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Social security debate may mean you need to rethink retirement plan

Have we been given a glimpse of the future? The recent debate over ways to keep social security financially afloat and the apparent resolution reached by a bipartisan commission has shown how much political tugging and hauling can take place over this issue.

Although severe cuts are probably politically impossible, the recent compromise by the National Commission on Social Security Reform does contain some firsts, including the first taxing of social security benefits (when an individual's adjusted gross income reaches $20,000) and a deferral of cost-of-living increases.

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These changes should make anyone who ever considered social security to be adequate as a sole source of retirement income - even when joined with a company pension - think again. Social security was never meant to be the complete retirement system, merely an attempt to guarantee that older Americans would not be penniless. And, in the current recession, several financially troubled companies have turned to the Pension Benefit Guaranty Corporation, another federally sponsored system, to help them with their pension-funding problems.

Looking at these developments, people who have not done so already should start thinking seriously about ways to start savings plans of their own to supplement government and company pensions.

In recent years, Congress has given Americans several ways to put money in retirement plans, take those deposits off their adjusted gross incomes on their taxes, and watch interest in the accounts grow tax-free until retirement.

The most widely publicized of these is the individual retirement account (IRA). It deserves the publicity. Anyone who is working for a salary or wages can and should open one, unless his employer has a tax-sheltered savings plan that can beat it. IRAs can be opened at banks, savings and loans, brokerage firms, insurance companies, and credit unions.

At some of these places, deposits can be as small as $50. So there is no need to worry about the $2,000 figure; it is a maximum annual individual contribution , not a minimum.

Lately, with yields on some IRA investments changing rapidly, many people are trying to spread the risk, putting some IRA money in a bank, some with an insurance company, the rest in a mutual fund.

The annuity is another good retirement savings vehicle. At one time, these came almost exclusively from insurance companies. Their return often was not much better than you could get from a passbook account, but the interest was tax-deferred until retirement.

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Today, the interest is still tax-deferred, but thanks to competition, many insurance companies are paying much better interest. Even better, annuities are also available from mutual funds that have found a way to work with insurance companies to offer a product that uses the funds' investing expertise and the insurance products' tax-sheltered status. These annuities are particularly good for people who can afford more than the $2,000 IRA maximum.

Another employer-sponsored savings plan is available to a much wider segment of the working population. This is the so-called ''salary reduction plan,'' which many people think is better than an IRA. Workers can put about 10 percent of their salaries into company profit-sharing or savings plans, and for tax purposes, the money is treated as a form of company contribution to a thrift plan, which means lower federal and social security taxes. The employer also has to pay less in social security taxes.

It has been proposed, however, that social security taxes be taken out of salary-reduction-plan contributions to help the system's finances. The idea is expected to be debated in the current Congress.

One thing all these retirement savings plans have in common is that they are easy to start, and money can usually be moved from one investment to another without penalty, as long as it stays in a retirement fund. With the tax breaks built into them, there is little excuse not to do something to let you worry a little less about social security and to make the glimpse into your future a little more pleasant.

If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.m

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