Some readers think personal finance writers shouldn't write about Social Security. I know that because they wrote and told me so, in no uncertain terms. The subject, they say, is too political. It turns me into a political writer and they don't like that.

Well, I can understand the political part. In an ideal world you and I would save and invest without a thought of politics. We'd look for the best investments. We'd make estimates of risk and return. We'd diversify in the hope of avoiding periods where everything we owned was sinking in value.

Describing a topic as political is a good way to foreclose dealing with the real world. Conservatives, for instance, wrote and dismissed Social Security as a "Ponzi scheme," doomed to disaster. To them, it's just an excuse to say, "I told you so." Liberals take the opposite view. For them, Social Security is an eternal verity. It must never be changed. Messing with it, they say, is misguided, insensitive, and cruel.

Whatever your political persuasion, however, Social Security and Medicare will both have to be changed because they are running into the raw force of demography. We are living longer. We are having fewer children. We are living longer because of our success as a society. We could eliminate the entire problem by the simple expedient of reducing our life expectancy--- but there is a shortage of volunteers. Neither political party is about to propose compulsory pillow smothering at age 75.

The combination of rising life expectancy and lower birth rates will put a massive burden on workers who are now middle aged and younger. While we'll see the most dramatic changes over the next 30 years as the boomers retire, the demographic shift will continue to the end of this century. This is about all of us, regardless of party affiliation. We simply have to deal with it.

  Like it or not, politics is part of personal investing. Like it or not, Social Security is part of financial planning. The reason for this is simple. Politics is about who pays how much in taxes and how those taxes are distributed as spending or benefits. Taxes affect the value of the assets we own. Here are four examples:

Stocks became better investments when the tax rate on dividends and capital gains was reduced to 15 percent. The net return on some stock dividends then rivaled the net return on some bonds because interest income could be taxed as high as 35 percent.

Many workers may find that their 401k plan accumulations are worth less than they thought because their withdrawals will trigger the taxation of Social Security benefits as well as the 401k money withdrawn.

When the tax rate on corporate dividends and capital gains was reduced to 15 percent it immediately reduced the value of investing in a tax deferred variable annuity that invested in stocks because withdrawals from a variable annuity are taxed at income tax rates as high as 35 percent.

Personal real estate has been in a major bull market for years because we can now realize up to $500,000 of capital gains on a personal residence and have no taxes to pay.

We must pay attention to what the politicians do because every time they fiddle with the tax code they change the value of our assets.

One of those assets is a virtual asset, our expected Social Security benefits. Since 1935 American workers have been paying an insurance premium, called the payroll tax, in the expectation of future benefits. Over time the tax rate (premium) has been increased. So have the promised benefits. The payroll tax, only 6 percent in 1960 when those now retiring began working, is now 15.3 percent. That's large enough to reduce the amount most workers can save on their own for retirement. Basically, the payroll tax is "crowding out" personal saving.

Social Security plays a bigger role in retirement than private savings for all but the most affluent households. The 2004 RETIRE Project Report from Georgia State University, for instance, indicates that a single earner household will need to have a final salary level of nearly $70,000 before personal savings would need to replace a larger portion of income than Social Security. Its figures show that a $70,000 household needs to replace 80 percent of pre-retirement income and that Social Security will replace 39 percent, leaving 41 percent from personal savings. (See table below)

In fact, Social Security is much more important than that because many households fail to save or don't save enough. According to Social Security Administration figures, about 65 percent of all people 65 or older get at least half of their income from Social Security.

You can get an idea of how far "off" many households are by examining the "required nest egg" figure in the table:   required savings are well over typical 401k plan balances, even for long term workers.

Estimating Your Retirement Nest Egg Requirement
These figures are for a couple with a 65 year old earner and 62-year-old non-earning spouse. Both the replacement rate and Social Security benefits will be somewhat different for two earner couples or singles.
Salary Level Replacement % Social Security % Percent from Savings $ Income from Savings Required Nest Egg
$30,000 84% 56% 28% $8,535 $ 213,375
$40,000 81 51 30 11,930      298,250
$50,000 79 48 31 15,425      385,625
$60,000 79 43 36 21,537      538,425
$70,000 80 39 41 28,678      716,950
$80,000 81 35 46 36,804      920,100
$90,000 82 33 49 44,412 1,110,300
Source: 2004 GSU/Aon RETIRE Project Report, Scott Burns calculations

Living too long is a wonderful "problem" to have. But financing our success at longevity is going to take patience, compassion, and skill.

Tuesday: A Look at the 'Worst Case Scenario'

On the web: Earlier columns about the Georgia State Retirement Income Study

June 13, 2004: A Nest Egg that Won't Crack Easily

April 30, 2002: Riley's Life Is Cheaper for Retirees

February 18, 2003: Don't Get Caught in the Early Retirement Tax Trap

February 22, 2004: Singled Out of Benefits