What’s Social Security and Why Does It Matter?

 SS is a government benefit covered by payroll withholdings, but according to some radio programs, it is headed for bankruptcy due to under-funding and politics. It sounds very unfair to have to pay into a program that won’t exist at the time of eligibility, and since a chunk of most paychecks goes towards SS, it is a biggie. What’s the deal with Social Security? Will it be around decades from now?

SS is actually a big deal

Most people are so busy working that they don’t take the time to learn about their payroll deductions, but SS is too big to ignore. During the Great Depression, many people were left destitute, and President Franklin D. Roosevelt signed into law (among others) to prevent poverty among the elderly, widowed, and disabled. Since its modest beginnings in 1935, SS has mushroomed into a financial support system for over 60 million Americans. It’s also currently the most significant expense for the Federal government, costing over $1.25 trillion annually, or about 25% of the entire Federal budget. It’s nice to help poor people, but someone has to pay that enormous bill. That’s where your paycheck comes in.

All workers pay and become eligible

Every working American helps foot the bill for SS. If your paycheck is smaller than anticipated, that’s because it was reduced by (among other things) Federal Insurance Contribution Act (FICA) withholdings. Currently, 6.2% of all salaries (up to $132,000 in 2019) is deducted directly from employee paychecks for SS, and employers are obligated to match that amount for a total contribution of 12.4%. Those who are self-employed pay the full 12.4% SS tax themselves. While this is a hefty tax, SS payroll deductions are what entitle people to future benefits. Unlike other government programs, all workers (or their spouses and guardians) pay into SS and become eligible for benefits down the road. And, up to a point, the more you put into SS (because of higher salaries and more years of work), the more significant the future retirement or disability payout.

Average monthly SS benefits

The average SS retirement benefit today is about $1,500 monthly, but those who’ve earned above-average salaries can currently receive approximately double that. Although $18,000–$36,000 a year isn’t very much, SS represents a significant percentage of retirees’ incomes. Because it’s guaranteed, inflation-protected, and lightly taxed (for those with lower incomes), SS goes a long way to minimize poverty- the program’s original intent. The SS administration has online calculators that people can use to estimate their future benefits: for example, due to expected inflation rises, a 40-year-old with a $90,000 salary in 2019 can expect to retire (at age 65) with $5,700 in monthly retirement benefits. Knowing that there is a tangible future retirement benefit growing helps minimize the sting of the current SS deductions.

SS is worth $650,000

One can better appreciate the financial value of SS benefits by comparing it with a similar benefit purchased through an annuity contract from an insurance company: to secure a monthly annuity payment of $2,400, growing with inflation and guaranteed for a 65-year-old couple’s life, an insurance company would demand an upfront payment of approximately $650,000. Clearly, SS benefits are very valuable—on the assumption that the Federal government’s long-term promises will be kept. Many on the political right, however, question the wisdom and ability of the Federal government to keep costly benefit programs going, and this vocal skepticism shakes the public’s confidence in this popular insurance system.

The political certainty of SS

However, SS’s vast popularity and broad eligibility is the reason it’s almost certainly not going away: the tens of millions of current and future beneficiaries are voters who won’t allow their monetary lifelines to be removed. Unlike needs-based government programs (which are funded by some to benefit others), SS deductions are made with a promise of a future benefit in exchange. History has shown that stripping away SS benefits, which much of the country spent decades paying for, is politically impossible. While program reform is necessary for the country’s fiscal well-being, government officials, left or right, will almost certainly tweak SS here and there while keeping its core promises intact. No one appreciates it when the government slices their paycheck, but decades later, they are thrilled to get their monthly checks.

Just by the way: get advice before claiming SS

As with all things governmental, SS benefit calculations are mind-numbing. While accruing SS credits is automatic, when the time comes to claim SS benefits, decisions must be made, and they can get very complicated. For example, currently, the regular retirement age for SS purposes is 65, but benefits become available to early retirees at age 62. It may be necessary to start drawing early retirement assistance (especially for those with limited savings or poor health,) but doing so reduces the amounts received permanently by some 30%. On the other hand, delaying SS retirement checks until age 70 increases their value over standard calculations by over 30%. (The payout of an early withdrawal is almost half of a late withdrawal’s: 70% versus 130% of age-65 benefits). While most are eager to begin getting a payoff on the benefits they’ve paid dearly for, it’s often a terrible financial move to start receiving their checks early. There are also many complicated rules related to spousal benefits. All people in their 60’s should consult with an SS expert (not me, by the way) to decide on a plan of action that maximizes their benefits based on their needs and circumstances.

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