How Do Social Security Retirement Benefits Work
As you pay your Social Security taxes over the years, you accumulate credits that can be used towards your Social Security benefits. The number of credits you need before you can apply for your retirement benefits depends on your date of birth. For example, people born after 1929 currently need 40 credits to apply for their benefits. This is equivalent to ten years of work. You can’t receive benefits if you stop working before you reach the required number of credits, but you don’t lose those credits either. When you return to the workforce, your credits will begin accumulating again from the point at which you left off, until you have enough to qualify.
You can begin gauging what your retirement benefits might look like by carefully reviewing your Social Security Statement. You can view your statement online at www.ssa.gov/mystatement/. Social Security sends out printed statements every five years to those not receiving benefits, and every year to those over 60. For information on reviewing your statement, see Nolo’s article Social Security: Checking Your Earnings and Benefits.
But Wait I Funded These Programs With Taxes This Is My Money
Yes and no.
Yes, you paid into the program, but Social Security is not a retirement savings program. Its more like a pension. The people paying in now through payroll taxes are paying for todays retirees. When you retire, younger workers will be paying it forward for you.
And, in fact, you probably have paid less in taxes than you are going to get out in benefits. According to a 2020 report from the Urban Institute:
- A single male who retired in 2020 with a high earning history will have, on average, paid a total of $629,000 in taxes to Social Security and Medicare and is expected to get $678,000 in lifetime benefits.
- A married couple who retired in 2020 with one higher earner and one average earning history will have, on average, paid a total of $1,021,000 in taxes to Social Security and Medicare and is expected to get $1,358,000 in benefits.
Of course, the above analysis ignores the time value of money and lost opportunity cost. Social Security contributions are put into the fund over decades, not all at once. Funding Social Security this way takes the risk away from accumulating benefits, but it also hampers growth opportunities.
Life Expectancy: A Closer Look Shows Why Raising The Retirement Age Is Not An Acceptable Policy Option
A number of people, including members of the National Commission on Fiscal Responsibility and Reform appointed by President Obama and Congress , have suggested that Social Securitys normal retirement age should increase because of rising life expectancy . As just shown, longevity improvements are often offset by growth in the covered workforce and other factors. But even without offsetting factors, tying the retirement age to life expectancy would be overkill since it would freeze the years of covered retirement while the number of working years would continue to rise indefinitely. Meanwhile, it would not do much to improve the systems shorter-term finances.
Moreover, increasing the retirement age would affect all workers, including those who have not seen improvements in life expectancy. A number of studies have documented that in recent decades these improvements have been concentrated among those with higher incomes and more education, especially men .
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Social Security Trust Fund Is Running Out
Old-Age, Survivors, and Disability Insurance , more commonly referred to as Social Security, is a program intended to provide assistance to retirees and disabled individuals. It was initially intended to be paid for via a payroll tax, but the portion of Social Securitys funding coming from this source has decreased. In 1957, 93 percent of all OASDI revenue came from the payroll tax, yet by 2017 this had fallen to 88 percent. The remainder is collected in the form of taxed benefits, reimbursements from the general fund, and interest on investments.
How Can I Increase My Benefit
Although there’s nothing you can do to revise your earnings history, there are other steps you can take to boost your Social Security payouts.
- Work longer: If you don’t yet have 35 years of income history, every additional year you work replaces a zero-income year. And if you’re currently earning your peak income, every additional year you work could replace a year in which your earnings were lower.
- Wait to collect: Although you can start collecting Social Security as early as age 62, waiting to collect will boost your monthly check. Receiving your benefits before full retirement agewhich is between 66 and 67, depending on your birth yearwill reduce your payment between 5% and 7% each year. If you can afford to wait, every year you delay past retirement age will increase your annual payout about 8% until age 70, when the benefit increases stop. You’ll receive from 24% to 32% more than if you had begun collecting at your full retirement ageand roughly 76% more than if you had begun collecting at 62.
Of course, it’s not always possible to work longer or wait to collect. Those in poor health or who need the income to make ends meet, for example, might decide to take Social Security as soon as possible.
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Ways To Balance Social Securitys Budget
Even though Social Security isnt expected to run out of money until 2034-35, several options for changes have already been floated to deal with the budget shortfall. These options include:
- Raising the payroll tax rate
- Increasing the wages subject to Social Security taxes
- Raising the full retirement age
- Reducing the annual cost-of-living adjustments
- Cutting benefits
Read on to learn more about the details of each of those proposals and how they would affect Social Security if implemented.
