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8/7/2019 Social Security and Pensions: What You Need to Know (Bill Arnone)
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Social Security: Its Role in
Retirement Planning
William J. Arnone
Ernst & Young LLPNational Academy of Social InsuranceSeptember 2007
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What Role Does Social Security Play
in Retirement Planning?It s more than just retirement >Spouse benefit >Survivor protection>Disability insuranceAs a retirement benefit, it s>Portable
>Guaranteed>Inflation-proof Social Security Administration>Social Security Statement
>Web Site
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It s More Than Just Retirement 50 million beneficiariesBeneficiary categories>Retirement and Dependents: 69%>Survivors: 14%>Disability and Dependents: 17%
One in three is not a retiree
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Spouse Benefit Baby boom women will be first generation of women to earn more Social Security benefitsas workers than as spousesSource: When Baby Boom Women Retire, Nancy Dailey (Praeger,1998)
No other retirement plan pays spouse whileworker is still alive
Unlike private insurance annuities, SocialSecurity does not reduce women s benefits toaccount for longer average life expectancies
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Survivor ProtectionOver 6.5 million survivors (widows, widowers,children) receive benefitsSocial Security is the main source of life insurance formost families with childrenFor 27-year old worker with two children, SocialSecurity provides equivalent of $403,000 lifeinsurance policy
Average annual benefit for widowed mother with twoor more children is just over $23,000
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Survivor ProtectionWomen over age 75 outnumber men by two-to-onePoverty risk for older women is 70% greater than forolder men
>55% of older women would be in poverty but for SocialSecurity>25% of unmarried older women rely on Social Security for allof their retirement incomeBaby boom women who reach age 65 will spend
most of their remaining years alone>Widowed, divorced or never married
99% of Social Security spouse, ex-spouse andsurvivor benefits go to women
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Disability InsuranceMost people do not plan for disability8.6 million workers and family members receiveSocial Security disability>2.4% of men and 1.4% of women ages 16-64 receive SSdisability benefits
- 10.5% of men ages 60-64- 7.2% of men ages 55-59
>Percentage of disability beneficiaries is growing andprojected to reach nearly 10 million around 2010 >For average worker: equivalent of a $233,000 insurance policy
- For 27-year old with 2 children: $353,000
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Retirement: Snapshot Median income of older persons:>Men: $21,102 >Women: $12,080
Today s retirees and income sources>Social Security: 40% (90% receiving) >Assets: 21% (56%) >Pensions: 19% (30% private, 14% public)
>Earnings: 17% (23%) >Other (includingpublic assistance): 3%
Source: A Profile of Older Americans, AARP and U.S. Administration on Aging (2005)
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Retirement: Snapshot (cont d) Over 3 out 10 beneficiaries receive 90% of their total income from Social Security6 out of 10: More than half of their totalincome comes from Social SecuritySocial Security keeps more than 13 millionelderly out of poverty> Without Social Security, elderly poverty rate would
be 48%
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Retirement: Motion PictureTomorrow s retirees>97% of boomer families will receive SocialSecurity
- Up from 90% of today s retirees>Average Social Security income for boomerswill be higher
- Greater rates of labor force participation by
women- Rising real wage growthSource: Pension & Retirement Income Simulation Model, EmployeeBenefit Research Institute (1988)
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Retirement: Negative3.6 million (9.8%) still below poverty level>Another 2.3 million (6.7%) are near-poor (125% of
poverty level)
Single elderly poverty rates are much higherthan for couples> Single men: 3x as high as married men> Single women: 5x as high as married women
- Widowed: 15% - Divorced: 18.5%- Never married: 19.5%
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Retirement: Negative (cont d) Single individuals and divorced individualsmarried under 10 years> No spousal or survivor benefits>Low earnings if raising children by themselves>Highly vulnerable and increasing populationMinorities>Elderly Black (28%) and Hispanic (27%) poverty
rates are 2.5x whites >Highest poverty rates: older Black women andHispanic-Latino women living alone (40%)
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Retirement: PortableStays with you from job-to-job All private employers play by the samerulesNo risk of leakage
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Retirement: GuaranteedGovernment obligationGenerational compact
Defined benefit Life expectancy risk>At birth
- Men: 74.0 years - Women: 79.4 years
>At age 65- Men: 16.8 years - Women: 19.8 years
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Retirement: Inflation-proof COLA is critical to the long-term valueof Social Security
Low appreciation due to low inflation>Last five years: 2.4%>Last ten years: 3.1%
>Last thirty years: 5.2%
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Value of Inflation Protection:
ExampleAverage worker with pre-retirement income of $30,000
>First year of retirement:- Pension: $12,000/57% of income- Social Security: 9,000/43%
- Inflation: 3% a year
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Value of Inflation Protection:
Example>Fifth year of retirement:
- Pension: $12,000/54% of income- Social Security: 10,130/46%
>Tenth year of retirement:- Pension: $12,000/51% of income- Social Security: 11,744/49%
>Twentieth year of retirement:- Pension: $12,000/43% of income- Social Security: 15,783/56%
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PensionsOnly 20% of private-sector workforce is covered by adefined benefit pension plan>Significant reduction from 35% in 1980
>Down from peak of 62% in 1970sMany large employers are freezing their pensionplansNearly 6 out of 10 workers in an employer plan rely
on defined contribution plans (e.g., 401(k) plans) astheir primary source of retirement funding
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Social Security AdministrationSocial Security Statement >Good News
- Proactive mailing to 125 million workersage 25+
- Triggers retirement planning aswake-up call
- Engages recipient - Most effective public information tool
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Social Security AdministrationSocial Security Benefit Statement >Not-as-good News
- Earnings errors- How zero years count
--78% of baby boom women will havefewer than 35 years of earnings
Source: Urban Institute s Center for Women PolicyStudies (1988)
- Today s dollars- Missing lump sum values for survivor and
disability protection
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