Greenspan's remarks on Social Security cuts put advisors and clients on edge.
Talk to an advisor about how they create a retirement plan for a client, and it's likely that you'll hear very little about Social Security benefits.
Yet that didn't stop plenty of advisors from taking notice in February when Federal Reserve Chairman Alan Greenspan floated the idea of cutting Social Security benefits-through higher age eligibility and reduced inflation adjustments-as a way to deal with the ballooning federal budget deficit.
Advisors, of course, weren't the only ones to react. Politicians and special interest groups were also quick to respond after Greenspan tossed out the hot potato.
President Bush attempted to distance himself from the remarks, saying he was opposed to cutting benefits to those in or near retirement. Candidates for the Democratic presidential nomination at the time were more vociferous in their reaction. Front-runner Sen. John Kerry, advocating a rollback of tax cuts for the wealthy to deal with the deficit, said, "The wrong way to cut the deficit is to cut Social Security benefits. If I'm president, we're simply not going to do it." The AARP called the proposal "irresponsible."
Financial planners seem no less passionate. A query asking for comment on the issue, put out through the FPA and NAPFA, elicited dozens of responses-significantly more than this magazine receives on questions pertaining to other planning issues. Many congratulated Greenspan for dealing with an issue they feel has been ignored for too long. Michael Kresh of MD Kresh Financial Services in Hauppauge, N.Y., feels Greenspan was intentionally raising the issue because "politicians really refuse to directly address it."
He notes that the problem with Social Security is that it runs on a pay-as-you go basis, which is prohibited in private sector retirement plans. "Corporations couldn't do what we're doing as a country," Kresh says.
Some of the solutions offered by advisors included a full or partial privatization of the Social Security system, benefits based on need, an increase in age eligibility to reflect lengthening lifespans, or even a liberalization of immigration laws to increase the population of workers paying into the system.
Why all the concern, when advisors themselves note that Social Security makes up a small percentage of retirement income for their typical clients? Possibly, some planners say, because Social Security may be taken for granted somewhat and has more of an impact on the affluent than people realize.
"For a lot of financial planners, the lions share of our clients' retirement income is not going to be from Social Security," says Stanley Ehrlich, owner of S.F. Ehrlich Associates Inc. in Clinton, N.J. "It's not as much a safety net for people who retain financial planners as it is for a lot of the rest of the citizenry."
But, as Ehrlich continues, "Therein lies the rub."