It's a political hot button, the subject of heated debates dividing generational lines, and it affects nearly everyone's take-home pay. For this episode of Motley Fool Answers, we offer a primer on Social Security, tackle some of the biggest myths and misconceptions, and offer tips on getting the most out of what you put into it. Read on, or download the episode for free on iTunes or Stitcher.
ALISON SOUTHWICK:
This is Motley Fool Answers. I'm Alison Southwick, and I am joined, as always, by Dayana Yochim and Robert Brokamp, personal finance experts here at The Motley Fool. Well, let's get into it, because today is going to be a lot of fun, yah?
ROBERT BROKAMP:
Oh, yeah!
DAYANA YOCHIM:
Oh, no.
ALISON SOUTHWICK:
That's right. With the elections starting to heat up, you're going to be hearing a lot more about the third rail of politics -- Social Security. And why is it called the third rail of politics, Robert Brokamp?
ROBERT BROKAMP:
Because if you've ever seen a subway or a Metro, the trains run on two tracks, but they're powered by the third rail, which is electrified. If you touch it, you die.
DAYANA YOCHIM:
I'm looking that up on Snopes.com. I'm not sure that if you actually touch that rail ...
ROBERT BROKAMP:
Well, let's go down to the Metro station, which is not far from here, touch the third rail, and then see what happens.
DAYANA YOCHIM:
I think I'll just throw some peanuts at it and see if there are any sparks.
ALISON SOUTHWICK:
[Laughs] Chances are you're not an expert on Social Security, even though you probably contribute to it every paycheck, so today we're going to give you a primer on Social Security and tackle some of the biggest myths.
DAYANA YOCHIM:
Let me interject a fun fact here, since that's my only job on today's show.
ALISON SOUTHWICK:
DAYANA YOCHIM:
Ninety-four percent of American workers pay 6.2% of their taxable income -- up to $118,000 annually -- into the Social Security Trust Fund. Fun fact over.
ALISON SOUTHWICK:
By the end of the show, you'll be better prepared to talk about Social Security at those cocktail parties we never get invited to, and you'll be armed to get the most out of what you put into it.
DAYANA YOCHIM:
Six point two percent.
ALISON SOUTHWICK:
Actually -- fun fact -- most people get more out of Social Security than they put into it.
ROBERT BROKAMP:
That's interesting.
DAYANA YOCHIM:
And it's super fun to know!
ALISON SOUTHWICK:
I thought it was! Why are you both just staring at me?
ROBERT BROKAMP:
I was staring at you because it may be that most people get back more than they put in, but that's such a wide distribution. I mean, you think about the people who have been paying into it for their whole lives and then they die at age 61. They never get a dime out of it. So I'm sure there's a wide distribution in terms of whether you got more than what you put in. That's all I'm saying.
DAYANA YOCHIM:
This is going to be a delightful episode ...
ALISON SOUTHWICK:
This one is brutal. We knew it was going to be brutal going into this -- which is why we are armed with so many fun facts!
All right! Well, let's get right into the fun history of Social Security, starting with the Great Depression!
DAYANA YOCHIM:
Yeah!
ALISON SOUTHWICK:
It was the 1930s. The country was in the midst of the Great Depression following the market crash of 1929. Millions of people were unemployed, including 2 million hobos.
That's what they called them on the Social Security website!
DAYANA YOCHIM:
Is "hobo" the politically correct term?
ROBERT BROKAMP:
That's what you put on your tax return. Occupation: "hobo."
ALISON SOUTHWICK:
Hobo. No, literally, that's what they said. They put it in quotes. They're like, "hobos." And what's funny to me is that when I was a kid, my dad used to say, "Oh, for a while there your grandpa rode the rails." And as a kid I was like, "Oh, that's kind of fun." But then later, when I was adult (more of an adult), I was like, "Hey! Wait a second! My grandpa was a hobo!"
DAYANA YOCHIM:
That's why we call him "Pawpaw Hobo"!
ALISON SOUTHWICK:
Papa Hobo! Obviously not for his whole life, but during the Depression, he was pretty hard hit. So one of those 2 million hobos was my grandpa. Pretty sad. All right, let's keep going.
