Personal financial planning: strategies for the social security safety net.

AuthorSarenski, Theodore J.

When the Social. Security program began in 1935, President Franklin D. Roosevelt said it was not intended to be the only means of support for the aged but rather a social safety net. Subsequent generations, however, tended to regard Social Security benefits as a major part of their retirement funding.

Social Security's role now appears to have come full circle. According to the AARP Public Policy Institute, the poverty rate for people over age 65 was just under 10% in 2009. Without Social Security, the rate would have been 45%. Members of the Baby Boom generation, some 77 million strong, are beginning to turn 65 this year. That group, known for spending, not saving, has been subject to a recent decline in the value of their homes and 10 to 12 years of securities markets that have returned nearly no equity growth, as well as historically low fixed-income rates. Today's need for a social safety net is as great as in the Great Depression when the Social Security program originated. The difference this time is that its ability to pay full benefits beyond a 25-year horizon appears doubtful under current projections.

Social Security contributions from employers and employees in excess of benefit payments are placed in the Social Security Trust Fund and invested in interest-bearing, nonmarketable U.S. Treasury securities. Since last year, less money has been collected from wages each year than is necessary to pay Social Security benefits, and this is projected to continue for the foreseeable future (Social Security and Medicare Boards of Trustees, A Summary of the 2011 Annual Social Security and Medicare Trust Fund Reports, available at tinyurl.com/3ekydeq). Without any changes to the system, the trustees of the Social Security program project that the trust fund will be able to pay only 77% of full benefits starting in 2036, although the percentage would fall only slightly over the subsequent 49 years.

Will changes be made soon to keep the program at 100%? Until legislation is passed that addresses this difficult issue, practitioners should use 75% of estimated Social Security benefits in their retirement planning with clients and assure them that it is a solid figure they can count on.

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