This is a guest post from Robert Brokamp of The Motley Fool. Robert is a Certified Financial Planner and the adviser for The Motley Fool's Rule Your Retirement service. He also has a blog, Twittering thing, and other things that are supposed to be important but he often forgets about, such as good manners. Robert contributes one new article to Get Rich Slowly every two weeks.
I'm a big advocate of crunching retirement numbers to make sure someone is saving enough to retire when and how they want. One of the big variables in that calculation is how much someone will receive from Social Security. We're all aware that the program is not on rock-solid footing. So how much should people assume they'll receive when fiddling around with a retirement calculator?
I put that question to several experts, and their responses are below. But first, a word from our sponsor.
As you'll see from the responses, the experts don't exactly agree on all the numbers, but they agree on a key fundamental point: Plan on getting less from Social Security than currently projected, but definitely plan on getting something. Here's what they had to say:
Alicia Munnell, Director of the Center for Retirement Research at Boston College, former member of the President's Council of Economic Advisers and Assistant Secretary of the Treasury for Economic Policy:
Social Security is going to be there for everyone — from their 20s up to their 50s. This notion that “it just won't be there for me” is wrong. The easiest way for me to think about it is: Once the trust fund is gone, the revenues are adequate to pay 80% of promised benefits. So I would take 80% as the minimum, but it probably varies by income class. It seems that everyone is concerned with protecting the benefits of those in the lower half of the income distribution and may trim something from those in the upper half. I actually think that for the lower half you can count on 90% of what you've been promised and for the very high-income earners, maybe 70%.
Michael E. Kitces, MSFS, MTAX, CFP®, CLU, ChFC, RHU, REBC, CASL, publisher of The Kitces Report and Director of Research for the Pinnacle Advisory Group:
There are two easy ways to adjust future Social Security benefits to handle the possibility of Social Security reform. The first is to reduce the growth rate/cost-of-living adjustment on Social Security ]by 1%; in financial planning projections, this is most commonly done by entering a Social Security inflation rate that is 1% lower than the assumed general rate of inflation. The second option is to apply a flat reduction in future benefits by up to 25% (e.g., if benefits were projected to be $1,000/month, only assume a $750/month benefit).
The reason for these adjustments — a 1% reduction in cost-of-living adjustments or a maximum 25% cut in future benefits — is simply because these in fact are approximately the magnitude of adjustments required according to analysis by the Congressional Budget Office about what is necessary to render the Social Security system solvent again. Alternatively, the 25% reduction in benefits also represents the amount that benefits would decline in approximately 25 years, if we do nothing to fix the system, and the Social Security trust fund is exhausted. Notably, though, because Social Security is largely a pay-as-you-go system — with taxes on workers being used to pay benefits for retirees — even exhaustion of the Social Security trust fund results in “merely” a 25% reduction in future benefits, NOT a total loss (as it would with a pension fund that fully pays its benefits from accumulated funds). To the extent that any of our Social Security woes are solved at least in part with tax increases — not just benefits cuts — the necessary reduction for solvency would be even less than a 25% benefits cut.
Eric Tyson, former financial planner (one of the first to charge by the hour) and author of Personal Finance for Dummies and Investing for Dummies:
There's a lot of fear-mongering and pundits taking extreme views like “Anybody under 40 shouldn't count on Social Security!” That's just ridiculous. Of course you're going get Social Security. It may not be what your parents got, but you're going to get it.
Back when I was doing individual financial planning, I noticed that in the Social Security projections that they assumed benefits were going to grow 1% faster than the rate of inflation. I think part of that was because of the underlying assumption that your employment income would be on that kind of trajectory. I told clients whom I worked with to look at benefits in today's dollars, rather than it was going to grow beyond the rate of inflation.
Tiya Lim, Director of Institutional Advisory Services at the Buckingham Family of Financial Services, co-author (with Larry Swedroe) of The Only Guide You'll Ever Need for the Right Financial Plan:
Current beneficiaries should continue to receive their benefits without any reductions. With the baby boomer population being such a large segment of the voting population, it would be very difficult to take away their benefits. The one feature that may be at risk for current beneficiaries is the Cost of Living Adjustment (COLA). There has been talk of either freezing benefits or adjusting it to be linked to a different measure than CPI-U. If the Social Security Administration decides to freeze benefits at current amounts, that could be very detrimental to retirees who are very susceptible to inflation. In a low inflationary environment like this, it's less of an issue, but should the economy start expanding again, then retirees with benefits that are not adjusted for inflation will have to rethink other assets in the portfolio.
But for now, we know that current beneficiaries will continue to receive their benefits without any significant changes. The SSA is looking for ways to ensure payments will be paid by doing simple things like ending paper statements, ending paper checks, and closing loopholes like the “interest-free” loan. It is also likely that the amount of taxes going into the system will have to increase and the full age of retirement will have to rise. It has been done before and when done far in advance (affecting future beneficiaries 20 to 40 years down the line) there is less opposition.
Scott Burns, financial columnist and Chief Investment Strategist at AssetBuilder, Inc.:
I believe the real squeeze will be on Medicare. There are two reasons for this. One is that Medicare is the elephant in the room; it accounts for most of the longterm problem. For example, the current unfunded liabilities of Medicare Part D, the Prescription Drug plan, are about the same size as the unfunded liabilities of the entire Social Security program, and Medicare Part D is only a small part of Medicare.
The other reason is that it will be a lot easier for the politicians to weasel out of Medicare commitments because they aren't nearly as clear as the promise of a monthly check. It is quite possible that we could reduce Medicare spending dramatically and have zero effect on life expectancy or even on disability-adjusted life expectancy.
Cutting Social Security benefits is another thing altogether. Tell the young their future benefits will be much smaller, but their taxes will be much higher, and we'll have an American Spring. [Warning: After you read that article, you may be inclined to vote for Scott Burns for president.] Tell the old their benefits will be cut today and we'll have blood in the streets. There are simply too many people totally dependent on Social Security benefits to cut them directly. They could, however, be reduced indirectly by making them fully taxable. Taxation of benefits now affects about 30% of retirees, so broadening their taxability would increase the number of retirees whose benefits were taxed, but it would still be more likely to fly than reducing benefits.
This doesn't mean the weasels won't weasel. The current discussion of raising the retirement age (in the future), raising the tax (soon), or raising the wage base cap (over time) are likely to continue because neither party has a clue about generational equity. I also think neither party has any comprehension of how totally they have violated the public trust and the anger and enmity that is out there. People are fed up.
Rick Ferri, founder of asset management firm Portfolio Solutions and author of All About Asset Allocation, The ETF Book, and The Power of Passive Investing:
My best guess: If you're over 57, assume you'll receive 100%. If you're between the ages of 45 and 57, assume 75%. If you're younger than 45, assume 60%.
How do you include Social Security benefits when deciding how much you'll need to retire? Have these experts changed your opinion on how much you'll receive in benefits?