By 1934, half of the elderly didn't have enough money to support themselves, and it was these people that President Roosevelt wanted to help, so his idea was to pretty much create what we've got right now (at least part of it). The basics, when you think of Social Security -- the idea that you pay taxes into a system and then when you retire, you get some money back.
At the time when it was initially launched, you got one lump sum. Eventually they changed it so you got money as, like every month, or whatever. Every ... this is so brutal. Sorry.
So it was signed into law in 1935. Here's a fun little story according to Wikipedia (because yes, I did some of my research on Wikipedia). In a Senate Finance Committee hearing, one senator asked the Secretary of Labor, Frances Perkins, "Isn't this socialism?" And she said that it was not. To which he replied, "Isn't this a teeny-weeny bit of socialism?"
ROBERT BROKAMP:
[Laughs]
DAYANA YOCHIM:
[Laughs]
ALISON SOUTHWICK:
[Laughs] S-o-o-o ... as it started, benefits were only paid out to the retired worker at age 65. It wasn't until 1939 that it was amended to pay out to dependents and surviving family. It was also amended in the '50s and '60s. That led to Medicare and disability coverage, and the eligibility age was lowered to 62. (But as you faithful listeners know, you don't get as much moolah when you retire that early.) A bunch of other amendments led to other stuff, which I'm not going to go into.
DAYANA YOCHIM:
Here's a fun fact.
ALISON SOUTHWICK:
Yeah! Keep 'em coming.
DAYANA YOCHIM:
This is all about your Social Security number.
ROBERT BROKAMP:
I wanted a boring fact, but go ahead.
DAYANA YOCHIM:
All right. It's kind of fun. In 1936, the Social Security Administration started assigning these numbers to workers so that they could track the earnings that someone had over their lifetime. For most of us, we've got the nine-digit number, starting with the first three digits, which are the area number. It's a geographical tie, and it's really based on your ZIP code ...
ALISON SOUTHWICK:
Where you were born?
DAYANA YOCHIM:
Where you were born. It's followed by a two-digit group number, which is between 01 and 99, and I could not find on the Social Security website exactly what that means (and I spent hours there). And then it ends with a four-digit serial number, and those are sequential.
But starting in 2011, they started issuing Social Security numbers differently and with a randomized method, the reason being that you didn't have to have that much information about someone to guess or figure out their Social Security number. Now that it's randomized, it's a lot harder for the bad people out there to steal your identity and start earning in your name.
ROBERT BROKAMP:
[Laughs]
DAYANA YOCHIM:
Why doesn't that ever happen? Why doesn't someone who's got, like, a high-paid Silicon Valley job steal my Social Security number, earn a bunch, and then give it back?
ROBERT BROKAMP:
That's right. And they're not reused?
DAYANA YOCHIM:
They're not reused. Once you die, your number dies with you.
ROBERT BROKAMP:
Right, and they have issued about 470 million numbers since the beginning, so there you have it. That's my fun fact. Thank you very much.
DAYANA YOCHIM:
Super fun.
ALISON SOUTHWICK:
Well, now that we've covered some fun facts and the history of Social Security, we're going to talk about some common myths and misconceptions. And Bro, the first one is that people think it's a retirement account, but it's actually more like insurance.
Myth No. 1: Social Security is a retirement account
ROBERT BROKAMP:
Right. In fact, when you pay your taxes, you'll see it on your pay stub as FICA (the Federal Insurance Contributions Act -- Social Security as well as Medicare). There's no account somewhere at the IRS, or at the Treasury Department, with your name on it saying, "This is all the money you've put in, and we're going to give it back to you when you retire." It all goes into this big, old, fat, ugly trust fund. It's a pool of money.
The money you put in -- most of that -- is going out to someone else's Social Security check, and the process will continue, hopefully, forever and ever, so that when you retire, someone else's money from their paycheck is going to be taken out and sent to you.
ALISON SOUTHWICK:
Right. So that kind of brings us to myth No. 2, because a common misconception out there is that Social Security is going bankrupt and that by the time we in this room are ready to retire, there will be nothing left in the kitty.
