NCPA - National Center for Policy Analysis


August 2, 2010

If you are worried about the future of Social Security, join the crowd.  With the nation's debt swelling, the pressure on Washington to cut spending will only rise.  Consequently, people 50 and below should change their retirement planning now to incorporate a benefit cut to Social Security, says Laurence J. Kotlikoff, an economics professor at Boston University. 

What will life be like for a couple if the retirement age was immediately raised to 70, asks Kotlikoff?  

At 35 years old: 

  • At this stage, our couple is earning $120,000 ($60,000 each) and they have $75,000 in total retirement savings.
  • But to make up for the decline in Social Security benefits, they need to save about $84,474 above and beyond what they are already saving before they retire.
  • He assumes they save the extra money in a taxable account that allows for easy access, because they are already saving 10 percent or more of their total income in a 401(k).
  • That extra money saved is equivalent to about a 7.8 percent increase in total retirement savings, across all accounts.
  • This also means they'll have less discretionary income -- about 9.4 percent less to be exact -- to spend each year, over the course of their lives.  

At 45 years old: 

  • Our couple now earns $140,000 and has amassed about $255,000 in a 401(k) account.
  • But if they learn their Social Security benefits are going to be cut by nearly 20 percent, they will need to save nearly an extra $90,000 -- which is about 8.3 percent more in their taxable and tax-deferred accounts -- by the time they retire.
  • To do that, they need to cut their discretionary spending by about 9.7 percent a year for the rest of their lives.
  • They have a larger permanent reduction in their living standard than the 35-year-olds because they have fewer years to adjust (they can't spread out the loss in spending power over as many years).  

At 55 years old: 

  • At 55, our couple is earning about $175,000, and has nearly $525,000 in total retirement savings.
  • But to help offset the lost Social Security money, they will need to save $82,900 more -- or nearly 7.7 percent across all accounts -- over the next decade.
  • To do that, they will have to spend 10.4 percent less each year.  

Source: Tara Siegel Bernard, "Social Security Jitters? Better Prepare Now," New York Times, July 30, 2010. 

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