GAO to Retirees: Delay Social Security

July 01, 2011, 11:01 AM EDT By Margaret Collins

(Updates with additional comment from Harvard economics professor Laibson in 18th paragraph.)

July 1 (Bloomberg) -- Retirees may have to delay Social Security benefits and buy an annuity to have enough money for retirement, said a U.S. government study.

“The risk that retirees will outlive their assets is a growing challenge,” according to a study from the Government Accountability Office released today. Increased life expectancies and health-care costs coupled with declines in financial markets and home equity over the last few years have “intensified” workers’ concerns about how to manage their savings in retirement, the report said.

Annuities are insurance contracts that can offer a steady stream of income for life. High-income households generally don’t need them, according to experts the GAO consulted. Middle- income households, defined in the study as having a net worth of about $350,000 including their homes, that don’t have traditional pensions should consider using a portion of their savings to purchase an inflation-adjusted annuity, the study said. Lower-income families need to accumulate some cash savings first.

The study recommended that retirees make withdrawals from their investment portfolios at a rate of 3 percent to 6 percent annually. Many also should wait to take Social Security until at least the full retirement age, or 66 for those born from 1943 to 1954.

Tremendous Benefits

The Social Security program lets recipients take reduced payments as early as age 62. It provides full benefits at age 66 and increases payouts for those who wait up to age 70. Almost three-quarters of individuals took payouts before age 65, the GAO said. Monthly benefits received at age 70 are increased by at least 32 percent compared with taking them at 66, according to the study.

“The benefits are tremendous especially if you’re married and the higher wage earner waits until 70,” said Christine Fahlund, senior financial planner at T. Rowe Price Group Inc. The amount retirees receive each year almost doubles from age 62 to age 70 in terms of purchasing power, Fahlund said. As long as retirees live to age 77, delaying payments until age 70 is usually worth it, said Fahlund.

Social Security’s trustees said in May that it wouldn’t be able to pay recipients in full beginning in 2036. The bipartisan U.S. deficit commission has recommended increasing the retirement age to cut costs.

Can’t Cover Expenses

The GAO study was requested by Senator Herb Kohl, a Wisconsin Democrat and chairman of the Senate Special Committee on Aging. The shift by employers from traditional pension plans, which generally guarantee income for life, to 401(k) savings accounts has put more responsibility on Americans for managing their “hard-earned savings” during retirement, Kohl said.

Almost half of those near retirement are predicted to run out of money and won’t be able to cover their basic expenses and uninsured health-care costs, July 2010 data from the Washington- based Employee Benefit Research Institute show. A husband and wife who are both 65 years old have about a 47 percent chance that at least one of them will live until 90, the GAO report said.

An immediate annuity can protect retirees from the risk of outliving their savings, according to the study. For example, a contract purchased for $95,500 by a 66-year-old couple in Florida may provide $4,262 a year until the death of the surviving spouse and include increases for inflation, the report said. Six percent of workers with a 401(k)-type plan opted for an annuity at retirement, said the study.

Resistance to Annuities

Americans have resisted buying annuities for reasons including concern about fees and the desire for control of assets, said David Laibson, an economics professor at Harvard University. Employers have held off on adding them to 401(k) savings plans because they’re worried about litigation and lack clarity on how to proceed, Laibson said.

“The problem right now is interest rates are so low you’re not getting a great return for that chunk of cash you’re handing the insurance company,” said Liz Weston, author of “The 10 Commandents of Money.” That’s why retirees may want to purchase a contract with some of their money now and buy another in the future when rates may be higher, said Weston, who’s based in Los Angeles.

The Labor and Treasury departments are considering ways to encourage lifetime-income options in 401(k)-type plans, including showing the potential income streams from account balances in participants’ statements.

“We anticipate issuing our first set of relevant guidance or rules in this area later this year,” Assistant Secretary of Labor Phyllis Borzi said in an e-mail.

State Street, BlackRock

Asset managers and insurers understand that annuitization may need to be part of the retirement savings system as people live longer and have fewer defined benefit pension plans, said Harvard’s Laibson. “Everyone’s racing to be at the head of that pack when the ice breaks,” he said.

State Street Global Advisors, a unit of State Street Corp., is planning to announce a 401(k) investment this fall that will include a built-in annuity, said Kristi Mitchem, head of the company’s global defined contribution business, which had $166 billion in plan assets at the end of last year.

BlackRock Inc., the world’s biggest money manager, has a target-date fund with a fixed deferred annuity from MetLife Inc. for 401(k)s that’s available to employers, said Brian Beades, a spokesman for the firm. No companies had adopted it as of June 27, he said.

