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Include Social Security in retirement planning

Author: Helen Dennis, Specialist on Aging

Question: I am 55 years old and thinking about my retirement. Given my projected income, I will have to depend on Social Security to some extent. What are the basic facts and will it be there for me? My friends doubt it.

– J.D.

Dear J.D.:

This topic is a hot one that won’t go away.

First, a bit of history. Social Security was created by President Franklin D. Roosevelt in 1935 as a social insurance program for workers at age 65.

It is the nation’s social contract and was originally created to provide at least a subsistence income to the most vulnerable of citizens. Social Security was never intended to replace all earned income or fully support an individual in retirement.

Yet today it provides the majority of income for more than half of retirees. For about a quarter or even a third, it provides nearly all of their income. And for 15 percent of beneficiaries, Social Security is their sole source.

The benefits are rather modest. The average monthly Social Security benefit for a retired worker was about $1,230 at the beginning of 2012, or a little over $14,500 a year.

Its future has been disputed for decades with the big question unanswered: How will demographics shape its finances?

Social Security is funded by payroll taxes – an equal amount paid by employer and employee. According to some analysts, the problem is there are too few people contributing to Social Security to support a growing retiree

Today there are 2.8 workers for each beneficiary, a ratio of 2.8 to 1. That’s a big change from 1950 when the ratio was 16.5 to 1. In 1960 the ratio fell to 5 to 1. By 2033, it is predicted there will be 2.1 workers for each beneficiary, a ratio of 2 to 1.

Contrary to public perception, Social Security is not broke. When payroll taxes were increased, Social Security accrued a surplus. In fact, the accumulated surplus is projected to rise and continue to do so until 2025, according to U.S. News & World Report (May 7, 2011). Note that the surplus is not gold sitting in a vault. It’s in the form of U.S. Treasury Securities. The surplus was spent a long time ago to fund government operations. Social Security has an IOU in the vault.

Around 2037, it is predicted, the surplus will be gone because of the large number of retiring baby boomers and smaller number of workers paying payroll taxes.

After 2037, the trust fund will be able to pay about 75 percent of its benefits using its annual tax revenue, since the surplus will be exhausted. That percentage may change depending on fertility and mortality rates and levels of immigration.

The impending bad news is that funds for the Disability Insurance part of Social Security will be gone in just four years according to the 2012 Annual Report of the Social Security and Medicare Boards of Trustees.

From a federal perspective, we do have a big problem. Social Security and Medicare are the two largest federal programs, accounting for 36 percent of federal expenditures. Social Security comprises more than 20 percent. These ongoing and growing expenses are deemed unsustainable. Congress continues in its attempt to rectify this problem.

So J.D., to your question: Will Social Security be there for me?

Social Security should be able to meet its commitments for another 25 years. That would take you to age 80. After that you might receive 75 percent of what was promised. Based on about $14,500 a year, that’s almost $11,000 annually.

Key questions for you:

What are your needs and what are your other sources of retirement income? Also, there is talk of raising the retirement age to collect full benefits. How will that affect your planning?

Let’s assume Social Security will be there for you. However, I am not sure about its longer-term viability to make good on all of its promises without some policy changes.

Financial planning is extremely important. Consider consulting with a financial planner to create a plan or review what you already have done. Knowing what you can depend on for income is certainly a first step.

J.D., thank you for your good question. I know it is on the minds of many.

Copyright 2011 Helen Dennis. All rights reserved.

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