Can you depend on Social Security?

USA Today (Society for the Advancement of Education), March, 1995 by Marysue Wechsler

The headlines are alarming: "Social Security to Go Broke by Year 2029"; "Budget Cuts May Include Social Security"; "Half of Americans Believe They Won't Ever Receive Social Security Benefits." How much should you depend on Social Security for your retirement years? Not as much as people once did, warn many financial planning professionals.

Approximately 94% of the U.S. workforce is covered by Social Security. it is one leg of what historically has been referred to as the three-legged retirement stool--the other two being company pensions and personal savings. For many years, Social Security was thought of as the primary leg of that stool. Pension plans and personal savings, if available, were considered supplemental sources that made retirement more comfortable.

This no longer is true. Social Security is providing a diminishing portion of most families' retirement needs. In fact, the greater a family's pre-retirement income, the smaller the percentage Social Security will replace. Take the example of a 65-year-old couple, each earning $12,000, for a combined income of $24,000. According to figures supplied by William M. Mercer, Inc., a compensation and benefits consulting firm in Louisville, Ky., Social Security would replace roughly 54% of the couple's preretirement income if they retired today. If they were earning $60,000, Social Security would replace 39%: if their combined income was $150,000, it would replace just 19%.

None of this should be surprising. Originally, this "social insurance" system was designed as a safety net against poverty in old age. It never was intended to provide full retirement for citizens. but, rather, serve as a foundation on which to build. However, for many people, Social Security is their sole or primary source of retirement income.

For years after the Social Security system was created in 1935, it drew little attention. Employees and employers paid a wage tax into a trust fund, and benefits were paid out of incoming taxes to retired workers. More money came in than went out, so the annual surplus was invested in U.S. Treasury bonds--in essence, loaned to finance other government programs.

This pay-as-you-go system worked fine as long as there were plenty of workers and few retirees, but demographics is changing all that. As people live longer, more retirees are supported by a smaller base of workers. In 1950, there were 7.2 workers for each retiree. Today, there are 3.2 workers for each retiree; by 2020, that number will be 2.4.

People also are retiring sooner. More than half of all retirees start collecting benefits before age 65. The average age at which workers begin to receive benefits fell from 68.7 in 1950 to 63.7 in 1991.

On the pay-as-you-go basis, Social Security still is taking in $60,000,000,000 a year more than it is paying out. In fact, it is projected that the Social Security surplus will swell to $5 trillion. Yet, when the crunch of Baby Boomers retire in the next 15 to 20 years, there won't be enough "Baby Buster" workers to support them with current Social Security taxes. Experts estimate that around 2010-15, more money will go out for benefits than will come in from taxes.

At that point, the mounting pile of Federal IOUs will need to be called in to cover benefit obligations. To meet them, the government almost certainly will have to raise taxes. Indeed, it has been estimated that, without changes, Social Security, Medicare, Medicaid, and Federal employee retirement programs will consume every single tax dollar by the year 2030.

Most experts agree that politicians will not let the Social Security system fail. Adjustments and compromises will have to be made and made soon, though, to keep it solvent. Several potential remedies exist:

* Benefits could be scaled back. One adjustment already has been made in this area. The full-benefit retirement age has been extended. If you were born in 1943, you can't receive full benefits until you turn 66; if you were born after 1960, you'll have to wait until age 67. Moreover, there may be further changes. The former chief actuary of the Social Security Administration, Robert Myers, among other experts, recommends pushing the retirement age to 70 and to do so sooner, rather than later, in order to secure the system.

* Reduction or elimination of the annual cost-of-living allowance, intended to help retirees keep pace with inflation.

* Means testing of benefits, so that payment would be reduced or eliminated for wealthier taxpayers. Concern here is that such a system would encourage fraud and abuse as taxpayers seek to cover up assets.

* Payroll taxes could be raised. Peter Ferrara, a senior fellow at the National Center for Policy Analysis, has cautioned that, "By the time today's younger workers retire, payroll taxes at current rates will be able to provide only half of the promised benefits."

Doubling or tripling payroll taxes is not a politically popular solution, though. In his book, Social Security: What Every Taxpayer Should Know, A. Haeworth Robertson notes that, "Although such high taxes may be feasible, their assessment would have a marked effect on the standard of living of both the active and retired segments of the population."