Retirement Crisis: Don’t Lean Too Heavily on Social Security

Wall St. Cheat Sheet

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John Bogle, who founded the Vanguard Group in 1974, has helped defined what long-term investing looks like for the average person. Credited with the creation of the first index fund available to individual investors, he has been one of the chief architects of the way in which people participate in the retirement system, and over his long career in the industry, he says he has seen the pillars of that foundation erode in the face of bad policy and economic hardship.

“There are three pillars of the retirement system,” said Bogle at a Morningstar conference in May. “One is Social Security. Two is the defined-benefit plan, and three is the defined-contribution plan. They are all in terrible shape.”

“Terrible” may be an understatement. It’s not productive to cry wolf, but the word “crisis” has apparently attached itself like a parasite to the end of the word “retirement,” and the data appear to validate the phrase. Sen. Tom Harkin (D-Iowa) helped legitimize the phrase in a 2012 report titled “The Retirement Crisis and a Plan to Solve It.”

In the report, Harkin, who is chair of the U.S. Senate Committee on Health, Education, Labor & Pensions, showed exactly how poorly the retirement system is working: Americans are running a collective retirement deficit of $6.6 trillion, only 20 percent of workers have a defined benefit pension plan, and half of Americans have less than $10,000 in savings.

If you gave Bogle five minutes, though, he thinks he could at least fix Social Security.

“I’d change the cost-of-living adjustment — not to cheat the retired people, but to get a formula that was right. It would result in savings,” he said in a question-and-answer session at the Morningstar conference. “That in itself would probably cure it. But I’d add a couple of things. I would raise the maximum taxable earnings for Social Security. I’d raise it to maybe $140,000, $150,000.”

Bogle’s prescription for what ails Social Security is consistent with fixes proposed by organizations like the Financial Planning Association. Both expenditures and revenue need competent adjustments — no surprises there — or else the system begins to fall apart as early as 2021, according to the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Other proposed changes to Social Security include raising the age of retirement, limiting benefits for those with high incomes, and simply reducing overall payouts.

Social Security was never intended to replace individual retirement planning, but unfortunately, data suggest that people are leaning heavily on the system.

Harkin’s report suggests that Social Security replaces approximately 40 percent of the average person’s income after retirement, but that in order to live decently people need to replace between 60 and 85 percent of their pre-retirement income. This leaves an enormous gap that insufficient savings cannot close.

If people have no other means to supplement their income, just living off Social Security could put them into poverty in retirement. In 2010, nearly 6 million people older than 65 lived in poverty, and this number is expected to grow by as much as 33 percent by 2020.

The Social Security Administration reports that 53 percent of married couples and 74 percent of unmarried retirees receive at least 50 percent of their income from Social Security, while nearly 25 percent of married couples and nearly 50 percent of unmarried retirees rely on Social Security for 90 percent of income.

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