Social Security

    More than 50 million people depend on Social Security benefits for part or all of their income during retirement. Although most working Americans do not plan on funding their retirements solely with Social Security income, it is a necessary source of income. Many senior citizens could not pay for basic necessities without their monthly Social Security payments.

    In the best-case scenario, retirees have multiple income streams. Monthly payments may come from a pension, an Individual Retirement Account (IRA) or 401(k), and from Social Security.

    Because of the projected underfunding of the Social Security system, however, few people today believe that Social Security will be much of a provider for them in later years. Regardless, many still consider the system to be an indispensable federal program.

    Types of Social Security

    There are four basic types of benefits based on the person receiving them. The types are retirement, disability, survivors and supplemental benefits.

    Retirement Benefits

    Retirement benefits are what typically come to mind when most people think of Social Security. Such benefits are available for people 62 or older who have worked at least 10 years. Your benefit amount will vary based on your pre-retirement salary as well as the age at which you begin collecting benefits. While it is not meant to be your only source of income, it can help you avoid debt during your retirement years. Additionally, your spouse or divorced spouse may be eligible for Social Security retirement benefits even if he or she has not paid into the program.

    Disability Benefits

    Disability benefits support people who cannot work because of disabilities. As with retirement benefits, you need to have worked a certain number of years to be eligible for Social Security Disability Insurance (SSDI) benefits. The amount of work you need depends on your age, and your monthly benefit amount depends on your pre-disability salary. SSDI benefits may also be available for your spouse or divorced spouse.

    Survivors Benefits

    Survivors benefits can help bridge financial gaps for survivors of workers and retirees. Eligible recipients typically include widows and widowers, divorced spouses and children. The level of benefits depends on a number of factors, including the worker’s age at death, the worker’s salary, the survivors’ ages and the survivors’ relation to the deceased.

    Supplemental Security Income Benefits

    Supplemental Security Income (SSI) helps people who are unable to earn sufficient wages on their own. It is available to adults with disabilities, children with disabilities and people 65 or older. Individuals with enough work history may be eligible to receive SSI in addition to disability or retirement benefits. The amount individuals receive varies based on their other sources of income and where they live.

    Social Security Payouts

    Social Security Funding

    The Social Security program is funded primarily through dedicated payroll taxes called Federal Insurance Contributions Act tax (FICA). Employers also pay Social Security taxes. This funding method has not changed since the program’s inception.

    Revenue collected and not used immediately is credited to the Social Security Trust Fund and invested in securities issued by the U.S. Treasury to fund government operations.

    Recipients of Social Security benefits receive payouts once a month.

    Full retirement benefits are available to you when you reach your full retirement age, which is between 65 and 67 depending on your year of birth. For people born in 1960 or later, the full retirement age is 67. For those born before then, the retirement age may be lower by a number of months.

    Although retirement benefits are available to people 62 or older, the program encourages seniors to wait until they are of full retirement age before they begin collecting retirement benefits. Early collection of benefits results in a permanent decrease in monthly benefit amounts. The earlier you begin collecting, the fewer benefits you receive over time.

    Assume your full retirement age is 67. Here is the percentage of benefits you’d receive each month based on the age at which you begin collecting:

    Age you first receive benefitsPercent of monthly benefits you’ll receive
    6270 percent
    6375
    6480
    6586.7
    6693.3
    67 (full retirement age)100 (full benefits)

    The percentage of benefits increases for each month you wait. For example, if you are 62 years and 6 months old when you first receive benefits, your benefit amount will be 72.5 percent of the total, in between the respective amounts for ages 62 and 63. This chart shows only the percentages for exact ages.

    The Best Age to Start Collecting

    There are two schools of thought about whether to start collecting Social Security at 62 or wait.

    The first is that everyone should start getting their money out of the system as soon as possible.

    This theory is based on two things:
    1. You have no assurances that you will live to full retirement age.
    2. You must live deep into retirement to make up the difference in the two potential payouts, the one you can collect at 62 and the one you can collect if you wait until full retirement age.

    In other words, getting some benefits now is better than the promise of more benefits later.

    The second theory states that you should wait until full retirement age in order to collect larger monthly sums. If you live long enough, this option will be more profitable.

    Let’s take a closer look at your total payout potential based on the age at which you begin collecting benefits. Assume your full benefit amount would be $1,000 per month, or $12,000 each year, and your full retirement age is 67. Here’s the total amount you could receive from the Social Security program.

    Starting benefits at age 62 would mean more money overall if you don’t live past age 79. However, if you live to 79 or older, you’d receive more money during your lifetime if you began earning benefits at age 67.

    Ultimately, the choice is up to you, and there’s no way to predict which option is better. However, financial advisers say that if you need the monthly income at 62, start taking it. If you can afford to wait – and if you are healthy and believe you will live many more years – elect to wait and enjoy the extra money when you do start collecting.

    History of Social Security

    Franklin D. Roosevelt signed the Social Security Act into law in 1935 during the Great Depression, when more than 50 percent of America’s senior citizens were living in poverty. The program was designed to help those who suffered most from the Depression, including the elderly, those in poverty, and the unemployed.

    Fast Fact

    As of November 2012, 453.7 million unique Social Security numbers had been issued. The first numbers were issued 76 years earlier in November 1936.

    During the Depression, significantly more people were paying into Social Security than there were people receiving benefits. In fact, the 1930 census reported that only 5.4 percent of the population was older than 65. Because of this ratio, workers were not required to pay much into the system.

    Up until 1950, for example, only about 2 percent of income was paid into the program, with 1 percent coming each from the employee and employer. Today, 12.4 percent of income is withheld for Social Security (split between employee and employer), with a cap at a gross income of around $114,000.

    The ratio between worker and retiree has changed dramatically over time. In 2011, about 13.3 percent of the country’s population was 65 or older, and now millions of baby boomers – Americans born during the population spike after World War II – are reaching retirement age.

    Future of Social Security

    Fast Fact

    By the end of 2009, the Social Security program had collected $13.8 trillion in taxes and distributed $11.3 trillion in benefits.

    An increase in eligible participants combined with an increase in life expectancy is straining the Social Security program. Because of the financial burden this created, Social Security was amended in 1983, changing the age people can collect full Social Security benefits.

    As a result of the 1983 amendments, the retirement age will increase between 2003 and 2026 from age 65 to age 67 with an 11-year gap at which the retirement age will remain at 66, depending on the year of birth.

    Economic analysts predict that the Social Security system eventually will pay out more in benefits than it receives in payroll taxes. Analysts have long warned of this shortfall, and they predict the program could be in jeopardy as early as 2016.

    It is anticipated a reduction in benefits of about 13 percent or an immediate increase in payroll tax rate from 12.4 to 14.4 percent, or a little of both, will be needed to allow full payment of scheduled payments for the next 75 years.

    As the challenges to meet the needs of millions of retirees continue, policymakers and politicians continue to argue about revamping or privatizing the program. The recent economic downturn has affected jobs and savings programs, further weakening the program. With so many people dependent upon Social Security for retirement benefits, it’s vital to understand the system and its limitations, as well as to make changes before time runs out.

    Bill Fay

    Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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