Under 55? Start saving now to offset Social Security cuts

Thursday, 11 November 2010 13:34
socialsecurity111110_optBY GERALD J. ROBINSON

President Obama's National Commission on Fiscal Responsibility and Reform has spoken.

Charged with figuring out how to reduce runaway deficits, the Commission has come out with a controversial list of spending cuts and tax increases, some of which significantly affect Social Security. Younger people especially have been skeptical about receiving full Social Security benefits and their skepticism has been vindicated.

The Commission would increase the retirement age to 69, cut benefits for most future retirees, subject higher income levels to payroll taxes and reduce cost of living increases. The retirement age increase wouldn't become effective for many years and there would be a higher minimum benefit for low wage workers. Specific numbers for the benefit cuts or the payroll tax increase were not in the report.

An intense political firefight is taking shape over the Social Security and other spending cut and tax increase proposals. While the ultimate shape of the deficit reduction plan is uncertain, it is certain that cuts are coming.

With huge annual deficits and a rapidly growing national debt linked with projected increases in entitlement programs, it has become obvious that our current national financial path is unsustainable. Under current Social Security rules, it's estimated that tax collections will enable the funding of full benefits only through 2037 or a little longer, and then, absent changes in the program, only about 75% of benefits. To be viable for the long term, the program has to be curbed.

While it's not possible to know what part of the Commission's Social Security proposals will be adopted by Congress, it's a good bet that part of the package will be a reduction in monthly payments, perhaps keyed to income levels. It's generally thought that while the likely reductions will not significantly impact individuals within ten years of retirement, it will substantially affect younger individuals. Such being the case, prudence dictates that those under 55 should assume a reduction will occur and adjust their current savings upward to offset the anticipated reduction of benefits.

Granted that increasing savings is warranted, how much should the increase be? To answer this question, it would be necessary to know what the aggregate decrease will be in the individual's Social Security payments — a figure that cannot now be known.

So a "guesstimate" is necessary. A four step approach may behelpful.

First, go to the Social Security website, SocialSecurity.gov, click on Estimate Your Retirement Benefits, and estimate the amount of your monthly Social Security payments at your retirement age based on present law. Second, reduce the amount of such monthly payments by your guess as to how much Social Security benefits will be reduced by the time you reach retirement age — say, for example, 25 percent. Third, figure the amount of additional principal you will need at your retirement age to generate payments sufficient to make up for the Social Security shortfall. Fourth, divide the additional principal required by the number of years before your retirement to guesstimate the additional annual saving required.

You may want to get professional help in making the guesstimate calculations to take into account some variable factors, such as the growth rate of additional savings, the effect of taxes and the rate at which principal as well as interest will be paid out from the accumulated additional savings at retirement. You also will need to take into account the effect of working longer on your need to save more.

The older you are now, the less time you will have to save before your retirement date and accordingly, the larger your increased current savings must be. This can be a bitter pill to swallow for some older individuals, but maybe not as bitter as a reduced standard of living inretirement.

Comments and questionsare welcome. Contact Gerald J. Robinson at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .