Social Security Check is Worth Fighting For

I often assert, in this column and in my discussions with clients, that people make major financial decisions based on poorly grounded assessments, without carefully considering the costs and benefits involved.

web-social-security.jpgThe escalating debate about the future of Social Security provides another example of this pattern. However, people’s thinking about this financial issue will not only have a profound impact on their own unique financial futures; it also will shape the financial security of our entire nation.

Public opinion polls clearly demonstrate that most people are aware that their future Social Security benefits are at risk if policymakers fail to adjust how Social Security is funded and distributed.

My observation, however, is that many people are acting on this threat in a way that reflects a weak understanding of the value of Social Security to their financial future. As a result, I see important constituencies opting out of the Social Security debate, risking bad results for them and others they care about.

The most common response to Social Security’s uncertain future that I see among my business and professional clients is to disregard Social Security as a part of their financial future. This reflects a broader mood nationally – a recent AARP poll found that over half of people between ages 40 and 59 are “not confident” that Social Security will “be there” for them.

On a moral level, this seems a responsible position to take. The less that a person relies on the government to take care of his or her financial future the better.

Pragmatically, however, the tendency of people to discount the value of their Social Security benefits could mean that they disengage from the debate about how to reform the system. Doing so could be quite costly to their financial future, because Social Security benefits are worth a lot more than most people realize.

For example, consider a hypothetical husband and wife, both age 65. The husband earned $100,000 prior to retirement and the wife had no earned income. According to the Social Security Administrator’s on-line benefits calculator, this couple would receive over $2,700 per month (over $33,000/year) Social Security benefits for as long as both were living. If one person dies, the survivor’s benefits would drop to roughly $1,840 per month (over $22,000/year).

The value of this future income stream is much higher than most people think. One way to estimate its current value is to ask what a life insurance company would charge for fixed income annuities paying the same benefits as guaranteed by Social Security.

According to an online annuity quotation service (, our hypothetical couple would have to pay over $300,000 to an insurance company today to assure that the household was entitled to $22,000 per year in annuity payments until both had died. In addition, they would have to pay $142,000 to receive $11,000 more in annuity payments per year as long as the husband (who is more likely to die first) is alive. This means that the total cost today of replacing their current Social Security benefits with a retirement annuity would be over $440,000.

But even this price significantly understates the current value of the couple’s Social Security benefits. First of all, the fixed annuity quoted did not increase with the cost of living, like Social Security benefits do. (The website I used does not offer quotes for inflation-indexed annuities.) And second, Social Security benefits are more reliable – a promise from the U.S. Treasury to provide monthly income until death is more creditworthy than a promise from even the highest-rated insurance company.

For most of the professionals and business people that I work with, I roughly estimate the value of their Social Security benefits to be roughly a half million dollars – plus at least a quarter million if they have a spouse. Using the same methodology, I estimate the value of Social Security for a couple with one $60,000 salary to be nearly $400,000.

Most people would be perplexed if I suggested that they disregard a $400,000-$500,000 asset on their financial statement – yet, that is what people do when they base their financial future on an assumption that Social Security may not be there for them.

My biggest concern about this practice is not its impact on my clients’ financial future. Though disregarding their right to collect Social Security benefits may cause my clients to spend less in retirement than they could, or to underestimate their need for estate planning, most will do just fine without including Social Security benefits in their plans.

Rather, my concern is more political than professional. In conversations with clients and in the public opinion polls, I hear a mood of resignation, informed in part by the discounted value that people place on their future Social Security benefits.

There are no easy solutions to the distant Social Security fiscal crisis. However, as we reflect on various proposals, we need to begin by pragmatically assessing the value of those future Social Security benefits – first for ourselves, and then for our relatives, our employees, and our neighbors. Only then will we be able to make the hard decisions about how to keep that vital source of financial security working for us in the future.