Kotlikoff: Government, Employers Should Butt Out of Retirement Planning

Boomers will be retired for longer than older generations, according to Lawrence Kotlikoff, professor of economics at Boston University. “Many are retiring at a pretty young age and will be living longer,” he told attendees at Sage Advisory’s Perspectives on the Future 2015 conference in Austin on Monday.

He said 30% would be primarily dependent on Social Security for retirement income.

“Americans have been taught that the government and their employers are going to take care of them,” he said. “That’s a big mistake. I don’t think you can trust the government to take care of anything.”

Furthermore, “employers aren’t our parents” and shouldn’t be relied on to make decisions about what health care or savings plans employers use.

“Employers aren’t our friends. They aren’t our parents. They should be the hell out of this entire game,” Kotlikoff said.

In an interview with ThinkAdvisor, Kotlikoff said education on financial planning should start in high school. “Every high school in the country should have a short course where they teach basic financial planning, present value discounting and life cycle consumption smoothing,” he said. As part of the course, students should be required to do a financial plan for their parents. “Then the parents will learn something and the kids will learn something.”

He added that “the math here is so simple, once you teach present value, how much you get to spend every year if you’re not facing these cash constraints — that’s high school algebra.”

Clients’ ability to retire will be hampered by several issues, including the underfunded status of Social Security’s trust fund.

He referred to Table VI.F1 of the Social Security Administration’s 2015 Trustees’ Report, which shows the trust fund is 32% underfinanced. “We all need to start paying four cents more out of every dollar we earn forever starting today in order to pay of all the benefits the Social Security system has scheduled,” Kotlikoff said.

Another problem is that investors aren’t maximizing the Social Security benefits they could receive, he said.

Social Security has 2,728 rules in its handbook and “hundreds of thousands” of rules in its program operations manual about those rules, according to Kotlikoff. “Most people in the Social Security office don’t understand those many rules and they are routinely giving people either incomplete advice, misleading advice or absolutely wrong advice.”

He described one woman who reached out to him after reading his book “Get What’s Yours: The Secrets to Maxing Out Your Social Security” because one of his suggestions, she claimed, was wrong. Kotlikoff and his co-authors wrote that if retirees take their Social Security benefits early, when they reach full retirement age they can suspend their benefits and start it up again at age 70.