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I'm currently tracking all my finances with GNUCash, and splitting the various paycheck deductions into expenses. It's pretty nice to be able to correctly predict what will be on my W2, and it's even better to be able to calculate net worth.

But I'm unsure of how to account for future social security benefits. I'm currently just marking the deductions as expenses, but this is understating the present value of (distant) future income. Any ideas on valuing SS as an (illiquid) asset?

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Social Security isn't an annuity contribution. Without factoring in the doom & gloom or other considerations re Social Security, it should be recorded as a tax for accounting purposes, and you shouldn't attempt to infer some present value.

Once you work a certain number of quarters or years, you're entitled to a benefit set by law. Whether it goes up, goes down, or stays the same, your contributions don't have the same impact that a pension contribution or 401k contribute would have.

For retirement planning purposes, I would consider the benefits that are described in your annual social security statement as an "income floor" or a defined benefit pension starting at age 62. Regardless of the current state of the system, there will always be some sort of old-age pension scheme available in a civilized society.

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  • "your contributions don't have the same impact" But those benefits are based on earnings history, which also determines contributions. – jldugger Jul 20 '11 at 22:41
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    It is, but your earnings history is plugged into a formula. There is no compounding. – duffbeer703 Jul 21 '11 at 1:02
  • That's the same with my actual pension. The formulas are just written to factor it in among a myriad of other costs and incomes. – jldugger Jul 21 '11 at 16:08
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You can start by going to the Social Security web site and by putting in your current info you can get a forecast of the benefit you should plan on. Say it tells you that at 67, your benefit is $30K/yr. If nothing else, you can see that based on the 4% rule, it would take $750K saved in a retirement account to give you $30K/yr. This is bit off as Social Security doesn't leave an inheritance for your heirs. So it may be better to use a 6% discount rate of an immediate annuity. A $500K age 66 value you can then discount to present using an appropriate rate. The future benefit is based on your highest 35 years of earnings, so once you have that present value, you should scale it back by years worked. It wouldn't made sense to drop this lump sum into your current net worth.

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Personally I don't think Social Security will be around by the time I am old enough to collect. So I count my contributions as a tax. And there is no asset. Which is also true of the Social Security Trust fund. No assets.

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  • Even the worst case analysis I've seen suggests SS is solvent if we cut it by 25 percent... – jldugger Aug 28 '11 at 19:24
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Get Rich Slowly has a guest post that suggests that the size of Social Security's problem is only 25 percent of total payments. That is, if SS benefits were cut by 25 percent, they'd be long term solvent. These cuts, while drastic, are not the 'end of social security.'

So, a standard present value analysis makes sense, so long as you apply the 25 percent discount. Maybe 35 if you're in a high income bracket and expect to be means tested.

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