Q: A recent column of yours answered an important question about Social Security. The annual statements regarding retirement payments are in constant dollars. Another question not addressed in those statements is: How does the amount of future earnings (and Social Security tax contributions) affect my projected monthly benefits?

My statement says I am already qualified. It also says that if I retire at the full retirement age of 66, I will receive $1,926 a month. It also says, in calculating those benefits, "For 2006 and later (up to retirement age), we assumed you'll continue to work and make about the same as you did in 2004 and 2005."

I have become self-employed as a form of semi-retirement. I don't pay anything near the maximum amount (based on $94,200 in earnings) in Social Security taxes now, as I did when I worked for corporations.

Am I at risk of having my future Social Security retirement benefit reduced because I make substantially less now and in the future than I did earlier in my career? -- A.M., via e-mail

A: If you suffer a reduction, it will probably be modest because of the way Social Security benefits are calculated. Social Security isn't a genuine retirement program that provides benefits in direct proportion to the amount of taxes received. It is a program to provide some level of retirement income to all workers. Benefits are disproportionately greater for lower-wage workers.

If you visit www.ssa.gov/OACT/COLA/piaformula.html, you can read about how benefits are calculated. Workers receive three levels of crediting for their wages:
  • Monthly wages below $680 (for 2007) are credited at 90 percent.
  • Monthly wages over $680 but below $4,100 are credited at 32 percent.
  • And monthly wages over $4,100 a month are credited at only 15 percent.
So wages over $4,100 a month increase your benefits one-sixth as much as wages under $680 a month.

This formula is the reason lower-wage workers can expect to see a relatively large part of their earnings replaced at retirement. Minimum-wage workers, for instance, can expect to receive about 60 percent of their work earnings in retirement, average workers can expect about 42 percent, and highest-wage earners (those at the $94,200 wage base cap for 2006) can expect about 27 percent. (A table of estimated future values is in the 2006 Social Security Trustees Report at www.ssa.gov/OACT/TR/TR06/VI_OASDHI_dollars.html#wp120186.)

In effect, the Social Security benefits formula is a steeply graduated tax on retirement contributions. The greater your wages, the smaller the benefit you will receive back for each dollar of employment tax payment.

For you, this means a period of lower earnings won't have as large an effect on your future benefit as you would think.   

Q: I recently bought several exchange-traded funds --this after having owned mutual funds for some time.

Mutual funds are valued at the end of the day at the net asset value of the equities owned by the fund. My question: Is the value an ETF is listed at and trades at related to the value of the equities held by the fund? Or is it a value that buyers and sellers agree to make a trade of the fund shares at that is otherwise independent of the value of the equities held by the fund? -- B.J., via e-mail

A: Exchange-traded funds, like closed-end funds, may trade at a discount or premium to the underlying value of the fund portfolio. Unlike closed-end funds, however, the discounts or premiums tend to be quite small for a number of reasons. Recently, for instance, the pricing of the iShares S&P 500 index ETF had ranged from a 0.20 percent premium to a 0.30 percent discount.

Premiums and discounts may become a material issue as the number and variety of ETFs increases, but the major ETFs (as opposed to the obscure ones) enjoy robust trading and tight pricing.