February 1, 2011

State of the Union: Dithering on Retirement Crisis

Financial advisors are uniquely positioned to assure pre-retirees will be self-supporting in their later years

“The Social Security program plays an important part in providing for families, children, and older persons in times of stress. But it cannot remain static. Changes in our population, in our working habits, and in our standard of living require constant revision."

It is not surprising that President Obama addressed Social Security in his recent State of the Union address. But the above presidential quote was spoken 50 years ago by President John F. Kennedy.

Kennedy was certainly correct that demographic changes would require revising Social Security, but the revisions made over the past five decades have increased the generosity of benefits; moreover, the demographics we face are those of vastly longer payout periods for boomers living decades beyond their retirement while fewer workers from the “Baby Bust” cohort are funding the program.

Now comes President Obama, rolling up his sleeve, with this to say about the problem of Social Security:

“To put us on solid ground, we should also find a bipartisan solution to strengthen Social Security for future generations. And we must do it without putting at risk current retirees, the most vulnerable, or people with disabilities; without slashing benefits for future generations; and without subjecting Americans' guaranteed retirement income to the whims of the stock market.”

Like presidents of both parties before him, the president simultaneously acknowledges the problem without proposing to do anything specific about it; indeed, by advising against “slashing benefits for future generations,” he preempts possible solutions.

TheAtlantic.com business blogger Megan McArdle compares the president’s address to a CEO of a failing company on an earnings conference call.  Says McArdle, who once worked at an investment bank: “Stating the obvious would make things worse, as customers and creditors decide that the end really is nigh, and it's time to get out while they still can.”

The problem has been obvious for decades. My college political science professor explained it pretty clearly in the mid-’80s. I don’t have my notes handy, but he said that our (then) current trajectory was leading us to a choice of either massive, painful cuts in benefits that could foment social unrest or massive, punitive tax hikes that would shut down economic growth.

One of the weaknesses of democratic government is the unwillingness to tackle difficult issues until the moment of crisis. The Iranian nuclear bomb is another current example; the WikiLeaks cables reveal that, despite our diplomatic charades, our government and are allies understand there is a real threat to our security. Still, the countdown to dangerous nukes goes on in the face of U.S. inaction.

It’s possible that a hero will emerge to defang the Iranian threat — perhaps the Israelis, who are believed to be behind the Stuxnet virus that has set the Iranian program back a few years. But who will arrest the Social Security crisis?

Only a thin line of financial advisors can do that.

The usual presidential dithering makes that pretty clear. And here are the basic guidelines: The attention-getting headlines about our record $1.5 trillion deficit is a good time to remind clients of our shaky government finances. If they are 50 or under, they can consider any future Social Security benefits as a happy windfall.

Encourage clients to take full advantage of tax-favored retirement savings vehicles: They should fully fund 401(k)s to receive the maximum company matching contributions.

And because future tax rates are likely to only rise higher, the Roth IRA also belongs in the top tier of choices — along with the free money offered with a 401(k). If clients can save more, they should stash additional savings in taxable accounts.

In a weak economy like this one, many people feel maxed out. Clever advisors will therefore “nudge” clients into increased savings — demonstrating the increased need and helping them make incremental improvements in saving habits.

President Kennedy was correct that the Social Security program would need constant revision. Better known was his call upon Americans to demonstrate social responsibility: “Ask not what your country can do for you — ask what you can do for your country.”

Financial advisors are in the right position at the right time to answer that patriotic call.

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