Myth No. 2: Social Security is going bankrupt
ROBERT BROKAMP:
Social Security is, and will always be, essentially what they call a paygo program -- pay as you go. So as long as people are working, Social Security will always have money. The issue is, will they be able to pay folks like us, who are so young and good-looking, as much as we are currently expected to get? And the answer is probably not. The estimate is somewhere around 2033 or 2035, the trust funds will be depleted, and we'll only get about 75% of what we're currently estimated to get.
DAYANA YOCHIM:
So I think it's time for a fun fact. What do you guys think?
ROBERT BROKAMP:
That would be great.
DAYANA YOCHIM:
I'm going to go back to Social Security numbers, because I'm just so fascinated by this. So you can change your Social Security number, but only under certain circumstances. If you've been a victim of identity theft and it's continuing to cause you problems because your number is floating out there and people are using it occasionally, you can get a new number. Also for reasons for harassment, abuse, or life endangerment (meaning someone's trying to use your Social Security number to track you down), you can have it changed.
Another reason is when your number is really similar to someone else's number — that whole sequential numbering thing — and things keep getting confused. You can change it. And another reason is the digits you were assigned contain your unlucky number. Seriously, if there's a number in there ...
ALISON SOUTHWICK:
But you have to say it's for religious reasons ...
DAYANA YOCHIM:
For religious or cultural reasons.
ROBERT BROKAMP:
Really?
DAYANA YOCHIM:
Yes! So you have to provide proof -- documentation from a religious group where you've been in an ongoing relationship ...
ALISON SOUTHWICK:
Yeah. So the Church of Odd Numbers ...
ROBERT BROKAMP:
[Laughs]
DAYANA YOCHIM:
The important point -- the old number does not go away. It's just cross-referenced with the new one so that you get the credit for both numbers.
ROBERT BROKAMP:
I mentioned this in a previous podcast, but you remember the tale of the secretary at a wallet company whose boss decided to use her Social Security number in a sample card in the wallet and thousands of people thought it was their Social Security number and kept using it? For decades! Decades.
ALISON SOUTHWICK:
Yeah. That was a good reason.
ROBERT BROKAMP:
I assume she got a new Social Security number.
Myth No. 3: Social Security will be just fine, thankyouverymuch
ALISON SOUTHWICK:
All right. So our next myth is kind of the opposite of the myth we just talked about, the idea that Social Security is bankrupt. Well, the other myth is that some people are like, "Oh, then Social Security's just fine, then."
So, Social Security is just fine, then, Robert?
ROBERT BROKAMP:
No, not exactly. Certainly, people who are in their mid-50s and older, and people who are retired are going to be fine. For younger folks, I think you cannot expect to get the level of benefits that you are currently promised. And I think they've gone back, now, to sending you a statement three months before your birthday so you can take a look at that.
So it's not fine. Lots of proposals are on the table to make it a little more financially sound. Retiring later, maybe. Raising taxes. But to me, that's essentially still a benefit cut. You're not going to get as much from Social Security, or you're going to have to pay more for it. So the bottom line is while Social Security is not going bankrupt, you're not going to get as much as previous generations.
DAYANA YOCHIM:
And this goes back to demographic changes ...
ROBERT BROKAMP:
Right ...
DAYANA YOCHIM:
In the U.S. In 1940, the life expectancy of a 65-year-old was about 14 years. Today it's 20 years, so we should rethink that healthy-living thing, maybe, if we want Social Security to remain healthy.
ROBERT BROKAMP:
That's right. If you want it to be solvent, just work and then die sooner. I think that's really it.
DAYANA YOCHIM:
And fun fact. By 2033, the number of older Americans will increase from 46.6 million to over 77 million.
ROBERT BROKAMP:
Nowadays there are like three workers for every retiree, and by then it will be just two workers for every retiree. That's fewer workers having to support those Social Security payments and that's one of the current political debates -- whether to raise the Social Security full retirement age to 68, 69, and 70.
ALISON SOUTHWICK:
Yeah. So the plan is that full retirement age will be 67 by 2027. Chris Christie just came out with a proposal for Social Security, and he proposed bumping that to 69 for getting full retirement. He also proposed that if you make more than $80,000 in your retirement, you should get less from Social Security, and if you make more than $200,000 in your retirement, you shouldn't get anything.
