Social Security up close: It's valuable insurance

Critics of Social Security and some of its friends often ask why its return on our investment, the years of payroll deductions, is so small. That would be a fair question if Social Security were an investment program, but it's not. It's more than that, much more.

A unique new report was released last month by the nonpartisan, nonprofit National Academy of Social Insurance titled "Social Security: An Essential Asset and Insurance Protection for All." As far as I know, it's the first close look at the monetary value of Social Security for all beneficiaries. Social Security is a life insurance policy with survivor benefits, disability insurance and, most important, it's one of the nation's few remaining guaranteed defined-benefit pension plans. And it's worth thousands more than most retirement savings plans or annuities.

According to the new report, based on last year's average monthly benefit of $1,045 (many beneficiaries get more), it would cost $140,000 if a 65- year-old worker wanted to buy a life annuity that paid as much. And if the worker wanted one that kept up with the cost of living and continued for the life of the widowed spouse, he or she would have to pay $225,000.

About 17 percent of the more than 50 million Social Security beneficiaries get disability benefits because of physical or mental illness. The value to the average beneficiary would be equivalent to buying a $414,000 disability insurance policy. And Social Security's life insurance benefits, which are paid to 14 percent of the program's beneficiaries, typically a surviving spouse and two young children, are valued at $443,000.

"For most Americans," the report said, "the value of their Social Security is the biggest accumulation of dollars they will take into their retirement. In fact, for two-thirds of recipients over the age of 65, Social Security is more than half their income during retirement."

And unlike savings plans such as 401(k)s, most of which do not amount to enough to retire on, the value of Social Security is not subject to the irrational volatility of the stock market. Such savings plans, of course, can have an important place in retirement planning. But their value, based on the stock market, is undependable.

Despite the cries of alarm, mostly by those who oppose the program, Social Security is backed by the full faith and credit of the United States and has never failed to pay benefits, through recessions and wars. And its long-term financial problems can be easily solved without cutting benefits. (An increase of 1 percent each on the 6.2 percent payroll tax for employer and employee would fix Social Security for 75 years.)

The new report was compiled with the help of a dozen economics, aging and retirement specialists. And though its conclusions and observations are drawn from basic Social Security data, it highlights the essential role Social Security plays in protecting the well-being of millions of Americans.

For example, the report says, "Social Security is paying monthly benefits to 2,377 children and 853 widowed spouses of people killed in the Sept. 11, 2001, terrorist attacks and to 642 individuals disabled during the attacks." And, as of September 2006, an estimated 12,290 children were receiving benefits as dependents of service members who have died in Gulf wars since 1990.

Of course, Social Security's main task is to provide a pension base when one's working days are done. And for that, the report is a valuable primer on Social Security. How many of you know, for example, that Social Security "benefits are based on work and replace lost earnings in a progressive way, providing a more adequate level of wage-replacement for low- and moderate-income families"?

Social Security's architects more than 70 years ago planned that Social Security benefits should replace about 40 percent of an average worker's last earnings. Today, according to the report, the average worker who last earned $37,200 a year will get benefits of $15,570, or a 40 percent replacement rate. The planned 40 percent still holds and serves as a retirement foundation.

Here's what I mean by progressive: A person who earns less, say $16,700, will get benefits of $9,400, which is a 54 percent replacement rate. A higher-income individual who earns $58,900 will get higher benefits, $20,610, with the replacement rate at 34 percent. And the person who earned $87,800 will receive $24,000, but the replacement rate will be only 28 percent.

Thus, Social Security benefits are a safety net, an income floor, for low-income families and, for more affluent Americans, a foundation on which to build their retirement assets with savings and a private pension.

As I mentioned last week, without Social Security, nearly one in two seniors would be poor; with Social Security that's one in 12, for the poverty rate among persons 65 or older is less than 9 percent. But middle- and upper-income people also value Social Security as an important and reliable share of their retirement income. Persons with earnings between $16,350 and $25,590 receive nearly two-thirds of their total income from Social Security. Those in the next highest income group, $25,590 to $44,130, rely on Social Security for half their income. And among persons with incomes of more than $44,130, most are still working and have private pensions, but Social Security accounts for nearly 20 percent of their income.

You may read the report at the site of the National Academy of Social Insurance, nasi.org.

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