Retirement now offers security; it's up to you to pin it down

TO a demographer -- someone who watches population trends -- the news about America's elderly population is very good indeed. ``For the first time in United States history, there is a smaller percentage of people 65 and over living in poverty than the rest of the population,'' says Peter Francese, publisher of American Demographics, a magazine out of Ithaca, N.Y. Today, 12 percent of older Americans are in poverty, compared with a national poverty rate of 14 percent, he says. In 1965, he says, the poverty rate for senior citizens was more than 20 percent.

This achievement was largely brought about without much effort on the part of the retirees themselves. The two strong supports of social security and company pensions have come together to give retirees a secure living standard. And since social security payments have been indexed to inflation (as are many company pensions), some retirees are even better off, because some inflation components -- home-purchase costs, for instance -- do not affect them.

While Americans can be proud of this accomplishment, they should not become smug about it. The next 20 or 30 years may hold as many bad surprises as the last few decades have provided good ones.

``We never knew 10 years ago where we would be today,'' notes Claire Longden, a first vice-president and financial planner with Butcher & Singer, a brokerage based in Philadelphia. ``We have no way of knowing where we will be 10 years from now. . . . For instance, there's a great disbelief in social security. I'm not sure it's going to be around in eight or 10 years. If I'm wrong, it's wonderful. If I'm right, it could be horrible.''

``Social security will be there in the next century,'' counters C. Arthur Williams Jr., professor of economics and insurance at the University of Minnesota. ``But it may be in a different form than at the present time. There are many financial problems that will have to be handled. The system looks secure, but it will have to undergo major modifications.''

Some modifications have already been made. Beginning at the turn of the century, the minimum age for receiving full benefits will rise two months a year until it reaches 66 in 2005, where it will stay until 2016. By 2027, when today's 25-year-olds will be reaching retirement, the minimum age for full benefits will be 67.

Some retirees have already seen one change: Married couples earning more than $32,000 ($25,000 for singles) must pay taxes on up to half their social security benefits. Income here includes money from investments and tax-exempt interest, such as from municipal bonds.

While Congress has made many efforts to keep the social security system viable, it has also taken steps that have added to the uncertainty about future company pensions.

When the Employment Retirement Income Security Act of 1974 (ERISA) was passed, for example, Congress required companies with pension plans to pay premiums to a federal agency for plans that fail. As a result, many companies have simply terminated their pension plans or made them unavailable to newly hired workers.

This has particularly hurt workers at newer small companies and pushed people toward larger corporations where benefits are more readily available.

``Large, old blue-chip firms are becoming very attractive places to work because of better benefits,'' says Mary Malgoire, a financial planner in Washington, D.C. ``They might have stock plans, pension plans, 401(k) [retirement-savings] plans. They're very attractive.''

A big concern for future retirees is, of course, the fact that there will be so many of them in the next century. As today's baby-boomers begin making serious retirement plans, they will have to consider that there won't be as many workers supporting them through social security payments. Instead of today's worker-retiree ratio of 3.3 to 1, it will be more like 2 to 1 in 2030.

Actually, Mr. Francese of American Demographics says, the situation will be more serious for what he calls the ``late boomers'' than the ``early boomers.'' By and large, he notes, the early boomers, born between 1946 and about 1955, have been able to buy their houses and have gotten most of the fast-track jobs that will lead to higher pay and benefits in the future.

It's the late boomers, born after 1955, he says, who are having trouble buying homes and have found fewer good opportunities in the job market. These people will be able to depend even less on social security and pensions, and will have to work longer to get their benefits.

The task of saving for retirement is complicated by efforts to ``reform'' the tax system. Right now, the effort that most concerns planners is the proposal to abolish or severely restrict the 401(k). This plan, which permits workers to set aside pre-tax dollars in a retirement account, with higher limits than individual retirement accounts, has become very popular in just a few years. More than half the largest corporations have them, and participation rates in some companies are as high as 70 or 80 percent. Still, the Reagan administration contends the plans are being used as a tax dodge by the highest-paid employees and has proposed abolishing it. If it is not eliminated, severe restrictions on early withdrawals are likely to be added.

So, with uncertainty about social security, pensions, and tax-advantaged savings programs, what are people supposed to do about their retirement?

In short, the answer seems to be: Set your own goals for what you want to do at retirement, try to estimate how much you'll need in today's dollars to do that, and begin your own savings progams, using whatever methods the law allows at the time. As inflation changes the number of dollars you'll need, you can set aside more, possibly from higher pay, to keep the savings current.

For a 30-year-old couple, it may be hard to make practical plans that far ahead, acknowledges Donna Brown, a vice-president in the trust department at State Street Bank & Trust Company in Boston. ``The 30-year-olds should ask themselves where they want to be in five years,'' she says. ``If they want a house, that's a step toward retirement saving.''

For those closer to retirement, Ms. Brown suggests taking more specific retirement-related steps.

``First, figure out what you want to do when you retire,'' she says. Some people may want to travel, move to a warmer climate, start a business, or help their children or grandchildren with college expenses or a home purchase. Or they may want to do several of these things.

Whatever, she says, ``You have to know your financial goals and where you stand now.''

Like many who help with retirement planning, Ms. Brown favors an independent approach, especially for those further away from retirement. ``I'm not planning to have social security take care of me,'' she says.

The most widely available way to save for retirement is the individual retirement account (IRA). They can be opened at banks, brokerages, mutual funds, and insurance companies. If you aloready have $10,000 or more in an IRA, you might want to diversify your savings.

If you are self-employed, or have self-employment or free-lance income, you can also open a Keogh account. The main advantage to Keoghs is a much higher savings limit: $30,000 per person each year, vs. $2,000 in an IRA.

If your employer doesn't already have a 401(k), see what you can to do push for one. Many employers are understandably reluctant to pay the expense of opening these plans until they see what Washington is doing, but assuming the 401(k) survives, it's well worth considering. With these plans, you can put away up to $30,000 or 25 percent of your income. You don't have to pay taxes on the deposits or on the interest earned until withdrawal. Thus they not only shield income from taxes, but they can also dro p you into a lower bracket. Employers usually match some of the workers' contributions.

Although Congress has given us these retirement-savings plans (and may take some of them away), it has also given us more reason to use them. Having found a way to tax social security, raise the retirement age, unintentionally encourage companies to end or restrict pension plans, Washington has added the worst element to retirement planning: uncertainty.

Thus, it is even more important for people to build their own retirement savings so as to help keep themselves in that group having a secure retirement, on the plus side of the demographic line.