What Is The Social Security Trust Fund
The Social Security trust fund is an account where extra funds for Social Security are placed. According to Investopedia, this account invests these surplus funds with the goal of making them grow. While the Social Security trust fund has been a valuable asset in years past, it is running out of funds sooner than expected.
The COVID-19 pandemic has had a significant impact on the worlds economy, and Social Security is no exception. With fewer payroll taxes coming in, the program has had to pull more from this fund. As a result, according to The Motley Fool, the fund will be insolvent in 2034.
Whats Really Going To Happen When Social Security Runs Out Of Money
Originally published on McLeanAM.com
I just read through the 257-page, 2015 edition of the annual social security trustees report. Ok, maybe not the whole report. I skimmed over somemost all of the boring parts. But I did actually read the first 24 pages the Overview which is where all the important stuff is anyway.
As a public service for those of you struggling with insomnia, heres the full report in all its actuarial glory. But for those of you who dont wish to subject your brain to numerous sentences like this one: A third approach uses stochastic simulations that reflect randomly assigned annual values for each parameter , Ive summarized the results below in actual English and added a section on how we think this could play out.
How Did We Get Here?
Its a bit of a perfect storm for the Old-Age Survivors and Disability Insurance trust fund. Baby boomers retiring en masse means larger expenses for the fund. Fewer babies per family results in a smaller pool of workers to support those who require benefits. Increased disability claims and the great recession just add to the fun.
So Doctor, How Much Time Does She Have?
What Happens When The Money Runs Out?
Should I Assume Social Security Will Be Gone When I Retire?
What Would It Take to Fix It?
Hows It Going to Play Out?
Congress has multiple tools at its disposal:
How Do I Plan For Future Changes?
Actuarial Status And Budget Scoring
The requirements in the law for the annual report of the Social Security Board of Trustees are specific on the nature of the analysis that is desired. Although the OASDI program is highly dependent on the trust fund assets for solvency, and these assets are held in Treasury securities, the assessment of the actuarial status of the program is separate from direct consideration of implications for the federal government budget.
An additional important distinction in trust fund versus budget scoring is the assumption about current law. In the trustees report, careful distinction is made between the cost of the programreflecting scheduled benefits, and the actual expendituresreflecting the benefits that would be payable subject to the limits imposed by the inability of the trust funds to borrow. If the trust funds ever become exhausted, expenditures thereafter would be limited to the amount of continuing tax income. It is projected in the 2009 Trustees Report that only 76 percent of scheduled benefits would be payable and could be paid at the time the trust fund is exhausted in 2037. This limitation not only places an absolute braking force on the spending that is possible by the OASDI program, but also forces Congressional action before exhaustion of the funds.
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Enjoy The Social Security Bump Now Youll Pay Later
Social Security is known as the third rail of politics. President Joe Biden has pounced on all who dare even think about curtailing the retirement program. In fact, this week cash-strapped retirees will get the biggest cost-of-living increase in 40 years, an 8.7% boost to protect them from inflation.
For many retirees on fixed incomes, thats a godsend. Some Republicans are considering reforming the program, an idea that could be political suicide. Its also the right thing to do.
The Social Security trust fund is expected to run out of money in 2035. At that point, taxes taken in will cover only 80% of the benefits paid out each month. If nothing is done, that could mean Social Security recipients are in store for a 20% benefit cut. Recent inflation may speed up this time frame. Benefits are indexed to inflation and the tax revenue that covers the benefit increases is based on wages. If wages rise more than inflation, then Social Security stays on track. But in the last year inflation has risen more than wages, which could hasten Social Securitys shortfall date.
Already, many Americans think they cant rely on Social Security. In 2019, 42% of those polled expect no benefits at all by the time they retire. This suggests some serious cognitive dissonance. Many Americans know they need Social Security and are worried it wont be there for them, but most also oppose reform.
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What Can Congress Do About Social Security’s Funding Issue
Munnell notes that there are two ways for Congress to solve the current long-term funding issue. The Social Security administration can either cut benefits for people or increase tax revenue.
Cutting benefits could mean reducing benefits for everyone or increasing the full retirement age again. Congress could also pass legislation that would increase tax revenue for the Social Security administration by raising the payroll tax rate or by increasing the Social Security payroll tax income limit from $147,000.
