Wednesday, March 4, 2009

Banking on Social Security

It sounds like an oxymoron, but a lot of people will probably end up banking on Social Security. With the U.S. and world economies deleveraging from a massive credit bubble, the values of all sorts of assets continue to fall. Asset values will bottom out eventually. But no one knows when that will happen, and recovery is likely to be slow. Stock and real estate prices will probably need a decade or more before they approach their previous peaks on an inflation adjusted basis. People who expected their homes and 401(k) accounts to cover retirement expenses are now lowering their expectations. Social Security is likely to be a crucial financial foundation for many millions of retirees. With that in mind, here are a couple of things to remember.

Working longer builds benefits. You knew that, but have you ever tried to quantify the impact of working longer? Look at your annual statement from Social Security for an idea of how much more you get if you keep working. There's a potentially big difference if you work until 70 instead of starting to draw benefits at 62 (about a 50% increase). If you start to collect benefits at 62, your benefits will be permanently reduced (although you'll get increases for inflation). Working longer also provides earned income from which you can save more. Now that the stock market is back to 1996-97 levels (meaning that 13 years of investment gains have simply evaporated), we now understand that Ben Franklin had it right: a penny saved indeed is a penny earned. Granted, working, in general, stinks. But so does poverty. If you have to depend mostly on Social Security in your retirement, the extra $100 or $200 a month you'd get from working longer will make a noticeable difference. For more information on when to start collecting benefits, see

Dependents can collect benefits, too. One of the less well known features of Social Security retirement benefits is that dependents of retirees can also collect benefits. There are limits on how much a family, in total, can receive (up to 150% to 180% of the retiree's benefits). This feature is a great way to save for college expenses of your late in life children or your grandchildren if they are your dependents. However, you aren't required to use the money for college expenses. Family structures keep changing and evolving, and many older folks are raising children or grandchildren. Keep in mind the possibility of benefits for dependents. You may want to start collecting benefits sooner rather than later, if doing so is in the overall best interests of the family.

There's plenty of yacking in the press and on political blogs about the insolvency, bankruptcy, infeasibility or whatever of Social Security. Don't worry. Social Security is here to stay. Your Representatives and Senators won't keep their jobs if the system becomes truly endangered. The amounts of benefits may have to be trimmed a little, and retirement ages may be pushed back a bit. But the fundamental system will remain sound, especially since people no longer can count on the stock and real estate markets. Younger voters may grumble. But they'll realize soon enough that if Social Security doesn't support their parents, they'll have to. That will clarify their thinking.

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