WASHINGTON, DC. Check out this fantasy. You're married. You and your spouse both work. You're 30 years old. Together, you earn a whopping $500,000 a year. Better still, you will earn it without interruptions until you retire at age 65.

When you retire, you'll own your house free and clear. You'll have no debts of any kind. And you'll have an investment portfolio of $2.3 million.

Now answer these two questions:
  • Have you got it made, or what? Yes ( ) No ( )
  • Are you going to worry about Social Security? Yes ( ) No ( )
If you answered "yes" to the first question and "no" to the second, I've got some surprising news for you.

You're wrong.

You haven't got it made. You should worry about your Social Security benefits because they are an important part of your retirement standard of living.

I learned this at the eighth annual conference of the Retirement Research Consortium, a group of three academic research organizations funded by the Social Security Administration to research important issues in retirement income. While people who lead normal lives aren't likely to recognize the names of any of those attending, the list is a veritable All Stars of Retirement Research. Alan J. Auerbach from UC-Berkeley, Barry Bosworth from Brookings, Alan Gustman from Dartmouth, Olivia Mitchell from Wharton, Alicia Munnell from Boston College, C. Eugene Steuerle from the Urban Institute, and David A. Wise from Harvard, to name a few. All this talent--- and a lot more---is in one room for two days. I'm surprised that only three members of the press are here to listen.

The news about the Social Security dependence of the wealthy comes from Laurence J. Kotlikoff, one of the prime movers in generational accounting and a prolific researcher at Boston University. At the conference he talks about two related things:
  • The cost citizens will pay for government failure to deal with the fact that government promises of future benefits now exceed the net worth of the entire country.
  • Specific estimates of what will happen to people at different living standards if Social Security benefits are cut by 30 percent or 100 percent.
Assuming inflation adjusted, no-risk investments for the wealthy couple, he estimates that an abrupt elimination of Social Security benefits at age 65 would cut their standard of living in retirement by a whopping 35.6 percent. "If correct," Professor Kotlikoff notes in his paper, "this finding suggests that like low-and middle-income households, high-income households have a major stake in preserving Social Security benefits."

The reason for this is simple: It takes an enormous amount of investment to replace the power of a paycheck. Invest $2.3 million at an inflation-adjusted real return of 3 percent and plan to spend it down over 35 years and you've got $107,000 a year to spend, before taxes according to Professor Kotlikoffs' paper. The same couple would have $47,434 in Social Security benefits, a loss that would be more than inconvenient.

Given more notice, of course, the reduction would be less because there would be more time to adjust savings and investments.

If that's what awaits the well-off, what about the rest of us?

The answer depends on how old we are when we learn about the benefits cut, the amount of the cut, and our income. A couple earning $30,000 a year would lose 17.8 percent of retirement purchasing power if they learn at age 35, 23.3 percent if they learn at age 50, and 32.2 percent if they learn at age 65. The table below shows the loss of purchasing power at four different levels of family income.

The longer a family has to prepare for a future reduction in Social Security benefits, the more they can reduce the impact by changing their saving behavior while working.

The Importance of a "Heads-Up" from Government

This table shows the reduction in standard of living at retirement for different income levels assuming they learn of a 30 percent reduction at age 35, 50, or 65. With 30 years of warning households can save more and "even out" the lifetime loss of consumption by saving more now. If the reduction comes with no warning at age 65 there is no way to offset the reduction. All these figures are derived from using a lifetime consumption smoothing program, ESPlanner, created and sold by Professor Kotlikoff.

Income level

Learn at age 35

Learn at age 50

Learn at age 65

$ 30,000

17.8 percent

23.3 percent

32.2 percent

$ 50,000




$ 70,000








Source: Kotlikoff, Marx, Rizza, "Americans' Dependency on Social Security"