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A blog about living in and planning for retirement

What a Social Security crisis could cost you

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By Matthew Heimer

No debate over the federal government’s long-term budget woes is complete without anxiety over the solvency of Social Security. (The growing cost of Medicare is potentially a much bigger fiscal problem, but let’s put that aside for now.) As they weigh the costs of reform and the costs of doing nothing, the players in the debate tend to focus on big-picture numbers – for example, using a “chained” consumer price index would theoretically save the system $20 billion a year – but they tend to steer clear of calculating what any scenario would cost individual households. So it was refreshing to see Mark Miller, author of the Retirement Revised blog, running the numbers to figure out how one possible outcome might affect specific retirees. For a column published today on the website WealthManagement.com, Miller worked with Sharon Lacy, a California financial planner, to sketch out the impact of a Social Security benefit cut on several hypothetical households. Those include two boomer households, one upper middle class and one more affluent, whose members were born in 1960 and who plan to retire with full Social Security eligibility in the year 2027. The affluent couple retires with a nest egg of $1.6 million; the upper-middle -class family has $492,000. Miller and Lacy assumes the couples’ spending in retirement will track national averages. (For a more detailed look at their assumptions, read the column here.)

Miller and Lacy focus in particular on a “no reform” scenario, under which the law goes unchanged, the Social Security trust fund runs dry in 2033, and the program is able to pay out only 75 percent of current projected benefits. “The results,” Miller writes, “are ugly, because Social Security provides a guaranteed income stream that outlasts savings.” Their hypothetical middle-class couple, who would have depleted their savings by age 85 without Social Security cuts, now runs out of money at age 80, at which point they have to cut their annual spending by 45% in order to live on Social Security alone. The more affluent couple runs out of money at age 82 instead of 85, but faces a more severe spending cut, with their income dropping 61%.

Miller acknowledges that this do-nothing outcome isn’t a likely one. But his larger point is still sobering:  In any scenario where future Social Security benefits are less valuable than present ones, retirees face more pressure to pump up their savings, slash their spending, or both. Good discipline, perhaps, but a disruptive change in expectations for many.

Miller also discusses a second possible scenario:  One in which a reform compromise raises the full retirement age. (Various policy proposals currently on the table recommend setting that level at 69 or 70.) Here, Miller and Lacy punt on specifics, but they do cite some stark numbers regarding the last increase, which was enacted in 1983 and raised the full retirement age from 65 to 67. For Americans currently in their early 50s, Miller reports, that two-year increase will mean a cut of about 13% in their total lifetime benefits compared to what they would have gotten before the 1983 reform, “because it raises the bar on how long they would need to wait to receive a full benefit.”


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