Fears about social 'insecurity' abound

The future of Social Security is unclear as the debate on how to fix the system is just beginning.

President Bush hopes to dispel pessimism about Social Security among younger workers by allowing them to invest a portion of their payroll taxes in private accounts (4 percent of salary carved out of the 6.2 percent tax now withheld for Social Security), offering the possibility of higher investment returns in exchange for a smaller guaranteed benefit.

Critics, including AARP, the powerful senior-citizen lobbying group, argue that Social Security is an insurance program, not an investment plan, and that there is no guarantee that private accounts would result in larger payments.

Meanwhile, the transition costs could be enormous. Because Social Security taxes finance the benefits of current retirees, it's been estimated that diverting taxes to private savings accounts would require the government to borrow $2 trillion or more over 10 years to fund promised benefits. According to Bush, there will be no changes — and no private accounts — for people born before 1950.

Currently, the money the government receives from Social Security taxes and income taxes on Social Security benefits exceeds the outflow in benefits — with the excess going to the Social Security trust fund. Around 2018, we'll finally learn whether the trust fund is as solid as Fort Knox or as phony as a $3 bill.

That's when Social Security will also need to start using interest earned by the trust fund as well as tax revenues to fund benefits. By 2029, the actual trust-fund reserves will have to be tapped. And in 2042, the trust fund will run dry — unless Congress raises taxes, cuts benefits or alters the program in some other way. At that point, as payroll taxes continue to roll in, Social Security would be able to pay just over 70 percent of scheduled benefits.

It's too early to predict the outcome of this year's momentous debate. But count on three things: Benefits will be cut in the future, not necessarily from today's levels but from what's been promised. You will receive some Social Security benefits. Savings outside Social Security will be the key to a secure retirement.

Keep in mind that financial planners suggest retirees will need about 80 percent of their pre-retirement income. Right now, Social Security is supposed to replace about 55 percent of a low-wage earner's income — someone whose average annual earnings are under $16,000. With average earnings of about $70,000, that drops to nearly 30 percent.