INSIDE FINANCE:
Social "Security"


By Robert M. Jaffe, MBA, AAMS
March 11, 2005

Have you noticed that we just can't escape the headlines, talk radio, network and cable news channels relentlessly bombarding us with the President's proposed changes in the Social Security system? We are told that Social Security has reached the "crisis" stage. According to the Administration (www.whitehouse.gov), 02/10/05: "In 2018, the government will pay out more in Social Security benefits than it gets in revenue - and shortfalls then will grow larger with each passing year. By 2042 (sorry folks, I won't be around for this one), when workers in their mid-20's today begin to retire, the system will be bankrupt …."

The current system is funded by each of us and our employer splitting 12.4% of wages equally into Social Security, capped at the first $90,000 of earnings, adjusted annually for the rise in average wages. The President has hinted that this cap could be raised, thus adding billions more into Social Security and its solvency.

So, what to do? Here are three scenarios.
1. Benefits paid as promised by current law i.e - do nothing;
2. Benefits cut based on what current tax rates would support;
3. Benefits cut by changing the formula used to calculate them.

What's it all about anyway? How would the changes affect you and me? To begin with, if you were born before 1950, take a deep breath, as there would be no change to the current method of calculating and paying your benefits. For the rest of you baby boomers and generation "X'ers", there'll be changes aplenty, if this "fix" becomes law.

What are the proposed changes?

---Workers born after 1949 can divert up to 4% of wages into private accounts, limited initially to $1,000 a year and rising gradually, so by 2042 every worker can put four percentage points of his payroll tax into a private account. The private account would allow the worker (that's you, youngsters) to invest in a selection of stock and bond mutual funds.

--- Those who divert payroll taxes into a private account will have a reduced traditional Social Security benefit at retirement with the private account making up the difference.

Here's the caveat: if, and it's a BIG "if", your private account has an annualized return of more than 3% after inflation throughout your working life, then your retirement benefit would exceed the amount you would have received from traditional Social Security. However, if the private account proved to return less than 3% after inflation, your benefit would be reduced based upon the White House formula. (The Wall Street Journal, David Wessel, 02/17/2005).

There will be much more discussion in the halls of Congress and the Oval Office before these changes, if approved, become law. In the meantime, check out these web sites for different viewpoints: www.ssa.gov; www.whitehouse.gov; www.aarp.org. And while you're mulling this over, for gosh sake keep adding to your own retirement accounts!

Please Email bob@cfsias.com with your questions.

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INSIDE FINANCE will appear regularly, addressing financial matters of interest to our readers. Any questions? Email bob@cfsias.com

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member NASD/SIPC. Cambridge and CFS are not affiliated.

The preceding article is for informational purposes only and should not be used as the primary basis for an investment decision. Indices mentioned are unmanaged and cannot be invested into directly. Past performance does not guarantee future results. All examples given are hypothetical and do not reflect actual investments. The views expressed in this article are those of the author and are not necessarily those of Cambridge. Bob Jaffe is Managing Director of CFS Investment Advisory Services, LLC in Totowa and has been a Clifton resident since 1984. Active in community affairs, Bob is Past Board Chairman of the North Jersey Regional Chamber of Commerce and a member of its foundation board. He serves as a commissioner on the Clifton Rent Leveling Board and the Committee for Individuals with Disabilities. He is Vice President of the Clifton Rotary Club. Representatives of Cambridge do not offer tax or legal advice. Consult a professional for your personal situation.