Can You Depend on Social Security?

Christine Benz: Hi. I'm Christine Benz for Morningstar. I'm here at the Investment News Retirement Income Summit, and I'm joined by David John. David is a senior research fellow for the Heritage Foundation. David, thank you for being here.

David John: Thanks for having me.

Benz: So, David, you've done a lot of work on Social Security, looking at the viability of Social Security. And what we hear from investors and financial advisers is that they struggle with figuring out how to factor in Social Security into their retirement planning puzzle.

And I'm wondering if you can offer some pointers based on the research you've done, how should people think about planning for Social Security as part of their total retirement package?

John: Well, first off, Social Security will be there. But the question that's going to be important for younger workers is what the benefit level is actually going to be. Social Security's long-term funding can pay about three-fourths of the benefits that it has promised for younger workers. And these are workers who are probably in their 30s or their 20s or something along that line.

The other thing that's going to come about, though, is that increasingly there's going to be an effort to focus Social Security's scarce resources on the people who need it the most. So, Social Security will be there, but if you're a younger worker you shouldn't plan that you're going to get precisely the same level of benefits that your parents got.

Likewise, the younger you are and the higher your income, the more likely that Social Security benefits are going to be lower than they would be now--because that money is going to be focused down to people who desperately need it who have no other savings or anything along that line. So, plan on Social Security, but don't necessarily plan on receiving the same amount as you would now.

Social Security has to be fixed. And the longer we wait for that, the more painful it's going to be.

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Benz: So, David, I know you have said that possibly raising the retirement age for Social Security may be part of the solution in your view. You think that's probably a direction?

John: I think that's essential when it comes down to it. And we're seeing this worldwide. It's not just in the United States. We're seeing it in all sorts of countries across the globe. Realistically speaking, for an individual who has reached age 65 to live the same proportion of their lifetime in retirement as they did in 1935--Social Security's retirement age right now would have to be 69 and not 66. And this is only going to increase the pressure.

An individual who was born in 2004, male, is going to live 10 years, on average, longer than a male who was born in 1950; if a female, will live nine years longer. So, people are living longer and, for the most part, they're healthier. And that simply means that we're going to have the raise the retirement age.

Benz: So, it sounds like a takeaway is: if you are a younger, higher income worker, save more just in case that Social Security safety net is not quite what you might think it would be.

John: Absolutely. And the key thing, no matter what, is Social Security is a foundation. The only way you're going to have the same level of retirement security that your parents and grandparents had is by saving early and regularly. If you don't save early and regularly, you can expect to have deep trouble once you get older.

Benz: OK. Thank you, David. Interesting insights. We appreciate it.

John: Thanks a lot.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.