The real risk in Social Security

Every year, each of us receives a document from the Social Security Administration entitled "Your Social Security Statement." I received mine at the end of March.

Usually, I ignore them, just put them in a tattered old file that sits in the unimportant section of my filing system.

Frankly, I never expected that Social Security would be around when I retired.

However, with the "controversy" engendered by President Bush's proposals to revamp the Social Security system, I decided to examine my statement more closely.

Having been a financial type all my life, I was astounded at what I found.

My historical circumstances I have paid into the system since 1964, at the maximum level for 28 of those years.According to my statement, contributions made on my behalf (myself and my various employers) to the OASDI (Old Age, Survivors, and Disability Insurance) fund (i.e., social security) totaled $140,230.

Each annual statement shows the amount of earnings on which the tax was paid in the year in which it was paid.

In 1937, the first year of the system, the maximum earnings subject to the OASDI contributions was $3,000, and the total combined assessment rate was 1 percent each for employee and employer (or $30 each in 1937).

In 1964, when I started paying in, the maximum earnings subject to the assessment were $4,800, the combined assessment rate was 7.25 percent, and the maximum contribution was $174 per year for each employee and employer.

In the past, Congress has "fixed" the system by raising the "tax.".

The maximum assessable earnings have risen steadily since 1964, today standing at $90,000 with a combined assessment rate of 12.4 percent.

An employee earning $90,000 pays $5,580 into the OASDI fund, as does his/her employer! My fantasy My statement indicates that, at age 66,my full retirement age, I will receive an estimated $1,750 per month or $21,000 per year in retirement benefits.

Using the OASDI historical assessment rates by year and applying it to the earnings on which my employers and I paid the assessments, as shown in my statement, I estimated, by year,my contributions to the Social Security "fund" and put it on a spreadsheet.

Next, I looked up the historical returns of the S&P 500 and put those in a column of my spreadsheet.

Finally, I built a column in which I assumed that I was permitted to put a portion of my "contributions" into an S&P 500 index fund.

Since I haven't reached retirement age yet, and do not know the S&P 500 returns for the future, I assumed that the hypothetical fund that I had accumulated would earn 5 percent annually until my retirement in 2010.

At that time, I assumed that I would purchase 5 percent bonds and only draw the interest out for retirement.

The table on this page shows the results.

The first row shows my current plight, the one I must live with.

None of my OASDI "contributions" were allocated to the markets, and I will receive $1,750 per month if I were to retire in 2010.

The other rows of the table show what I, hypothetically, could have accumulated in a fund of my own, and what I would receive if I had been permitted to allocate 25 percent, 33 percent, 50 percent or 100 percent of my "contributions" to an S&P 500 index fund.

Note that, because these funds were invested over a 40 year period,my accumulation would have survived the 2001-03 bear market in stocks.

Using the 33 percent column as an example (33 percent of my "contribution"went into an S&P 500 index fund), the $3,265 monthly income is composed of $1,167 from the existing Social Security system (i.e., 67 percent of my $1,750 retirement benefit) plus $2,098, the interest throw-off from my accumulated fund.

Because I only use the 5 percent cash throw off from the accumulated fund in my monthly retirement benefit, that fund, shown in the second column, would never be depleted in this exercise, and could be passed on to my estate.

Thus, if I wanted to, I could actually increase my monthly retirement benefit by invading my principal.

The last column shows the percentage differences in my monthly retirement income.

As you can see, using the 25 percent or 33 percent row, I would be 65 percent or 87 percent, respectively, better off, had such options been available to me and I was smart enough to take advantage of them.

Non-Social Security participants The majority of teachers in this country are not in the Social Security system.

Neither are most state employees, some local government employees, federal employees, or members of Congress.

There is an educator, to whom I am close, who has shared with me her retirement situation.

This person has been an educator all of her professional career, and has contributed to the Nevada PERS (Public Employee Retirement System) for most of that career.Many states run similar programs (CalPERS is the most famous), as does the federal government for its employees.

Congress has its own very very generous retirement system.

In addition, those involved in higher education have been able to purchase retirement annuities as their primary retirement vehicle or supplemental retirement annuities as a secondary retirement vehicle.

TIAA/CREF is the industry leader in the provision of that product to the educational community.

It is my understanding that the pension plans of the employees of some major labor unions (i.e., the labor union leaders) are heavily invested in securities.

The major characteristic of all of these non-social security retirement systems is that they all invest heavily in the securities markets.

Some of these retirement funds (these are true funds with real portfolios) even invest in private equities.

Yet, not one of these groups has complained that their retirement plans are too risky! The contributions of my educator friend to her retirement plan have somewhat paralleled the maximum levels she would have been assessed had she been in the social security system, and, by 2010, will approximate what my "contributions" have been to the Social Security system.Assuming that she retires in 2010 with 30 years of service and receives an average salary increase of 2.5 percent per year from now until 2010, her monthly retirement benefit will be approximately $6,500.

Compare that to my social security benefit! The scariest part of Social Security So, what is the scariest part of Social Security? It can't be President Bush's modest proposals to allow younger workers to put part of their OASDI "contributions" into highly conservative market investments.

No, the scariest part is written in plain English on the second page of "Your Social Security Statement," the one you get every year.

I quote verbatim: "Your estimated benefits are based on current law.

Congress has made changes to the law in the past and can do so at any time.

The law governing benefit amounts may change because, by 2042, the payroll taxes collected will be enough to pay only about 73 percent of scheduled benefits." Of course, as I have just shown, even 100 percent of those "scheduled" benefits leave a lot to be desired.

Indeed, the scariest part of Social Security is the fact that Congress has control and can change it at any time.

And, you know they will! If only I could invest Social Security contributions on my own % of contributions allocated to market 0 25 33 50 100 Amount accumulated by retirement age (1) $0 $377,622 $503,496 $755,245 $1,510,490 Monthly Retirement benefit (2) $1,750 $2,886 $3,265 $4,022 $6,294 Percent difference -- 64.9% 86.6% 128.8% 259.7% (1) Until 2004, it is assumed that the accumulated fund was invested in an S&P 500 index fund; post-2004, in a fund earning 5 percent per annum.

(2) The monthly retirement benefit is equal to $1,750, my benefit in 2010, times (1 minus my allocation to the market) plus a 5 percent cash throw off from my accumulated fund Robert Barone, Ph.D., is chairman of the board of Adagio Trust Co.

of Reno.

This article also appears in Adagio's quarterly publication, "Quarter Notes," and on the Web at www.adagiotrust.com.