And like you were saying, and Dayana said at the top of the show, right now any income you make over $118,500 is not taxed. You don't pay Social Security income tax on that, and they're thinking of raising that amount, too. So there's lots of different options out there ...
ROBERT BROKAMP:
Yeah. Interestingly, the very first real pension program in the world was in Germany in the late 1800s in Bismarck. Then, to collect you had to be age 70 -- and think about the life expectancy back then. That's why they call it an insurance program. It's an old-age insurance program, so that if you get to a really old age, and you have no money, there's something there.
Whereas now, people would argue that we're looking at this as a lifestyle retirement program. "I've finally reached a certain age. Now I can go to Florida and spend this money." The original plan was never intended for that. It was just a way to provide a bare level amount of income for people who lived a very long time.
ALISON SOUTHWICK:
Well, it still is for a lot of people. Because here's a not-fun fact. (Dayana can bring the fun ones. I can bring the not-fun ones.) Without Social Security in 2013, more than half of the elderly in this country would have fallen below the poverty line.
ROBERT BROKAMP:
That's a very interesting statistic -- to look at the difference between the number of seniors at the poverty level before Social Security and after Social Security. If you want to look at one single stat in terms of the program's success, that would be it.
ALISON SOUTHWICK:
Yeah, because these numbers aren't that different from the numbers I was saying at the top of the show. Half of the elderly in 1934 didn't have enough money to support themselves. Well, look at that. Today in America, still, half of the elderly would be below the poverty line if they didn't have Social Security.
DAYANA YOCHIM:
And the benefits represent about 38% of the income of these people. So you take that away ...
ROBERT BROKAMP:
And that's the average. It's something like one in five basically relies completely on Social Security. And when you think that the annual benefit of Social Security is around $16,000, that's a little scary.
Myth No. 4: You should collect Social Security as soon as you're eligible
ALISON SOUTHWICK:
So that gets us to our myth No. 4, which is that you should collect Social Security as soon as you're eligible, because you've got to get what's yours before the pot runs dry.
Wait, that's not a thing people say at all.
DAYANA YOCHIM:
It's "when the well runs dry."
ALISON SOUTHWICK:
The well! It's the well that runs dry!
DAYANA YOCHIM:
The pot calls the kettle black.
ALISON SOUTHWICK:
Mixing metaphors with Alison Southwick, on the next episode of Motley Fool Answers.
DAYANA YOCHIM:
No -- pretty much every episode.
ALISON SOUTHWICK:
Yeah, probably.
ROBERT BROKAMP:
Anyway, so yeah. A large percentage of people claim it as soon as they can, which is 62 for most people. And for the most part, that's not the smartest thing to do from a financial perspective, because the sooner you take it, the more you lower your benefit, and you've lowered that for the rest of your life. There's some coordination strategies if you're married when that might make sense. But generally speaking, it's better to wait.
And some people have that same answer. Like, "I'm going to get the money because the money's going to go. It's not going to be there in 10 or 20 years, so I've got to get it now." So I hope that we have dispelled some of that. I have no doubt that whatever changes they make to Social Security, it's not going to affect people who are already retired. So I think anyone who is at that point, they just don't have to worry about it. Any changes are just going to affect the younger folks.
DAYANA YOCHIM:
And if you are right there, it really behooves you to wait a few years. So -- fun facts about collecting Social Security: If you retire at 62, which we just talked about, your maximum benefit per month in 2015 would be $2,025. If you waited until full retirement age, which is 66, your maximum benefit would be $2,663 a month. And if you can put it off until age 70, which is when you have to start taking your benefits, right ...
ROBERT BROKAMP:
Right. There's no benefit to delaying that beyond age 70 ...
DAYANA YOCHIM:
... your maximum benefit would be $3,501. So that's a lot of scratch per month we're talking about.
ALISON SOUTHWICK:
Yeah. Well one of the things we were talking about before the show is that a lot of the people who do take their money -- who do cash it out at 62 -- are also in lower-paying jobs doing hard, manual labor, and the idea of working much longer is just brutal to them, or maybe physically they're incapable of it.
