Plan now while you still can
RETIRING: If Social Security Is Your Plan A, Get A Plan B
--U.S. workers younger than 40 likely to receive greatly reduced benefits
--Small changes in strategy can boost one's benefits
--Damage could be mitigated if policy makers were to agree on a solution
By Robert Powell
A DOW JONES COLUMN
If Plan A in your retirement scheme is Social Security, it's time to start working on Plan B.
Based on this week's report from the folks responsible for the Medicare and Social Security Trust Funds, Americans--and especially those under age 40--need to reconsider their retirement plans.
Absent major action by lawmakers, the annual reports say that the combined assets of the Old-Age and Survivors Insurance and the Disability Insurance trust funds will be exhausted in 2033. That's three years sooner than was projected last year. And the Disability Insurance, or DI, trust fund will be exhausted in 2016, two years earlier than last year's estimate.
Come 2033, just 21 short years from now, Social Security will pay just 75% of scheduled benefits, just 75 cents on the dollar. So, instead of getting, say, $1,000 per month from Social Security, you'll get just $750 per month come 2033.
Meanwhile, the outlook for the social insurance program that covers nearly 50 million elderly and disabled people was slightly worse than findings from last year. The trustees, as they did last year, forecast that Medicare's hospital insurance fund would begin to run out of money beginning in 2024.
So what adjustments do you need to make to your retirement plan given the latest reports from the trustees of Social Security and Medicare?
Well, if you're already retired, don't worry. "The advice I give people is that if they are already retired, I see little risk to benefits," said Jeffrey Brown, a finance professor at the University of Illinois at Urbana-Champaign. "No politician will cut for current seniors."
Others share that opinion. "I would tell those living in retirement or very near retirement, make your decisions based on the current rules," said Bill Meyer, the president of Retiree Inc. "History tells us that Social Security benefits will not be impacted for those in or very near benefit-claiming age. For example, it took seven and 17 years respectfully from the time change [for Social Security] was announced to implementation back in 1983 and 1977."
But for those who plan on retiring in 2033 and beyond, the advice is much different. "It might be smart to look at the worst case," said Andy Landis, the founder of "Thinking Retirement and the author of Social Security: The Inside Story."
"What if Congress does nothing between now and 2035? At that point Social Security payments could be cut up to 25%. If you're a pessimist, work that into your retirement plan," Landis said.
If you're under age 40, start worrying
In other words, anyone younger than, say, 41 today should plan to get just 70% to 75% of promised benefits, Brown said.
Unfortunately, there's no silver bullet to make up the difference between what those retiring in 2033 expected to get from Social Security and what they will get.
Those folks should consider the usual strategies and tactics: up the amount they save toward retirement; invest differently, perhaps with an emphasis on creating guaranteed inflation-adjusted income not unlike that provided by Social Security; delay retirement; work part time in retirement; delay taking Social Security; and consider any and all ways to turn assets into income, be it home equity, the cash value in your life insurance policy, or the collectibles in your curio cabinet.
Optimize your Social Security benefit
Of all the bromides, however, delaying--or what Meyer and other experts refer to as "optimizing" Social Security benefits--is perhaps the most important. For one, the average American who optimizes when to claim Social Security can "make their savings last two to 10 years longer," according to Meyer.
What's more, what's good for you is also good for the Social Security Trust Fund. "Delaying or optimizing Social Security will help will help lessen the near-term burden on the Social Security liabilities," said Meyer.
One such strategy is "claim and suspend," whereby, typically, a husband would file for his benefits and then suspend those benefits so that his wife could collect the spousal benefit off her husband's work record. "The claim-and-suspend strategy is typically used by married couples where the wife wants to start receiving her spousal benefit but the husband wants to delay his benefit to age 70 in order to earn maximum delayed credits," Floyd previously told Retirement Weekly.
Of all the Social Security claiming strategies, however, experts are telling older Americans not to panic and take Social Security early at age 62 or before normal or full retirement age just because of the program's financial woes. "It may be tempting to take early benefits in light of the system's worsening financial condition, but those who do so risk being stuck with a permanently reduced benefit and lower lifetime income," said Elaine Floyd, director of retirement and financial life planning at Horsesmouth LLC and author of "135 Social Security Questions Answered: What Savvy Advisors Need to Know," as well as "The Financial Advisor's Guide to Savvy Social Security Planning."
"Even if future benefits are reduced in some manner, it is inconceivable that those who took early benefits would come out ahead of those who had delayed," Floyd said.
Planning for health-care expenses in retirement, given Medicare's financial problems is, however, an entirely different matter. "I'm not sure how policy makers can get escalating health-care costs under control, but in light of the trustees' sixth consecutive 'Medicare funding warning,' the best thing people who are living in or planning for retirement can do is set aside funds for future health-care costs," said Floyd.
Experts, meanwhile, say that fixing Social Security and Medicare's financial problems isn't all that hard. There are two basic choices and variations on those choices. What's hard is mustering up the desire and will on the part of lawmakers to tackle the problem before it becomes too late.
"One, either we spend less by reducing the level or growth of benefits, or two, we put more money into the system via higher payroll taxes, or general revenue transfers," Brown said. "There are a myriad ways to do either of these things--raising the retirement age, changing how we index benefits [wages vs. prices], other changes to the benefit formula, and the like."
To be sure, there is debate over who should bear the brunt of the proposed fixes: reduced benefits or increase taxes.
Landis, for instance, doesn't think retirees should have to pay with a reduced benefit. "With the average retiree getting only about $1,200 per month, and with that being most of his or her income, benefit cuts start to seem like getting blood from a turnip," Landis said. "With wealth disparity at historic highs, income-tax rates at historic lows, and payroll taxes capturing a smaller percentage of all wages, Congress might want to look at the tax side of the equation."
Others, meanwhile, say lawmakers should consider a combination of reform proposals so that no one group pays the price for saving Social Security.
"These [proposals] would include raising the wage base subject to payroll taxes, gradually phasing in a higher retirement age for future retirees, and slowing the growth of future benefits for higher earners," said Floyd. "I hesitate to favor cost-of-living adjustment reductions for current recipients because they're going to need those COLAs for Medicare premiums, if nothing else."
To be fair, some experts, including Landis, say there's no need to press the panic button just yet. "First, let's all take a breath, because the report is no surprise," said Landis. "Forecasts about Social Security's solvency have been remarkably stable since 1983, the last big overhaul of the system. Projected insolvency dates have varied from the mid-2030s to the early 2040s consistently since then. We're 'on track' according to the 1983 overhaul."
But even though we're on track doesn't mean changes aren't necessary. It's just that the changes can be small. "What Social Security needs right now is a tuneup, not another major overhaul such as that which took place in 1983," said Landis. "Obviously, taxes need to be raised and/or benefits reduced. Congress needs to decide how much of each is right.
But is time running out? "Any changes are cheaper if done sooner," Landis said. "Waiting until 2035 just drives up the cost of reforms."
Lita Epstein, author of "The Complete Idiot's Guide to Social Security and Medicare," agreed: "Clearly, Congress must act as quickly as possible to fortify Social Security and Medicare. The quicker the Congress designs the fix the less painful it will be. Congress can't keep kicking its work down the road."
Congress is, of course, unlikely to take any action in an election year. But Landis is holding out hope: "What if Congress reframed the issue? Wouldn't 'saving Social Security for another generation' have political benefits? Nice to have on your resume."
(Robert Powell is editor of Retirement Weekly, a MarketWatch/Dow Jones service, and writes for MarketWatch. He can be reached at 415-439-6400 or by email at AskNewswires@dowjones.com.)
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