Social Security in flux: change is inevitable. With more control over your benefits, you may even come out ahead

Kiplinger's Personal Finance Magazine, Sept, 1998 by Mary Beth Franklin

How would this couple make out under a plan that diverted a chunk of their social security taxes to personal accounts?

Under the current system, if the Pazes' incomes keep pace with inflation, they can expect a combined monthly social security benefit of about $2,540 (in today's dollars) at age 67--the "normal" retirement age for their age group. Under the NCRP plan, their retirement benefit would be slashed by some 39% (costing them $990 per month) if they chose "early" retirement at age 67. Even if they waited until age 70 to retire, the proposal would pay them about 18% ($457 per month) less than they'd get at age 67 under the current law.

That sounds devastating. But don't forget the personal accounts. If 2% of their combined $82,000 pay ($1,640 a year) were invested in their own names and earned a modest 5% annual return, they'd have about $200,000 at age 67, and close to $250,000 at age 70. In both cases, that's enough to buy annuities that would guarantee more than enough income to offset the reduced social security benefit. For example, based on today's rates, $200,000 can buy an annuity guaranteeing $1,300 a month as long as either spouse is alive.

How could a no-tax-hike plan not only shore up the social security system but actually leave future beneficiaries better off? Because even the modest 5% return assumed in our example is more than double the return today's average worker can expect from social security contributions. Also, don't overlook the tens of billions of dollars the reform plan calls for pouring into social security from budget surpluses.

Boomers

THE CONCERNED SAVERS

Anita and Dale Brown of Aurora, Colo., were born near the end of the baby boom. Now they are each 37, work full-time, have a 2 1/2-year-old daughter and save as much as they can for their retirement.

More than $6,000 in annual day-care bills makes it harder to save than before Isabel was born, but both Anita, who works as a financial analyst for Norwest Bank, and Dale, who is a plumber for the city, contribute to employer-sponsored retirement plans. Ten percent of Anita's $40,000 salary goes right into her 401(k) account, and 5% of Dale's $37,000 salary goes into his retirement plan. The $6,000 a year he receives for National Guard duty is socked away, too.

"As long as I can remember, I've heard that the social security program was in trouble," Anita says, adding that she tries not to think about how much they have contributed to the system over the nearly 20 years that she and Dale have been in the work force. But she's glad the benefits are there for her parents and grandparents.

The Browns can expect a combined social security payment of about $2,600 a month if they wait until 67 to collect benefits. Under the NCRP plan, their benefit would be reduced by about one-third (an $855-per-month reduction) at age 67 and by about 17% ($440) if they wait until age 69 to collect--the proposed "normal retirement age" for people their age.

The cuts are smaller percentages than for the Pazes because the Browns would have less time for their personal accounts to build up. Still, if they get to divert 2% of their annual salaries ($1,660) to personal accounts--and their investments return 5% a year--they'll have more than enough to make up the difference.