ROBERT BROKAMP:
Right. And that is certainly an issue. What's good about the program, in terms of those concerns, is that for lower-income workers, more of their working income is replaced. A higher percentage of their working income is replaced by Social Security than wealthier folks, so you can expect to have more of your income replaced the lower you are on the income scale. So that's good. It is a progressive system, to that degree, and I think that is something people have to appreciate as we debate about raising the age. There are some jobs that you just cannot do for 40 years and expect to continue to do it well into your 70s.
DAYANA YOCHIM:
My back's kind of hurting sitting here talking to a microphone. I don't know how much longer I can deal with that.
ALISON SOUTHWICK:
We're going to be doing this show for 40 more years. Forty more years! Forty more years!
DAYANA YOCHIM:
[Laughs]
Myth No. 5: Social Security is enough to provide a comfortable retirement
ALISON SOUTHWICK:
All right. Myth No. 5 -- Social Security is enough to retire on.
ROBERT BROKAMP:
We touched on this earlier. The average benefit is $16,000. That is the average, so if you were a higher-income earner during your life, it's probably closer to $20,000 or $22,000. But still, that is not a lot to live on, and it's certainly not going to pay for the retirement most of us want. So you have to supplement it in other ways, ideally by saving and maybe working part-time. Something like that.
DAYANA YOCHIM:
Oh, hey. Here's a public service announcement: Do not laminate your card. It prevents detection of many security features.
ALISON SOUTHWICK:
Child, please! Have they dramatically changed Social Security cards from when I was a little kid?
ROBERT BROKAMP:
Is there a security feature in my card?
ALISON SOUTHWICK:
If I remember right, I literally wrote my own little number on my Social Security card ... or wait! Was that a different card? That might have been that.
ROBERT BROKAMP:
That was our secretary's card.
ALISON SOUTHWICK:
Was it? No. I think it was my Mystery Science Theater 3000 fan-club card.
ROBERT BROKAMP:
[Laughs]
DAYANA YOCHIM:
For mine, it was my Duran Duran fan club card.
ALISON SOUTHWICK:
Yeah. It's just a little piece of paper. Did they change it since then?
DAYANA YOCHIM:
I don't know! Don't laminate your card is all I'm saying.
ALISON SOUTHWICK:
When was the last time someone asked to see your Social Security card?
ROBERT BROKAMP:
I don't even have one. I don't know where mine is.
ALISON SOUTHWICK:
Never.
DAYANA YOCHIM:
You get asked for the number all the time. You can ask a business what they're going to do with it -- why they need the number -- and you can refuse to give it to them. Of course, they could refuse to give you service if you don't provide it. But there's a right you've got!
Also, don't lose your card. You can replace it for free, if it's lost or stolen, but only three times in a single year and only 10 times during your lifetime.
ROBERT BROKAMP:
So somewhere at the Social Security Administration, there's a little spreadsheet that keeps track of how many times you've asked for a new card?
DAYANA YOCHIM:
There's a guy who's doing that, yeah.
ROBERT BROKAMP:
Oh, my gosh. [Laughs]
ALISON SOUTHWICK:
Your tax dollars at work, Robert.
DAYANA YOCHIM:
He's ticking a box. By the way, legal name changes and stuff like that don't count toward the limits.
ROBERT BROKAMP:
Got ya.
DAYANA YOCHIM:
Carry on!
ALISON SOUTHWICK:
Do you have any closing thoughts, Robert, when it comes to Social Security?
ROBERT BROKAMP:
I would say that while we are big fans of do-it-yourself investing here at The Motley Fool -- and you can do a lot of financial planning on your own as well -- the decision of when to take Social Security, especially if you're married, is actually pretty complicated.
I read something recently that said there are, actually, 96 different points at which you can choose to take your benefits. And it really could pay off to hire someone (a fee-only planner) and pay for an hour or two of their time to really look at the situation and tell you what the best situation is for you. Because once you do it, you can ...
DAYANA YOCHIM:
You can, actually, undo it, but you've got to give the money back that you've taken, right?
ROBERT BROKAMP:
Right and even that, once you make the decision, you only have a certain amount of time to change your mind. Otherwise, it's permanent. You're stuck with it.
So it definitely makes sense to get an expert opinion right when you're at that point of making that decision. It's not a bad time, anyhow, because you're about to go into retirement. There are a lot of decisions (Medicare, accounts from which you should be taking your investments, how much you can afford to spend each year in retirement). It's a good time in life, in general, to see a financial planner.
