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  • Writer's pictureHugh F. Wynn

Social Security vs. Pension Plans: How do they Stack in Retirement?

Like bonds, both Social Security and pension plans provide reliable sources of monthly payments in retirement…and in some cases for life. So, how should you view them, one versus the other?

Sturdy and Steady

Personally, I don’t consider Social Security a bond-like instrument at all except for its lifetime flow of funds. On the other hand, I do view pension plans in the same manner as bonds.

As a society, we tend to underappreciate the value of the Social Security program in retirement. As a retirement vehicle, dollar for dollar, that monthly Social Security stream of payments we’ve funded during our working lives is far superior to a bond.


First, it’s backed by the full faith and credit of the Federal Government. Yeah, I know. It’s hard to forget the huge debt the government owes, but default is not in the cards. If Uncle Sam becomes uncreditworthy, the whole world is in deep water.

Second, Social Security is inflation-adjusted – meaning its purchasing power is secure. And third, it keeps sending those monthly checks until your life ends…often with a survivor benefit. In pure dollars and cents, how much this is worth depends on your life expectancy (as well as whether a surviving spouse receives a higher benefit).

The Inflation Factor

On the other hand, most pension plans are not inflation-adjusted, and those that are rarely provide a full measure of inflation protection. For example, even with an annual 3% inflation adjustment, after two decades in retirement (not uncommon), that pension check will only buy about half of what it would purchase in today’s dollars. That important fact alone makes your Social Security checks superior to those of pensions.

This is the primary reason I view pension and Social Security income very differently. Yes, a pension fund check is a reliable source of monthly income, but it’s not nearly as reliable in terms of purchasing power. Therefore, risk-wise, I toss pensions in with stock and bond investments.

Down the road, Social Security income will hold its value…will be a dependable source of spendable funds…while a bond-like stream of pension checks will expose its recipients to a lifetime of inflation risk. Some argue that there is an imminent risk of Social Security payments being reduced. Anything is possible, but politicians love their jobs. For that reason alone, I suspect the Social Security program is as risk-free as Treasury bonds…even better because of the inflation factor.

So, in considering the evolution of your own well-balanced portfolio, set aside those inflation-adjusted cash payments that Social Security generates and then determine how much non-inflation adjusted cash flow is generated by the balance of your portfolio. Stocks are susceptible to market risk. Bonds are susceptible to inflation risk. And finally, pensions have a similar degree of bond-like inflation risk even though the checks are there for life. But will those pension dollars buy as much two decades down the road? Not likely.

That’s why I would include them – if I had any – in the same category as my portfolio of stocks and bonds…and plan for purchasing power erosion accordingly.

Balance is Key

From the standpoint of developing an investment plan, if your portfolio is overloaded with stocks and bonds, you risk suffering those Bear Markets that are sure to come with little or no additional income to offset losses. This over-exposure to bonds…to include non-inflation-adjusted pension plans… without question increases your risk of suffering purchasing power erosion over the long term

In short, a well-diversified balance of investments is key to mitigating inflation and market risk.

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