SOCIAL SECURITY IMPORTANT FOR RETIREMENT OF POOR AND RICH
August 7, 2007
Even the wealthy depend upon Social Security for much of their consumption after they quit working, according to a new report from the National Center for Policy Analysis (NCPA).
- Social Security accounts for virtually all of the discretionary consumption of households with preretirement incomes of less than $50,000 a year or $25,000 for singles.
- Social Security accounts for about one-third of all discretionary consumption for the highest-income households -- couples earning $500,000 or singles earning $250,000 prior to retirement.
A primary goal of financial planning is to maintain a consistent standard of living during a person's lifetime. If Social Security were abolished tomorrow, all retirees would experience an immediate reduction in their consumption. If younger workers were notified in advance, they could adjust their saving and spending habits today to avoid abrupt changes in their standard of living upon retirement. Yet only the highest income workers have the ability to adjust so as to completely smooth their consumption across their lifetime. Because low- and middle-income workers are constrained by current obligations they cannot completely adjust. For example, if Social Security benefits were eliminated for workers age 35 or younger:
- A couple with an annual income of $500,000 could level their consumption across their lifetime by reducing their current consumption by almost 18 percent in each succeeding year.
- Yet a couple with an annual income of $200,000 that reduced their current consumption by almost 24 percent, would experience approximately another 15 percentage point reduction in consumption upon retirement.
- A couple with an annual income of $50,000 that reduced their current consumption by more than 21 percent would experience another 26 percentage point reduction upon retirement.
Source: Laurence J. Kotlikoff, Ben Marx and Pietro Rizza, "How Much Do Americans Depend on Social Security?" National Center for Policy Analysis, Policy Report No. 301, August 2007.
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