Correcting My Social Security Slip-Ups

By Allan Sloan
Tuesday, January 27, 2009

Normally, I wait until the end of the year to write my "mea culpa" column discussing my mistakes. This year, December has arrived in January because of a mistake I made in my Social Security column two weeks ago. Compounding the problem, I omitted something that I should have included.

The column discussed how a retiree cashing in a private Social Security account at the end of last year (had such accounts existed) would have gotten a much smaller lifetime annuity payment than someone who had cashed in an equivalent investment at the end of 2007. That's because the stock market took such a wallop in 2008.

The point was to show the risk of entrusting your eating money -- which is what Social Security retirement benefits are for most recipients -- to the less-than-tender mercies of the capital markets. That point is still valid -- but I muddied the waters by making a bad call and a bad mistake.

First, my mistake of omission. I didn't mention that for 2009, Congress has waived the rule requiring that retirees 70 1/2 and older take at least some money from their retirement accounts. I felt that including this would add one complication too many to an already-complicated and numbers-heavy piece. Judging from my e-mail traffic, I should have mentioned it. Sorry I didn't.

My mistake of commission was writing that under the plan proposed by former president George W. Bush's Social Security commission, people of limited financial means would have had to turn their private accounts into annuities when they retired.

I was wrong. Retirees of limited means would have had the option of using their accounts to buy retirement annuities but would also have had the option of making small regular withdrawals. That's a big difference -- and a big mistake on my part, for which I apologize.

This matters, because forcing people to buy annuities with their year-end 2008 balances would have locked in current stock market values for recipients' lifetimes. Making small withdrawals, by contrast, would allow retirees a chance to recoup their losses when the market recovers.

I made my forced-annuity mistake because I'd already made it once before and had never heard anything from anyone. So when I reviewed the commission's report before writing my recent column, I saw only what I expected to see: the part about annuities. I read right past the "or make withdrawals" part.

I should have followed my normal procedure of contacting someone who doesn't agree with what I plan to write and giving him (or her) a chance to knock down my thesis. That's saved me from many mistakes over the years. I didn't do that this time because I thought I knew the material cold. Alas, I didn't.

Now, having groveled, I'll say again that turning some or all of Social Security from a government-guaranteed "defined-benefit" plan into a "defined-contribution" plan whose value is tied to the securities markets would be wrong -- and not only because people, on average, tend to make terrible investment choices, buying in at market peaks and selling out at bottoms.

It's a question of staying power, a major factor in determining how well you do with your investments. People like me who don't need Social Security for eating money could take minimal distributions (or none at all, if permitted) from our private Social Security accounts and await better days. But retirees who need Social Security money to feed and house themselves would have to take significant distributions, forgoing a big part of any future market upturn.

Fixing Social Security seems to be back on Washington's agenda, so I'm sure I'll be writing about Social Security "reform" plans again. When I do, I'll try even harder than usual to get my facts straight. I don't want to have to write another column like this one.

Allan Sloan is Fortune magazine's senior editor at large. His e-mail address is asloan@fortunemail.com.


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