Seems like most of our close friends are concerned about Social Security – everything from the best age to start taking payments, to certain apparently favorable (possibly unintended) opportunities around spousal elections that even the local Social Security office may not be familiar with. A cottage industry has even grown up around providing education and analysis about Social Security elections.

And it’s just not my age group doing the talking. Many people under 40 say they don’t expect Social Security even to play a part in their retirement. The Social Security Board of Trustees in its annual report showed that if things continue as they are, funding will run out in 25 years–just in time for those now 40 and under to start turning 65.

But in the political arena, any talk of reforming Social Security remains the “third rail” – essentially a kind of political suicide.

Mark Twain said that everyone talks about the weather, but no one ever does anything about it. I’m not running for political office or working at Social Security, so I’d thought I’d see what I could come up with by applying my industry and actuarial experience to this enormous challenge.

Let’s start with the notion that transparency and clarity are essential to any successful financial program, of which Social Security is among the largest for so many people.

Next, let’s do something unconventional: let’s look first at the benefit side, rather than the funding issue: after all, benefits are the reason the program exists and starting there will at least help us properly frame the solvency challenge. Here are a couple of scenarios I’ve come up with so far:

  1. Why not make our benefits transparent by keeping us posted on their actuarial present value, or in other words what it would cost you to purchase those benefits in the market. Let’s call this “Social Security Benefit Value”. When I ran some numbers a few years back I found that mine is around $600,000, which was at the time the cost of providing a COLA protected immediate annuity with a starting payment equal to my benefit amount This kind of value can’t be cashed in — but it can be “spent” on a personalized income benefit plan for the individual
  2. What if we then permit our Social Security Benefit Value to be used for any number of income possible options while keeping its value constant — based on age, benefit level and market based actuarial assumptions. So we might take my Social Security Benefit Value and let me take lower payments in return for providing my beneficiary (spouse or children) at least 10 years of payments.
  3. As another example, a new benefit option might be one that lowers current payments, but raises payments if an individual needs care, or uses the value to self-fund a portion of their home care costs.

Transparency of this kind will help us see Social Security as a true benefit with a defined personal value Politicians can then see this value as a liability that has to be funded. From the perspective of the Social Security Trust Fund I see this approach as extending its life as more retirees elect to defer or stage their retirement.

If this structure were also adopted in the pension and 401(k) sectors, we could be given more choices, including the ability to better-integrate retirement programs with Social Security. As I mentioned in an earlier piece, such a system for Social Security and pensions could facilitate the new reality of “staged retirement”.

Is this workable? It’s already been applied in the private sector in the form of what’s called a “flexible immediate annuity contract,” so the administrative technology and actuarial methodology are in place.

But my central point is that there are far more options around Social Security than the headlines would lead you to believe — if we stop focusing solely on the problems, and open our minds to creative new solutions.

Jerry Golden
Golden Retirement, LLC