Is Social Security As Bad Off As Everyone Thinks?

We hear a lot of bad things about Social Security coming out of the media - specifically focusing on how it is underfunded. In fact, if you listen to all the reports, the system is completely dysfunctional. If you are relying on Social Security for your retirement planning, then frankly you must be crazy. Is that the real truth, though? According to Ezra Klein, many of these notions are being exaggerated. Economics professor Mark Thoma takes a closer look at Klein's article in his blog post below.

Ezra Klein on Social Security:

1. Over the next 75 years, Social Security’s shortfall is equal to about 0.7 percent of GDP. Source (PDF).
2. For the average 65-year-old retiring in 2010, Social Security replaced about 40 percent of working-age earnings. That “replacement rate” is scheduled to fall to 31 percent in the coming decades. Source.
3. Social Security’s replacement rate puts it 26th among 30 Organization for Economic Cooperation and Development nations for workers with average earnings. Source.
4. Without Social Security, 45 percent of seniors would be under the poverty line. With Social Security, 10 percent of seniors are under the poverty line. Source.
5. People can start receiving Social Security benefits at age 62. But the longer they wait, up until age 70, the larger their checks. Waiting to 66 means checks that are 33 percent larger. Waiting to 70 means checks that are 76 percent larger. But most people start claiming benefits at 62, and 95 percent start by 66. Source.
6. Raising the retirement age by one year amounts to roughly a 6.66 percent cut in benefits. Source.
7. In 1935, a white male at age 60 could expect to live to 75. Today, a white male at age 60 can expect to live to 80. Source.
8. In 1972, a 60-year-old male worker in the bottom half of the income distribution had a life expectancy of 78 years. Today, it’s around 80 years. Male workers in the top half of the income distribution, by contrast, have gone from 79 years to 85 years. Source.

Among his comments, my preferred solution:

Social Security’s 75-year shortfall is manageable. In fact, it’d be almost completely erased by applying the payroll tax to income over $106,000. Source (PDF).

This post was republished with permission from The Economist's View.

Baby Boomer Retirees Losing Hope

The entire notion of a traditional retirement is being discounted by 25% of Baby Boomer retirees, according to a recent story in the Associated Press. This is attributed to that population currently having little or no retirement savings and no faith that they ever will. Learn more about this in the full blog post from The Mess That Greenspan Made.

The outlook gets more grim in the latest survey of aspiring Baby Boomer retirees, a full 25 percent now discounting the entire notion of a conventional retirement, in no small part due to the fact that they have little or no retirement savings and don’t expect that situation to change anytime soon. Details are in this story at the Associated Press.

The 77 million-strong generation born between 1946 and 1964 has clung tenaciously to its youth. Now, boomers are getting nervous about retirement. Only 11 percent say they are strongly convinced they will be able to live in comfort.

A total of 55 percent said they were either somewhat or very certain they could retire with financial security. Yet a substantial 44 percent express little or no faith they’ll have enough money when their careers end.
…
Excluding their homes, 24 percent say they have no retirement savings. Those with nothing include about 4 in 10 who are non-white, are unmarried or didn’t finish college.

At the other end, about 1 in 10 say they have banked at least $500,000. Those who have saved at least something typically have squirreled away $100,000, with about half putting away more than that and half less.

It would be interesting to see what that “Money from the sale of your house” response in the graphic above was five or six years ago. My guess is that the “Extremely/Very Important” response would have been some multiple of the current 17 percent.

I’ll never forget that time back in about 2006 when I raised the possibility of home prices falling significantly with my dentist as he was about to put both hands in my mouth. He pulled back and said, "They better not. My retirement is depending on it." He’s probably had to rethink his golden years at least a little bit.

This blog was republished with permission from The Mess That Greenspan Made.