Can you count on Social Security?

This month: understanding SS & Medicare taxes and benefits - along with the realities.

How to plan for Social Security benefits continues to be one of the toughest questions for both planners and clients, especially for clients under the age of 50.

This month we will explore how the program started, how it is paid for and the looming issues on the horizon that are going to force some major changes.

History of Social Security:

Social Security was signed into law by President Roosevelt in 1935 as a result of hardships caused by the Great Depression. In 1956 President Eisenhower added disability benefits to the law and then in 1965 President Johnson added Healthcare benefits for retirees known as Medicare.

How is it funded?

The program is funded by payroll taxes or what we refer to as FICA taxes (Federal Insurance Contribution Act). You may also have noticed on your paystub the letters OASDI which stands for Old Age, Survivors and Disability Insurance.

Current rates:

• if you are an employee 6.2% of your paycheck goes toward social security taxes.
• your employer also has to match that and pays 6.2% of your pay to the government in social security taxes for you.
• The Social Security wage base for 2009 is $106,800, meaning that only this amount of compensation is taxed for social security.
• Medicare tax: 1.45% paid by you on all of your earnings.
• your employer has to match that and also pays 1.45% in medicare taxes on all of your earnings.

So where is the problem?

Up to this point there has always been enough workers and payroll taxes to run a surplus in Social Security and Medicare, however as the baby boomer population moves into retirement that will change. It is estimated that 77 million boomers (almost 1/4 of the American population) will be moving into retirement over the next 25 years. Another way to think of this is more than 10,000 boomers will become eligible for Social Security benefits each day over the next 20 years.

As you can imagine the unfunded liabilities of the federal government regarding SS and Medicare make the current recession and bailouts look like pocket change.

What is the solution?

As unpopular as it is, most of us realize what will probably have to occur for these programs to be sustainable in the future: payroll taxes and wage caps will have to rise and/or benefits will have to be reduced for future generations.

This issue is definitely a political hot potato that most politicans would prefer to avoid. However the reality is that it will have to be addressed over the next couple of years.

What do you do?

Social Security is something that as individuals we do not have direct control over, but there are things you can do:

• If you have a number of years left in your working career, plan your retirement strategy solely based on your own savings (something you do have control over).
• Write to your elected leaders and ask that they begin focusing on a solution to this issue for the benefit of future generations.

I encourage you to learn more at these websites:

Concord Coalition

Pete Peterson Foundation