Everything You Need to Know About Social Security

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If you pay taxes and plan to retire in your golden years, you should probably know a thing or two about social security. No doubt you’ve heard about it, maybe in the context of politicians shouting about how to fix it. But why is it even broken and what exactly is the meaning? We have your answers right here.

What is Social Security?

In the United States, Social Security is a government benefit for three main groups of people: retirees, families of disabled or deceased workers, and people with disabilities.

When you receive your paycheck, you probably noticed that a small amount of money goes into an account called FICA. This is a Federal Insurance Contribution Act tax that funds social security. Your money goes into the pot, and current Social Security recipients (your grandparents perhaps?) Receive money from this bank. When it’s time for you to retire, your benefits will come from the same basket that will be funded by future tax-paying generations (maybe your grandchildren!)

The bank consists of two different trust funds: the old age and survivor’s insurance fund (OASI) and the disability insurance trust (DI). When the money that goes into the bank exceeds the amount they have to distribute, the Social Security Administration (SSA) has a surplus. This money earns interest, just like you could save extra money at the bank . Meanwhile, the government is allowed to use this money in the same way that your bank can use your savings for loans.

What happens when you are eligible to participate

When you turn 60, you will probably start thinking about retirement. This means applying for social security as your source of retirement income. I hope this is not your only source. Ideally, you will save money over the years to fund your retirement – whether through an employer-sponsored 401 (k) plan or an individual retirement account . You can also receive a pension.

But Social Security can be a useful addition to your retirement income. The maximum Social Security benefit is $ 2,663, which is not much and most people are entitled to even less. How much money you are actually right for will depend on several different factors:

  • Your Age : You can start getting Social Security as early as 62, but the actual “full retirement age” is 65 (or older, you cancheck your own retirement age here ). If you retire before that time, your monthly benefit can be reduced by up to 25% for the rest of your life. It makes sense because you get money earlier – which means it’s the same amount, only reduced, because it is spread over a slightly longer period. Likewise, if you retire after reaching full retirement age, you can get 8 percent more before age 70.
  • Your salary for several years. The Social Security Administration spends 35 years of your highest income to calculate what is calledAverage Indexed Monthly Earnings (AIME). From there, they use a formula based on that number to decide how much you will be paid.
  • Did you work for the government: If you worked for the government and received a pension, SSA uses a different formula to calculate your benefit.

SSA has a useful calculator to help you estimate your retirement benefits. You can also get an estimate of future earnings by registering on the My Social Security website.

Here are the average monthly Social Security benefits as of July 2015, according to the SSA :

  • $ 1,336 a month for retirees;
  • $ 1,282 per month for widows or widowers over 60;
  • $ 1,165 per month for disabled people;
  • $ 1,979 per month for a disabled worker, spouse, and one or more young children;
  • $ 2,631 a month for a widowed mother and two children.

If you are ready to start receiving payments, be it retirement benefits, disability benefits, or survivor benefits, you can start by calling SSA, visiting an office, or applying online. SSA offers some pretty simple instructions here .

The real problem with social security

You’ve probably heard that Social Security is doomed and in the next couple of decades we will run out of Social Security money entirely and you will lose your benefits. In fact, this is not true . However, this does not mean that things are completely rosy.

Another common misconception is that the government continues to borrow money from the social security fund, which is why we run out of money. This is not a problem either.

The problem is simple: we have more going out of social security than coming in.

In theory, Social Security is a great idea: you pay taxes now to secure your retirement later. The problem is that in practice it doesn’t work that clearly, because the money you pay goes to a completely different generation – it doesn’t go back directly to you. The baby boomer generation is now retiring, which means that we have a lot of retirees and therefore we pay a lot of money into social security. At the same time, we have fewer workers who pay taxes and fund social security. So we have less money in than out: Investopedia calls this a declining employee-to-beneficiary ratio. This is not a problem at this second, because we have surpluses, but they are running out.

When you hear the news that social security funds are “dwindling,” that doesn’t mean that welfare itself is crumbling and the sky is falling. It just means that we will run out of extra money – money in the piggy bank, if you like. People still pay social security taxes, so we still have money. But that’s not enough, so if we stick to the course that social security is taking, future generations won’t get that much money.

For example, by next year it is planned to exhaust the piggy bank of disability insurance. According to SSA :

Trustees continue to forecast a depletion of the Disability Social Security (DI) Trust Fund at the end of 2016 if legislators do not take action. This looming DI funding gap, which threatens beneficiaries with sudden and significant benefit cuts, is just the first manifestation of a larger financial imbalance facing Social Security as a whole, as well as Medicare.

When this fund is empty, incoming taxes will only cover about 81 percent of the people who are scheduled to receive payments. And you can not just not pay the full percentage of people, so to solve the problem of SSA have automatically cut disability benefits for all of 19 percent.

And that’s just a disability. The rest of the Social Security piggy bank is expected to be empty by 2034 . This does not mean that they will stop paying benefits, but it does mean that everyone will receive less. According to Motley Fool, if we stick to this course, we can probably expect about 20% reductions:

If Congress is unable to come to a long-term solution that includes an increase in ancillary revenue and / or cost cuts, benefits for eligible beneficiaries will be reduced by 23%. This is a big problem, and it worries the elderly and retirees.

Given that most retirees receive half or more of their income from social security, this is a huge amount to contend with.

What does the government do about it

Politicians have all sorts of ideas on how to fix social security, but they all boil down to either increasing taxes or cutting benefits. You can look at OnTheIssues to see what level a particular policy is at, but most ideas fall into one of these two broad categories.

There is currently a limit to which taxpayers must pay social security taxes. In 2015, the maximum taxable income is $ 118,500 , which means that if you earn more, you will only be taxed on the first $ 118,500. Many politicians talk about raising this amount, but the Social Security Modernization Commission wants to get rid of the restriction altogether. Fellow Maya Rokeimour tells Bankrate that while most of us have seen fairly steady wage growth over the past few years, the incomes of the richest two percent of taxpayers have skyrocketed. If the cap were lifted entirely, high-wage workers would be more taxed on social security.

On the other hand, the retirement age can be raised. This will still reduce the full benefit amount as you are postponing retirement, but it does not require a tax increase. We are already on track to raise the retirement age for future generations to 67 by 2027. One group, the Business Roundtable, wants to raise the retirement age even further to 70 years .

How to make sure you have enough money for retirement

You will still receive some social security money, but whether it is enough to fund your pension is another matter entirely. Payments are averaging around $ 1,300 a month right now, so even if that number doesn’t drop, you’re unlikely to be living in Paris on Social Security checks alone.

It is best to secure your retirement with your personal savings. Easier said than done, but safer than trusting politicians to figure it out. The more you save (and the sooner you start!), The better it will be. To get started, you need:

In short, the sky does not necessarily fall, and Social Security will not completely disappear by the time younger generations retire. But we can get not as much money as we expect, so it helps to understand what the problem really is, how it is being solved, and in the meantime, do everything possible to increase our own savings.

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