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."

Because affluent clients are least dependent on Social Security, he says, they are probably more at risk of being affected by future changes-through either a cut in benefits or a hike in taxes.

And if benefits were cut, planners say, even some affluent clients would feel the pinch. Ehrlich notes that $15,000 per year in Social Security benefits equates to a $300,000 pot of money, assuming an annual withdrawal rate of 5%. For those with $1 million set aside, and a 5% withdrawal rate, an annual $15,000 Social Security benefit amounts to an extra 30% in income, Ehrlich says. If that income were to disappear, Ehrlich says, such a client would have to risk increasing distributions, lowering expenses or possibly adding income through a part-time job.

Michael Kitces, director of financial planning with Pinnacle Advisory Group in Columbia, Md., says even for clients with assets in the $500,000 to $1 million range, a cut in benefits "would matter. They'd feel it, they'd notice the difference." Those with less than $300,000 to $500,000 "will certainly be counting on Social Security for a substantial amount of income," he says. Clients with $2 million or more, he adds, are at the point "where it's extra gravy, but they'll probably maintain the same standard of living regardless."

For the bulk of his firm's clients, who have assets averaging about $800,000, a cut in Social Security would have some impact but it "wouldn't be the doom of their retirement," he says.

Joseph Janiczek, founder and chairman of Janiczek & Company in Greenwood Village, Colo., also feels that his clientele is most likely to be affected by a change in benefits or funding. "Basically, if you would be in the top 2% to 3% of wealth in the nation, I think you're going to be a prime target," he says.

The greatest risk to such clients, he says, is being forced to increase their annual distribution in retirement to risky levels. At Janiczek's firm, that is considered to be anything more than 4.5% of liquid assets. "That is really pushing distribution rates into a very vulnerable level," he says. "The chances of someone depleting their wealth increase quite substantially."

Many advisors feel that neither cuts in benefit nor tax hikes would be needed to save Social Security if the retirement system were managed more aggressively. Rather than rely on Treasury bonds and annual 3% growth, some advocated a transition of Social Security funds to equity markets and possibly private management.

Such a system could be modeled after the way TIAA-CREF manages the nation's teacher retirement system, says Somnath Basu, professor of finance and director of financial planning programs at California Lutheran University in Thousand Oaks, Calif. "They've done a fabulous job, and they make a case for professional management," he says. "If I had a choice between giving money to the government and giving it to TIAA-CREF, it wouldn't be a choice for me."

Robert Fragasso, president of the Fragasso Group in Pittsburgh, feels Social Security could easily attain a 9% return by investing in equities. "Social Security works at 9%. It doesn't work at 5%," he says. What he proposes is that 25% of a worker's contribution be invested in no-load mutual fund devoted to equities, either by the government or by letting the individual keep the money and manage it. Similar proposals have been criticized as being too risky when they've been brought up in the past, but Fragasso feels the market's history has shown a consistent reversion to the mean. "The bogeyman of the early '30s crash and Depression is the specter that people use to ward off a more progressive view," he says.

Planners seem to be divided on the idea of giving individuals the right to manage their own Social Security funds. Some, such as Basu, feel that the majority of Americans have already shown themselves to be unable to adequately manage their 401(k) plans. There's no reason to believe they would act any differently if given a free hand to manage funds that were originally designed to be their retirement "safety net," Basu says.

Others feel it would only take some educating to get workers prepared. Federal law already requires employers with 401(k) plans to educate workers on retirement savings, but what's needed, Fragasso says, is a better definition of what type of education is required. "They understand what to do when you give them the right education," he says. "Even your mailroom boy will make the right choices given the right models."

Joseph Murtagh, president of The Source financial planning firm in Goshen, N.Y., says one reason people are neglecting their retirement savings is because they view Social Security as a fallback. By giving them a role in their Social Security savings-he wants to see two-thirds of contributions managed by the individuals themselves-it will give people an incentive to learn, he says. "It's the chicken or the egg question," he says. "Is the government, by taking this position with Social Security, in effect saying to people, 'We'll take care of you?' Is that encouraging people to behave irresponsibly?"

Some planners feel that while Social Security will have to be dealt with, the most serious issue facing retirees in America is actually health-care costs. David Diesslin, of Diesslin & Associates in Fort Worth, Texas, feels it will have the most impact on retirees. "I think it has the potential of being the more onerous," he says. "It has the highest inflation rate and the most unanswered questions."