Meet Bernard. He is a lucky person because I am assigning to him a retirement choice none of us have but should.
He was born in 1949. Like many, his parents applied for a Social Security number for him early in his life.
Bernard’s first job was a part time position in high school. He was given a choice regarding the Social Security contributions that he and his employer would make on his behalf. He could choose the conventional arrangement that offers the guaranteed retirement payment of the current Social Security system. Alternatively, he could choose that the contributions be invested in a mutual fund of the stocks that made up the Dow Jones Industrial Average. With the latter choice, the retirement benefit would be secured by an annuity purchased with the accumulated investment balance at whatever normally allowable retirement age that Bernard selected.
Bernard chose the latter option. So how did he do?
Bernard had other part time jobs through the balance of his time in school. He began working full time in 1970. Through his career, during which he worked various jobs for various employers, he generally earned an income equal to the median, placing him at about 50% of the maximum for social security contributions. He has had setbacks. Working in real estate in the early 90s he lost his job and was unemployed for about a year. Recently, like many others, he was laid off in 2009 and has been unemployed for two years.
So now he’s turning 62 and is considering dropping the job search and taking the early retirement available under current Social Security rules. The time of reckoning has come. Here is how he’s done.
After all contributions made on his behalf (which excluded the three years of unemployment) were invested in a fund of the Dow Jones Industrial Average and all dividends reinvested, through 2010 he had a balance of $780,000. He might have had more but for the $250,000 drop in value due to the disastrous year of 2008. Nonetheless, this will purchase him an annuity that will pay him $3,649 per month (over 80% of his recent year’s earnings) for the rest of his life, with a survivors benefit to his spouse of the same amount for the rest of her life should she outlive him.
If Bernard had chosen the conventional arrangement, he would have been eligible for approximately $1,900 per month. That is about one-half what he is actually entitled to under the choice he made over four decades prior, even after that horrible loss in 2008. Bernard made a good decision. Would that he, or anyone, could!
A recent study by the University of California at Berkeley Labor Center, Meeting California’s Retirement Security Challenge, laments the Age of Retirement Insecurity, as they put it. Summarized by Timm Herdt in the Ventura County Star, he quotes the report: “Nearly half of California workers – including a large majority of young workers age 25-44 – are projected to lack sufficient resources to meet basic expenses when they retire.” Social Security benefits will be nearly all they have, he concludes from the study. They do endorse Social Security as a reliable component of retirement benefits and urge no changes to the system.
So a solution he cites from the study is a state-run California Guaranteed Retirement Account into which all workers would be required to pay 5% of their wages, be guaranteed a 3% investment return and then receive an annuity upon retirement that for their lifetime workers would receive about 20% of pre-retirement income.
Three percent return? Really?
When CalPERS insists they guarantee almost 8% return on their funds to avoid a bailout by taxpayers (that would be those getting the proposed 3% guarantee) if they fall short of that return?
Why don’t we enter Bernard’s fictional world. Because the only thing that’s fictional about it is the choice he made. Everything else is a completely accurate reflection of the financial facts that have occurred if Bernard really could have made that choice.
The U.C. study specifically advises against changing anything about Social Security and proposes to set up a new mandate on all private sector workers. And it offers them less than one-half of the return that is effectively guaranteed to the public worker pensioner for which those same private sector workers are also paying.
This is a solution to retirement insecurity? If Social Security is to remain a significant and reliable component of retirement benefits I think we need to do more than advise that we leave it unchanged. And as for other options, is another sub-par-return government-run system the most creative and effective we can come up with? The qualifications of the authors of Meeting California’s Retirement Security Challenge are very impressive. The report itself falls a little short. Perhaps they should meet Bernard.