If I receive benefits before full retirement age, how much are they reduced?
What is the "Part B" Medicare monthly premium for 2005?
My husband is presently incarcerated; are my son and I eligible for any Social Security benefits?
These questions (and the answers) come straight from the source -- the Social Security Administration's (SSA) comprehensive list of more than 600 Qs and As. Last year, the only website that got more action on its "Frequently Asked Questions" area was the producer of a popular video game.
Those who have already found the secret giant soccer ball in Halo 2 can head to the SSA's site to study the intricacies of government pension rules, supplemental security income, and the 40 issues about prisoner rules.
But if you're like most Americans (OK, if you're like me), you might not find what you're looking for by scrolling through 31 pages of inquiries. Since most of you also don't sit right next to The Motley Fool's resident retirement expert, Robert Brokamp, I have taken the liberty of representing you, Everyman/woman (with cute shoes), by asking Robert to address those simple, straightforward questions that are too embarrassing to ask in front of the class.
Dayana: Is Social Security like a 401(k) or an IRA -- my retirement savings account?
Robert: Social Security is not a savings account. You do not have an envelope at the Social Security Administration in which your taxes are deposited. The taxes taken out of your paycheck today become a retiree's benefit check tomorrow. For now, the government is collecting more money than it is paying out, so a trust fund was established for the extra payments.
However, in 15 years the flow will reverse, with more money going out than coming in. At that point, the government will need to dip into that trust fund. The SSA estimates that by 2042, the trust fund will be depleted.
Dayana: They're gonna run out of money before I get my share?
Robert: Three months before your birthday, you should receive a statement from the SSA listing your recent earnings history and your estimated benefits. On the front page of the current statement -- as seen in this example -- you'll read the following:
"Without changes, by 2042 the Social Security Trust Fund will be exhausted. By then, the number of Americans 65 or older is expected to have doubled. There won't be enough younger people working to pay all of the benefits owed to those who are retiring. At that point, there will be enough money to pay only about 74 cents for each dollar of scheduled benefits."
So, as you can see, Social Security is facing financial problems. But even without changes, you'll still receive approximately three-fourths of your scheduled benefit. That stinks for those of us who will be in retirement by then, but it's not as gloomy and doomy as we are often led to believe.
Dayana: So if Social Security can't cover the cushy retirement I've been planning, who's going to foot the bill?
Robert: Regardless of the future of Social Security, it never was -- and never will be -- a way to fund the retirement of your dreams (unless your dreams involve small living spaces and small portions). The average annual retirement benefit is approximately $11,000; the maximum is $24,000. So banking on Social Security was never a smart idea.
When it comes to retirement, you cannot -- and never could -- rely on Uncle Sam to make your golden years truly golden. For that, you can only rely on your ability to forgo current consumption in order to save for future, in-retirement consumption.
Dayana: What if the Fool starts a pension plan? Will I have enough to loll away my retirement in Tuscany?
Robert: If you've put in a couple of decades as a teacher or policeman, or worked for a solid company such as General Electric (NYSE:GE), ExxonMobil (NYSE:XOM), or Johnson & Johnson (NYSE:JNJ), then you might be fine -- assuming you need less than your pre-retirement income. (On the other hand, if you work for an old-line airline, such as United, U.S. Airways, or Northwest, then it would be prudent from a planning perspective to count on getting less than your full pension.)
Let's say you retire after working 25 years for a company that offered a traditional pension (a.k.a. defined-benefit plan), and your average salary over the last few years was $50,000. Using a common benefit formula, you'd receive $18,750 a year from your pension. Add that to the approximately $15,400 you'd receive from Social Security, and you'd have an annual retirement income of $34,150.
The key here, though, is the years of service. If you worked for that company for 15 years instead of 25, your annual pension benefit would drop to $11,250, resulting in an annual retirement income of $26,650. Could you live on that?
Also, keep in mind that most pension payments do not adjust for inflation (unlike Social Security). So you'd receive the same amount at age 85 as you did at 65, even though your expenses probably increased. Or maybe not ... there is growing evidence that our expenses may actually drop as we age.
Dayana: Do I have to wait until I can no longer chew my own food to get any benefits from Social Security?
Robert: Even if you're not retired, chances are you're already receiving benefits from Social Security. Those benefits are disability and life insurance coverage.
According to the SSA, in 2002, the average insurance value of Social Security benefits to a young disabled worker with a spouse and two kids was $353,000. For the same year, the average life insurance value to survivors of a deceased worker covered by Social Security was $403,000.
That may not be much consolation if you never receive disability or survivor's benefits, but you nonetheless have that safety net. And since one in seven workers dies before age 67, and almost three out of every 10 of today's 20-year-olds will become disabled before age 67, this coverage isn't negligible.
Dayana: Does this make me look fat?
Robert: [Awkward silence.]
Dayana: Thanks a lot, Robert.
Even if you're not a day over 29 (ahem), you can get a record of your Social Security earnings history detailed year by year, as well as estimates of the benefits that you may qualify for, now or later. (You'll simply need to fill out Form SSA-7004, which also goes by the name "Request for Social Security Statement." You can access an electronic version of this form online at the SSA website, or you can call them at 800-772-1213.)
When you're done taking a stroll down salary memory lane, start considering how you're going to fund your future.
More opinions on Social Security:
Robert Brokamp heads up The Motley Fool'sRule Your Retirementnewsletter service. He's offering a 30-day free trial right now.In light of Robert's answers to her questions, Dayana Yochim is rethinking her annual shoe budget. Neither Dayana nor Robert own any of the companies mentioned in this article. The Motley Fool's disclosure policy is very slimming.