Retirement push will certainly come to shove

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Retirement push will certainly come to shove

By Scott Burns, The Houston Chronicle

January 2, 2004

Ten years ago a group named Third Millennium made an alarming discovery. More young people believed in flying saucers than believed they would receive Social Security benefits. Specifically, Third Millennium found that 47 percent of the 18- to 34-year-olds surveyed believed that flying saucers exist. But only 9 percent believed the Social Security system would have the money needed to pay their scheduled benefits.

If that is the case — if what the young believe comes true — the next 20 years are going to see some radical behavior changes.

Why do I say this?

Simple. The main source of income for today's seniors is Social Security.
Indeed, for many it appears to be the only leg on the three-legged stool of retirement funding. According to recent figures from the Social Security Administration, two retirees in 10 get 100 percent of their income from Social Security. Three retirees in 10 get 90 percent of their income from Social Security. And nearly two out of three retirees get at least half of their income from Social Security.

Without that income, nearly half of all retirees would immediately fall into official poverty status. According to Social Security Administration figures for the year 2000, 48.1 percent of all people over 65 would fall into poverty without their Social Security benefits. Having Social Security benefits means that only 8.5 percent of retirees fall into poverty.
Quite a difference.

Not that Social Security checks are so large.

If you go to the Social Security Web site and dig around for current retirement benefit statistics, you'll find that nearly 70 percent of all men and 75 percent of all women take their benefits early. You'll also learn that the average monthly benefit ranges from $1,194.80 for men who retire at full retirement age to $743.50 for women who retire early. The average monthly benefit for a retired couple is $1,487.

If we make the assumption that a couple retires with the average benefit, about $18,000 a year, nearly two-thirds of all retirees are living on less than $36,000 a year. Most are living on much less.

One indication comes from a recent Congressional Research Service report. It noted that the median value of all retirement accounts held by workers between 55 and 64 was $55,000. This would buy a life annuity, the report noted, of about $400 a month.

Over the last 20 years, large-cap stocks have earned about 15 percent a year, while long-term government bonds have earned about 12 percent. This means you could have accumulated $55,000 over the last 20 years if you saved as little as $40 a month. Clearly, 20 years of exhortations from Money magazine, not to mention every newspaper in America, hasn't done much to increase our collective investing for the future.
This leads me to two questions. One is simple.

When will the collision between government promises and saving realities occur?

The official answer can be found in the annual letter workers get from the Social Security Administration: "Unless action is taken soon to strengthen Social Security, in just 15 years we will begin paying more in benefits than we collect in taxes. Without changes, by 2042 the Social Security Trust Fund will be exhausted." The collision will occur, in other words, between 2018 and 2042.

My personal bet is that the collision will occur before 2018. Why? In government, only cash flow counts. Benefit payments will exceed tax collections around 2018, probably before. Remember, the trust fund is an accounting fiction.

The second question is more complicated.

Do senior citizens know something that has escaped the economists and statisticians? Is income less important than most of us believe?
I'll be searching for the answer to that question later this year.
And I'm going to need your help because the answers will come from people, not economic researchers.
Stay tuned.