DAYANA YOCHIM:
And the Social Security website (SSA.gov) has a lot of calculators and tools on there that are pretty cool.
ROBERT BROKAMP:
It's pretty helpful. It's a very helpful website ...
DAYANA YOCHIM:
When I said "cool," I meant ...
ALISON SOUTHWICK:
You meant cool.
ROBERT BROKAMP:
Oh, you loved it.
ALISON SOUTHWICK:
This is so much fun! Entering numbers! Clicking those buttons! [Laughs]
DAYANA YOCHIM:
OK. But you know what is fun on the Social Security website? It has an area that's devoted to baby names by birth year, decade ... and so I did a little research, guys. This is where I spent most of my research time, just clicking around on baby name history.
ROBERT BROKAMP:
How many Dayanas are there?
DAYANA YOCHIM:
I did not find Dayana ...
ROBERT BROKAMP:
I can imagine.
DAYANA YOCHIM:
In the 2000s, the No. 1 male name was Jacob and the No. 1 female name was Emily.
ALISON SOUTHWICK:
Those are good names.
DAYANA YOCHIM:
Yup. In the '90s, it's Michael and Jessica. And then second place, Christopher and Ashley. Michael and Jessica again in the '80s, and then Christopher again and Jennifer was the second most popular name in the '80s.
ROBERT BROKAMP:
Hm.
DAYANA YOCHIM:
In the '60s, Michael again and Lisa. Lisa shows up.
ROBERT BROKAMP:
What was No. 1 in the '50s?
DAYANA YOCHIM:
James and Mary.
ROBERT BROKAMP:
Oh. See, I always heard Robert was No. 1 in the '50s. I guess it was ...
DAYANA YOCHIM:
In the '30s it was Robert and Mary.
ROBERT BROKAMP:
Oh, maybe.
DAYANA YOCHIM:
And then Robert and Mary are pretty much the most popular names from the 1880s through the 1930s.
ALISON SOUTHWICK:
Robert and Mary, or John and Mary?
DAYANA YOCHIM:
Oh, sorry. Robert and Mary ... Robert and Mary ...
ALISON SOUTHWICK:
[Laughs]
ROBERT BROKAMP:
In the 1790s ...
DAYANA YOCHIM:
Yeah. It only goes back to the 1880s. So from the 1880s to the '10s? What do you call them? The 1910s? John ...
ALISON SOUTHWICK:
[Laughs] I was told this would be fun! Can we go back to talking about Social Security now?
DAYANA YOCHIM:
[Laughs]
ALISON SOUTHWICK:
[Laughs] Let's talk about some actuarial tables, please!
ROBERT BROKAMP:
In 1520, Elmer made a comeback.
DAYANA YOCHIM:
They only go back to the 1880s, Robert!
ROBERT BROKAMP:
But how would they know? Social Security didn't begin until the 1930s.
DAYANA YOCHIM:
I don't know! It's on SSA.gov. I'm just repeating what was there! Anyhow, John and Mary from the 1880s ...
ALISON SOUTHWICK:
[Turns away from the microphone] We're still going!
ROBERT BROKAMP:
[Laughs]
ALISON SOUTHWICK:
Whoo! Well, that was plenty of fun for one day, but if you need more Social Security hijinks or have to know what year this country reached peak-Darlene ...
ROBERT BROKAMP:
Jehoshaphat, anyone? Jehoshaphat?
ALISON SOUTHWICK:
... there's tons more information on the government's website. Just go to SSA.gov. We also didn't get around to talking about Medicare or disability, so maybe we'll cover that in the future. Because the only thing more fun than talking about Social Security is becoming sick or disabled.
The show is edited by Rick Engdahl with theme music composed and performed by Dayana Yochim. Our email is [email protected]. Drop us a line, or don't. That's OK. And also, please, if you have time, leave a review for us on iTunes. It helps us get more higher ranked, and brings more people to the show, and we want to help spread the word ... the good word about Social Security. And Ashley. All right, for Robert Brokamp and Dayana Yochim, I'm Alison Southwick. Fool on!
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