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Social Security Important for Retirement of Poor and Rich
added: 2007-08-08

Even high-wage workers depend on Social Security for a substantial portion of their retirement income, according to a new study published by the National Center for Policy Analysis (NCPA).

"People often say that Bill Gates and Warren Buffet don't need Social Security because they can live off of their investments when they retire," said NCPA Senior Fellow and Boston University professor Laurence Kotlikoff, who authored the study. "Yet most high-wage workers would have to significantly reduce their standard of living if their Social Security benefits were taken away." While Social Security is the cornerstone of retirement security in the U.S. today, the program so many depend on simply cannot afford what it promises today's workers.

In addition, Social Security faces a shortfall of more than $4.6 trillion over the next 75 years. To close this enormous fiscal gap, some have suggested cutting or eliminating entirely benefits for the wealthy. However, according to the NCPA report almost all retirees depend on Social Security for much of their consumption after they quit working:

- Social Security accounts for virtually all of the discretionary consumption of households with pre-retirement 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 35-years 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% in each succeeding year.

- Yet a couple with an annual income of $200,000 that reduced their current consumption by almost 24%, 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% would experience another 26 percentage point reduction upon retirement.

"It will be hard to reform Social Security by simply cutting the benefits of the wealthy," said Kotlikoff. "But the longer we wait to enact a substantive solution, the more likely it is that benefits will have to be reduced for some, if not all younger workers."


Source: PR Newswire

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