The statement shows the monthly Social Security benefits an employee can expect to receive based on his or her average lifetime earnings, as well as estimated disability and survivor benefits. According to pilot testing and surveys, an understanding about Social Security is significantly greater among persons who have received the personalized statements than among those who have not. For example, recipients are more likely than non-recipients to understand that Social Security was designed to provide only part of their total retirement income.

Overview of Social Security
As employees receive the statements and look at the numbers, they may become alarmed. Their expectation of what they may receive from Social Security very likely does not match reality. For employees close to retirement, the statement calculation provides a fairly good estimate of the benefit that is to come. But for younger employees, the statement will greatly understate their potential benefit.

That is because the estimates assume an employee's pay will stay about the same until retirement. Employees who are 25 or 35 may be alarmed when they see how low their projected benefit is, particularly if they consider what inflation will do over the next 30 or 40 years to the buying power of their projected benefit.

Alarm may be heightened by what employees are hearing during this election year about "robbing" the Social Security trust fund and "saving" Social Security.

Employees' questions about Social Security and retirement security may provide the opportunity for a discussion and education about what Social Security may provide, what the employer's pension or savings plan may provide and the responsibility of individuals to save for retirement.

Basics about Social Security
When educating employees about Social Security, it is best to keep it basic and let the Social Security Administration provide the specifics (www.ssa.gov). The key point to make to employees is that there are too few workers paying Social Security taxes to support the growing number of retirees.

In 1945, there were about 42 workers paying Social Security taxes to provide benefits for one Social Security recipient. By 1970, that number had plunged to 4.1 workers per recipient. In the not too distant future, less than two workers will pay Social Security taxes to provide a benefit for each of the 40-plus million recipients. So a change has to occur, whether it is raising Social Security taxes, increasing the age to receive Social Security benefits or reducing benefits themselves.

Consider this - based on 1999 figures, Social Security will replace:

• about 53 percent of pay for low-wage earners, defined by Social Security as $13,000;
• 40 percent of pay for average-wage earners, defined by Social Security as $28,924;
• 32 percent of pay for high-wage earns, defined by Social Security as $46,663; and
• 24 percent of pay for those earnings earning the taxable maximum, $76,200, or more.

Once employees have a sense of what they will receive from Social Security, they are likely to start wondering where the rest of the money will come from. Employers are required to provide at least annually information on any (defined benefit) pension benefits the employee is entitled to or working towards and/or any 401(k) savings (defined contribution) benefit the employee has earned.

Where Will the Money Come From?
In explaining the basics of retirement security, it may be helpful to use the old analogy of retirement as a three-legged stool. Retirement relies on three solid sources of income. If any of them are weak or missing, the "security" loses its solidarity. These income "legs" include:

• government benefits - primarily Social Security and Medicare;
• employer-provided benefits - defined benefit plans, defined contribution plans and profit sharing plans; and
• personal sources - savings plans; other investments such as IRAs or passbook savings; other assets such as a home; supplemental income such as a spouse's income and benefits; part-time employment, inheritance, etc.

How Much Money Will it Take?
The key to helping employees make the decision to save is to show how much money they will actually need to retire. It is not difficult to get this information. Making it appealing and encouraging employees to take action to ensure their own financial future is another story.

Generally speaking, most experts suggest people need to replace 70 to 80 percent of their pay to maintain the lifestyle they have during their working years into retirement. But there is no universal agreement on how much it will take. That is why it is very helpful for each employee to go through the exercise and answer the questions about how much they are earning, what other assets they have and how they want to live in retirement. In this way they get a basis for creating a personal plan and financial goals.

There are lots of books, workbooks, checklists, Web sites and other information available that help employees calculate what it will take to retire. The American Savings Education Council, which is affiliated with the Employee Benefit Research Institute, an independent research group (www.ebri.org), provides some of the most clearly presented and objective information.

Employers can also provide financial counseling, financial planning, investment education seminars and/or pre-retirement workshops; there is a whole range of options limited only by budget. Besides the American Savings Education Council, other resources include AARP (www.aarp.org), the International Foundation for Employee Benefit Plans (www.iscebs@ifebp.org), the Financial Planning Association (www.FPANet.org) and the major investment and brokerage firms.

First published on May 22, 2000.