The last time Social Security faced a reserve deficit was 1983. The solvency issue was resolved through bipartisan legislation that, among other changes, increased the full retirement age from 65 to 67 over time and charged income tax on Social Security benefits
Recently, House Democrats introduced the Social Security 2100 Act which would increase Social Security benefits for low-income workers, change the price index the cost-of-living-adjustment is tied to and reapply the payroll tax rate to individuals making more than $400,000.
Since legislation regarding Social Security cannot be passed through reconciliation , any legislation would require support from both Democrats and Republicans, says Romig.
“All we need is political will and that is something in scarce supply, even in the best of times. 2034 to a congressperson is a long time away So there’s no incentive on the part of the people in Congress to solve this problem before it is imminent,” says Munnell.
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Addressing The Social Security Problem
In places like the United Kingdom, governments have begun to prefund their Social Security plans. In the United States, prefunding is being considered, and so are other solutions like infusions from general revenue and increases to payroll tax.
Social Security is seen as too important of a safety net for millions of American workers to risk losing. If small changes to the Social Security system are made now, they’ll go a long way toward ensuring that drastic measures don’t become necessary in the future.
What Would Happen
As the trust fund reserves dwindle down, the payroll tax would need to increase enough to sustain the program. If nothing is done until 2034 or 2035, that increase would need to be sharper.
However, Roseman doesnt expect Congress to raise the payroll tax to boost trust fund reserves. Theres probably the least appetite for that than anything you can look at, he said. Its a tax increase.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
Will Social Security Run Out Before I Retire
While there are a lot of questions about the future of Social Security, the fact is that it is highly unlikely the program will ever actually run out of money. The federal government founded the Social Security program during the Great Depression. The program provides money to people after theyve retired. A tax that everyone pays while they are working provides most of the funds in the program. Todays retirees use money todays workers are paying tomorrows retirees use money tomorrows workers will pay. For more help with Social Security and any other financial questions, consider working with a financial advisor.
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When Will Social Security Run Out Projections Now Suggest Insolvency By 2033
First, it is important to note that Social Security will not actually run out of money. However, the money being brought into the program will soon not be enough to cover the benefits being paid out and most people refer to this as running out of money. And, the deficits in the program may cause benefits to be cut.
A new report from the Social Security and Medicare Board of Trustees finds that Social Securitys surplus reserves are expected to run out in 2033, a year earlier than previously forecast.
If nothing changes, the Social Security Administration has stated that in 2033, The funds reserves will become depleted and continuing tax income will be sufficient to pay 76 percent of scheduled benefits. Sounds ominous. However, it is still more optimistic than findings from a report last year from the Bipartisan Policy Center , a Washington D.C.-based policy think tank, suggests that Social Security will run out of money in 2028.
Why Is Social Security Important
Social Security is vital to many retirees and is one of the few social programs that enjoys broad support across the political spectrum. A 2020 AARP survey found that the program was supported by 90% of Democrats, Republicans and independents.
While Social Security is intended to supplement peoples’ retirement savings, many retirees end up relying on the program’s benefits as their primary source of retirement income. According to the Center on Budget and Policy Priorities, half of seniors get half of their retirement income from Social Security.
The National Institute on Retirement Security describes retirement income as a ‘three-legged stool’, consisting of Social Security, a pension plan and individual retirement savings through accounts like a 401 or an individual retirement account .
With only half of private sector employees having a 401 at any time, Social Security is one of the most important aspects of retirement income’s ‘three-legged stool’, says Munnell.
“The 401 system has worked well for, let’s say the top 40% of workers and is not much help for the bottom 60%,” says Munnell. “A lot of our population has nothing else to rely on other than Social Security, so you really don’t want to have that benefit level cut.”
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More Wages Could Be Taxed
Another option to increase tax revenue to fund Social Security is to raise the amount of earnings subject to taxation. Only the amount of wages up to the Social Security contribution and benefit base are subject to Social Security taxes. This amount is indexed for inflation, so it was $132,900 in 2019 and is now $137,700 for 2020.
Is This An Easy Problem To Solve
As Roseman sees it, the Social Security shortfall problem is easy to solve but its not easy to get Congress to make the necessary changes. Nobody wants to compromise, he said.
Nonetheless, Roseman doesnt expect Social Security to run out of money. He tells his clients to count on it as a source of retirement income, but it shouldnt be their only source of retirement income. I would never advise anybody to live on Social Security alone, he said.
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