable retirement — with or without Social Security.

Will there be changes to Social Security for today's retirees?

Most politicians run on the promise that they will not cut benefits. One proposal under consideration, however, would do just that. Some politicians, including President Obama, have stated that they would consider changing how Social Security's cost of living adjustments (COLA) are calculated for inflation. This change is called "chained Consumer Price Index," or "chained CPI," and it calculates inflation lower than a traditional CPI calculation. By using it, the government would be able to pay less in COLA increases to beneficiaries of Social Security. For example, the Social Security COLA increase for 2009 was 5.8 percent. Had chained CPI been used, retirees would have received a 2.5 percent increase. Social Security beneficiaries didn't receive a COLA increase in 2010 and 2011, and the 2013 COLA was a mere 1.7 percent. The transition to chained CPI is still a proposal, but if politicians make it law, many advocates are worried that seniors will have less purchasing power and won't be able to keep up with inflation.

Will Social Security be around when someone in their 50's retires?

Starting in 2010, Social Security paid more in benefits and expenses than it collected in taxes and other noninterest income. It was still operating at a net positive, though, because of income from interest. Beginning in 2021, annual costs will exceed total income, and trust fund assets will begin to decline, according to the 2012 Social Security Board of Trustees Report. Trust fund reserves will be completely exhausted in 2033. Once this happens, Social Security will be able to pay only 75 percent of its benefits through continuing tax income. Essentially, the majority of today's retirees will not be impacted. But the trust fund will run dry in 2033, at which point, the program will no longer be able to operate at the same capacity. Unless Congress is able to increase the longevity of the program through reform, 20 years from now retirees could face significant cuts to benefits.

Will Social Security pay enough for today's retirees to afford retirement?

It's important to remember that Social Security was not designed to provide Americans with all the income they need in retirement. It was intended to supplement their other retirement income, not replace it. The average annual income from Social Security is only $15,144. Yet for 23 percent of all married beneficiaries, Social Security represents at least 90 percent of income. That number increases for single beneficiaries, with 46 percent relying almost entirely on Social Security. A common analogy is that retirement income is a three-legged stool. Social Security is only one leg, the others being pension plans and personal savings. With uncertainty rising over the stability of Social Security, personal savings plans such as IRAs and 401(k)s become even more important.

Could sequestration or negotiations about the budget cuts bring about Social Security reform?

The only proposed change to Social Security during the sequester negotiations was President Obama's proposal to implement chained CPI, although members of his own party didn't stand by that proposal. Nevertheless, the recurring emphasis on the federal debt and budget deficit could still bring about reform. The last notable Social Security reform took place in 1983, and although some of those changes took effect immediately, such as how much of Social Security benefits are taxable, others are only starting to take effect now. The increase of the retirement age to 67 that was legislated then won't take effect until 2027. The Social Security Board of Trustees emphasized in their 2012 report that the sooner lawmakers take action to address the financial challenges of Social Security, the more options and more time will be available to them to phase in the changes.

dawn@sltrib.com

twitter@DawnHouseTrib Sean P. Lee, consultant