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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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