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Reduced Social Security Benefits

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In “Will You Need to Work Until 70?” [4], I noted that you should expect reduced government benefits when you retire.

Part will be due to reduced actual payouts. Part will be due to increased retirement ages.

I believe that if you factor in current social security payouts in your retirement calculations, you will face a shortfall when you do retire.

I want to quickly highlight this point as it is crucial for a successful retirement. 

OECD Agrees With Me

The Organisation for Economic Co-operation and Development (OECD) believes that raising retirement ages [5] and expanding private pension coverage is essential.

Governments will need to raise retirement ages gradually to address increasing life expectancy in order to ensure that their national pension systems are both affordable and adequate, according to a new OECD report.

“Bold action is required. Breaking down the barriers that stop older people from working beyond traditional retirement ages will be a necessity to ensure that our children and grand-children can enjoy an adequate pension at the end of their working life,” said OECD Secretary-General Angel Gurría. “Though these reforms can sometimes be unpopular and painful, at this time of tight public finances and limited scope for fiscal and monetary policy, these reforms can also serve to boost much needed growth in ageing economies.”

Change is Already Happening

The OECD news release notes that governments are already addressing this issue.

The Pensions Outlook 2012 says that increases in retirement ages are underway or planned in 28 out of the 34 OECD countries. These increases, however, are expected to keep pace with improved life expectancy only in six countries for men and in 10 countries for women.

In the OECD we are seeing a significant reduction in actual monetary payments to retirees.

The Pensions Outlook 2012 finds that reforms over the past decade have cut future public pension payouts, typically by 20 to 25 per cent. People starting work today can expect a net public pension of about half their net earnings on average in OECD countries, if they retire after a full career, at the official retirement age.

Forbes [6] looks at a few countries and their retirement ages.

In 2007 Germany raised its retirement age from 65 to 67 and the German government is now talking about increasing retirement to age 69 for full pension payments to start. On the other hand Greek workers now retire at age 58 with 80% of pension payments and the country’s workers are currently agitating for a lower retirement age.

My German friends just love that paragraph.

And I think those two sentences nicely summarize the situation in Europe.

The AARP [7] and Washington Post [8] also review countries that are increasing retirement ages.

For Canadian readers, a move from 65 to 67 [9] is occurring. Given Canadian current life expectancy (men 77, women 82 [10]), expect 67 to shift to (say) 72 in the next decade or two.

Be Realistic When Planning

Many individuals plan for retirement based on current variables. They use existing tax rates, inflation expectations, historic asset class returns, etc. This includes factoring in current retirement ages and payout rates.

Use caution when relying on historic or current data when planning. The future can change.

This is especially true with retirement benefits. The world is already changing and the trend is clear. The age you will be able to start collecting social security retirement benefits is increasing.

When factoring in social security benefits into your retirement cash flow, be extremely conservative. Better to err on the side of caution and end up with a surplus than to suffer based on lower than expected income.