Do Social Security Benefits Qualify As An Asset
Mini Case Study Instructions
A new client for your firm is Sam Jones who is preparing personal financial statements for a bank loan. Mr. Jones is attempting to list his social security benefits to be received based on his future life expectancy as an asset on his financial statements. Mr. Jones states that such benefits meet the definition of an asset. Would you agree to allow the social security benefits to be listed as an asset?
Would you agree to allow the social security benefits to be listed as an asset? – Sample Answer
The social security program is an agreement between employees and employers that they would contribute towards a fund that would provide them basic income when they are no longer part of the workforce. It ensures that workers continue to have basic income that enables them to lead respectable lives even after disability or old age or their death does not make their families destitute. FASB 106 requires companies to record their unfunded retiree health benefits in their financial statements. Despite the fact that social security benefits provide people with a steady source of income, it should not be considered as an asset when calculating for a loan (Kotlikoff & Smith, 2008). Therefore, it would be wrong for Sam Jones to consider his future social security benefit as an asset when calculating for a loan from a bank.
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First and foremost, social security benefit cannot be part of an individual’s portfolio. A portfolio refers to a financial asset. A financial asset is anything that can be bought or sold. However, social security benefit cannot be bought or sold. This implies that its market value is zero. Nonetheless, this does not imply that social security is worthless. Indeed, it very valuable despite the fact that it is not an asset.
As such, if Sam Jones has investment worth $500,000, then that would be size of his portfolio. If after calculating the social security benefit based from his life expectancy, Jones determines that they are worth $200,000, his portfolio does not increase automatically when he receives his first social security check. It is vital for Jones to ensure that he does not confuse asset and income. Doing so would make him make mistake on how to manage his finances. It is impossible to for Jones to know the real value of his social security benefits unless he is on his death, which is not the case.
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Despite the fact that Jones should not treat his social security benefits as an asset, there is a correct way that he may use to treat in his retirement planning. He should first determine what would be his cost of living in retirement. He should then determine his expected income in retirement. This would comprise of social security benefits and other sources of income. Determining the difference between the two values would enable Jones to determine the amount he would need from his investment portfolio.Order Unique Answer Now