The Social Security program provides a critical safety net for 59 million Americans, but that doesn't mean that everyone knows all there is to know about it. For example, did you know that the latest number-crunching in Washington indicates that Social Security payments could be cut by 29% in 2030? Read on to find out more about how this vital program works and how changes to it may affect you in the future.
No. 1: It's not a savings account
Yes, you made significant contributions in the form of payroll taxes to Social Security when you were working, but those taxes were used to pay your parents' Social Security income. Unlike employer-sponsored retirement plans and IRAs, Social Security is a pay-as-you-go system, and that means that the benefits you receive today are being paid for by taxes on current workers, not taxes you paid in the past.
No. 2: Running on fumes
Revenue that's collected from current workers via the 12.4% payroll tax has fallen shy of the amount needed to pay Social Security outlays since 2010. The shortfall is being made up for with money that's coming out of the Social Security Trust Fund. However, the Congressional Budget Office reports that the Trust Fund will run out of money in 2029. If so, then an across-the-board 29% cut in benefits could be on tap in 2030.
No. 3: Averages can deceive
The Social Security Administration reports that the average retired worker receives a monthly Social Security benefit of $1,341 this year. But, as you see in the following chart, the amount of money that recipients receive for Social Security varies widely. Typically, retirees pocket a monthly benefit that ranges between $700 and $1,800.
No. 4: File and suspend is gone
In the past, individuals could file for Social Security at their full retirement age, allowing spouses to collect spousal benefits, and then suspend their own benefit. That strategy provided immediate retirement income via the spousal benefit while also allowing the primary filer to benefit from delaying Social Security until age 70. Under this strategy, a person with a full retirement age of 66 could collect 32% more in benefits by waiting until 70 to restart payments, potentially adding thousands of dollars per year to retiree income. Washington is now closing this loophole on May 1. However, if you already took advantage of this strategy -- or do so before May -- you'll be grandfathered in.
No. 5: The shrinking size of your check
If you're wondering why your Social Security benefit check is a bit smaller this year, blame Washington.
Forty million Americans enroll in Medicare Part D drug plans and many of them have their monthly premiums automatically deducted from their Social Security check. According to the Kaiser Family Foundation, the average premium for a Part D plan increased 13% in 2016 from 2015, however, flat inflation means that Washington didn't increase the amount of your Social Security benefit this year. As a result, your monthly haul from Social Security may have shrunk.
Unfortunately, Medicare payments may take an increasingly bigger chunk of your Social Security benefit in the future too, especially if you're a high income earner. Drug price inflation is outpacing other inflation, so plan premiums will probably continue to grow more quickly than your benefit. Also, Medicare levies a Medicare Part B and Part D surcharge on premiums if income exceeds certain thresholds. Since those thresholds aren't adjusted for inflation, HealthView Services estimates about 25% of all Medicare recipients will be stuck paying Medicare surcharges in 20 years.
No. 6: Change may be coming
Momentum is building to reform Social Security to sidestep the risk of running the Trust Fund dry. Possible solutions include increasing the Social Security payroll tax beyond 12.4%, boosting the full retirement age beyond the current maximum of 67, and changing how benefit increases are calculated.
Changing the payroll tax and the full retirement age won't affect most retirees, but if a switch is made to chained-CPI from standard CPI, your benefits could grow more slowly than they have in the past.
No. 7: Double-dipping is OK
If you're retired, you can still collect a paycheck from working, and if you're older than your full retirement age, it won't reduce the amount you receive in Social Security income.
However, if you've enrolled in Social Security early, you can only earn up to $15,720 this year without it reducing your Social Security benefit. Anything you earn above that level will result in a reduction in your benefits by $1 for every $2 over the limit.
No. 8: Spouses will be taken care of
If you qualify and receive Social Security income, then surviving spouses can receive Social Security income based on your work record after you die. The amount a surviving spouse can collect in Social Security income depends on the spouse's age and the type of benefit they're eligible to receive. Generally, a widow or widower who is full retirement age or older can collect 100% of the deceased spouse's benefit, while a widow or widower between age 60 and full retirement age can collect between 71.5% and 99% of the deceased spouse's basic amount.
No. 9: Uncle Sam gets his cut
No one pays the IRS taxes on more than 85% of Social Security income, but income thresholds for taxation are low enough that many Americans will pay taxes on at least some of their Social Security benefit.
Specifically, if you're single, and your combined income (adjusted gross income + nontaxable interest + one half of your Social Security benefit) is between $25,000 and $34,000, you may have to pay taxes on up to half of your Social Security benefit. Earn more than $34,000 in combined income, and you could be taxed on 85% of your benefit. Married couples with a combined income between $32,000 and $44,000 could pay taxes on up to half their benefit, while couples earning more than $44,000 in combined income may be taxed on up to 85% of their Social Security benefit.