‘Guinea Pig Employer’

“The thing that will be the icebreaker eventually is that one of these providers is going to come up with a product that finally gets traction,” Laibson said. “There’s huge resistance to being the guinea pig employer that adopts it first.”

Individuals should consult with a fee-only planner before committing to any retirement strategy, said Weston, the author. That’s because many things can go wrong when spending down savings, such as withdrawing funds too fast or tapping pots of money in an incorrect order, she said.

“It’s really not a do-it-yourself project,” Weston said.

--With assistance from Elizabeth Ody in New York. Editors: Alexis Leondis, Rick Levinson.

To contact the reporter on this story: Margaret Collins in New York at mcollins45@bloomberg.net.

To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net.

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Medicare, Social Security Funds Expiring Sooner

May 13, 2011, 4:44 PM EDT By Drew Armstrong and Brian Faler

(Adds trust projection change in 16th paragraph.)

May 13 (Bloomberg) -- Medicare, the U.S. health insurance program for the elderly and disabled, and the Social Security trust for the disabled and retirees are running out of money sooner than the government had projected.

While Medicare won’t have sufficient funds to pay full benefits starting in 2024, five years earlier than last year’s estimate, Social Security’s cash to pay full benefits runs short in 2036, a year sooner than the 2010 projection, the U.S. government said today in an annual report.

Both forecasts were affected by a slower-than-anticipated economic recovery, the government said. The estimates for funding add urgency to talks between Democrats and Republicans on ways to cut spending to reduce the U.S. budget deficit.

“Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and will require legislative corrections if disruptive consequences for beneficiaries and taxpayers are to be avoided,” according to the report summary.

The 2010 health-care overhaul backed by Democrats extended the life of Medicare, though a greater effort is needed to shore up the program’s long-term funding, Treasury Secretary Timothy Geithner said in a statement distributed with the report.

“If we do not do more to contain health-care costs, our commitments will become unsustainable,” said Geithner, managing trustee of Medicare and Social Security, in the statement.

Debt-Limit Deal

When Medicare and Social Security funds run short, they will pay less in benefits rather than stop paying entirely. Social Security would have to cut payments by 23 percent, while Medicare would reduce by 10 percent what it pays hospitals and other inpatient care providers.

Congress is debating potentially sweeping changes in the federal budget as part of a deal to raise the government’s $14.3 trillion debt limit, which the Treasury Department said will be needed by Aug. 2.

Two groups of lawmakers have held private meetings to negotiate a deficit-reduction plan while President Barack Obama met yesterday with Senate Republicans, a day after meeting with their Democratic counterparts.

Republicans demanding that the U.S. cut its budget deficit have proposed privatizing Medicare by giving individuals a subsidy to buy coverage from private insurers. Lawmakers such as House Budget Committee Chairman Paul Ryan, Republican of Wisconsin, said today’s forecasts were justification for action.

“Leadership is required from both sides to ensure that Medicare and Social Security are saved for current seniors and strengthened to meet the need of future generations,” he said.

Time To Respond

Democrats, who have resisted changes to Social Security, said the trustees’ analysis shows there’s time to respond.

“The current situation does not necessitate rushed or severe action,” said Senate Finance Committee Chairman Max Baucus, Democrat of Montana. “We must continue to protect the Social Security benefits our seniors count on.”

The Social Security trust fund that finances aid to about 10 million disabled Americans and their dependents will be the first to dry up, with funding scheduled to run out in 2018, according to the trustees.

The fund, when combined with a separate and much larger trust fund paying benefits to seniors, has enough money to stay solvent until 2036.

The new projections partly roll back last year’s trustees analysis, which credited the 2010 health care overhaul with expanding the life of the Medicare trust fund by 12 years.

Spending Law

Social Security law requires program spending to match revenue, so a lack of action by lawmakers by that time will mean benefits will have to be cut 23 percent -- or the Social Security payroll tax increased to 16 percent, or a combination, the report said. Congress has never allowed the program’s two trust funds to be depleted.

Medicare, to stay solvent for the next 75 years, would have to immediately raise payroll taxes by 24 percent, or cut current benefit payments by 17 percent, Cori Uccello, a senior health fellow with the American Academy of Actuaries in Washington, said in a phone interview.

The longer the U.S. waits to address the coming shortages in Medicare and Social Security, the more painful it may be, said Uccello. A U.S. delay in extending Medicare’s fiscal life may force cuts for current beneficiaries rather than diminishing them for people who enter the program several years from now.

--Editors: Steve Walsh, Adriel Bettelheim

To contact the reporter on this story: Drew Armstrong in Washington at darmstrong17@bloomberg.net;

To contact the editor responsible for this story: Adriel Bettelheim at abettelheim@bloomberg.net.

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