Can you depend on Social Security?

• Author: Wechsler, Marysue

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...