What is Social Security?
The Social Security Act was signed into law by President Franklin D. Roosevelt in 1935. It created “a system of Federal old-age benefits” for taxpaying workers and their families. In 1956, the law was amended to also provide disability benefits, but we’re just going to cover the “Old-Age and Survivor’s Insurance” portion.
The basic idea behind Social Security is that after you, the taxpayer, pay into the social security fund through taxes for your entire working life. At the age of 65 you can begin to receive social security benefits. These benefits include: a monthly social security benefit, and discounted medical insurance coverage, split into separate “parts” for hospital, other medical, “premium” medical, and prescription drug coverage.
The taxes get put into a “trust fund,” which the Social Security Administration then pulls its funding from. The fund is managed by the Treasury Department, which pays interest on the fund as well, allowing for the amount of people who benefit from Social Security to grow as the country grows. Pretty clever!
You pay taxes, as an employee (the FICA tax) or as a self-employed person (the SECA tax), into the Social Security and Medicare funds. Your employer also pays FICA taxes, as well as a payroll tax. So every worker and employer is taxed to pay for Social Security and Medicare.
As part of the Tax Relief Act of 2010, the payroll tax was reduced for two years. However, as of 2013, the payroll tax has been reset to its former 6.2% rate. So basically, when everyone’s paychecks were a little smaller this past January, this increase was a part of that.
How much can I get when I retire?
Monthly benefits pay about 40 percent of an average wage earner’s income after retiring. Most financial experts, as quoted by the Social Security Administration, say retirees will need 70 percent or more of pre-retirement earnings to live comfortably. Unfortunately, the program was never meant to be the main source of income for seniors.
The SSA tells every participant in the program, “Social Security is the largest source of income for most elderly Americans today, but Social Security was never intended to be your only source of income when you retire. You also will need other savings, investments, pensions or retirement accounts to make sure you have enough money to live comfortably when you retire.”
So, you won’t get very much.
When can I get it?
You can begin receiving Social Security benefits at 62, but most people can’t receive full benefits until 67, and you are penalized for taking payments early. For example, if your full retirement age is 66 and you sign up for Social Security when you are 62, you would only get 75 percent of your full benefit. If your spouse dies, you may be eligible to receive benefits from their work.
Should I be worried?
There are several reasons that many politicians, economists, and experts are worried about our Social Security program.
1) It has a history of breaking promises. When it the program started, the program promised “And finally, beginning in 1949, 12 years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.” Accounting for inflation, in 2013 the maximum payroll tax collection per person was eight times what was orginially promised.
2) In its current state, the program cannot pay for itself much longer. And there is no foreseeable way to make the program viable without either cutting benefits (which some say is political suicide) or raising taxes.
|2010–2012||Social Security spends more than it collects in taxes and transfers from the Treasury, but the Trust Fund grows because the interest it collects from the Treasury exceeds the program’s shortfalls.|
|2013-2033||The Trust Fund declines in value every year. The federal government pays back the money that the Social Security program has loaned to it with interest, and the Trust Fund is depleted.|
|2033-2086||The Social Security program runs annual deficits that accumulate to $65 trillion, which could be covered by (a) adding $8.6 trillion to the Trust Fund today, or (b) increasing payroll taxes by 33% starting in 2033, rising to a 36% increase by 2086, or (c) reducing benefits by 24% starting in 2033, rising to a 25% reduction by 2086.|
|2087 and beyond||The Social Security Program runs deficits that could be covered by adding $11.9 trillion to the Trust Fund today.|
– Table from Justfacts.org
by Greg Bennett