Social Security has become a critical part of most Americans' financial security in retirement -- and it probably is, or will be, important to you, too.
Check out these 12 interesting Social Security stats, many of which may surprise you. The more you know, the more you'll be able to maximize your Social Security benefits.
Social Security is a huge program. This year, it will pay over 62 million Americans about $955 billion in benefits. The lion's share of that will go to retired workers and their dependents: In December 2016, this group received about three-quarters of all Social Security payments.
Social Security is surprisingly critical to many Americans. According to the Social Security Administration, most elderly beneficiaries get 50% or more of their retirement income from Social Security, while 21% of married ones and 43% of unmarried ones get fully 90% or more of their income from it. According to a 2016 report from the Center on Budget and Policy Priorities, without Social Security income, 22.1 million Americans would be poor. That's rather meaningful, considering how low the official poverty line is. For 2017, it was $12,060 for an individual, $16,240 for a couple, and $24,600 for a household of four. It's estimated that 41.5% of people aged 65 and older would be living in poverty without Social Security, versus 10% with Social Security.
The average monthly retirement benefit was recently $1,368. That amounts to $16,416 per year. If your earnings have been above average, you'll collect more than that -- but the overall maximum monthly Social Security benefit for those retiring at their full retirement age in 2017 is still just $2,687 -- or about $32,000 for the whole year. Those who retire at age 70 in 2017 can collect monthly checks as large as $3,538, for $42,456 per year. That's the maximum, and it isn't an immense income. Remember that about half of all recipients are collecting less than $16,416 per year.
-30% to 24%
You can make your retirement benefit check smaller or bigger, respectively, by filing for benefits earlier or later than your full retirement age. You can claim your benefits as early as age 62 and as late as age 70. For every year beyond your full retirement age that you delay starting to receive benefits, you'll increase their value by about 8% -- until age 70. So delaying from age 67 to 70 can plump up your checks by about 24%. If your full retirement age is 67 and you start collecting benefits at age 62, they will be 30% smaller -- but remember, you'll be getting many more of them than you would if you started collecting later. The system is actually designed so that total benefits received are about the same no matter when you start collecting, if you have an average life span.
To qualify for Social Security retirement benefits based on your earnings, you need to collect 40 "credits." A credit is equivalent to $1,300 in earned income (as of 2017) within a year, and you can earn up to four credits per year. In other words, you can qualify for retirement benefits simply by earning at least $5,200 per year for a decade, which is not an especially high bar.
Meanwhile, the formula that the Social Security Administration uses to calculate your benefits is based on your earnings in the 35 years in which you earned the most money (adjusted for inflation). So it's rather valuable to work a full 35 years or more. If you earned income in only 28 years, the formula will be incorporating seven zeros, which will shrink your benefits. Better still, if you work longer than 35 years, higher-earning years will kick out lower-earning years, boosting your benefits.
Social Security retirement benefits are designed to replace about 40% of your pre-retirement income, assuming you earned an average income. That percentage is higher for lower-income folks and lower for higher earners, because Social Security is a "progressive" program designed to help needy Americans more than well-off Americans.
Employee income is taxed at 6.2% for the purposes of funding Social Security. You may recognize that figure from your pay stubs. However, you may not realize that your employer also pays 6.2% of your wages on your behalf. That's not news to self-employed people, though, as they pay both the employer and employee portions, forking over a hefty 12.4%.
Someone earning $127,200 and someone earning $127 million will pay the same amount in Social Security taxes this year. That's because the amount of our earnings that are taxed for Social Security is capped -- at $127,200 for 2017. Any earnings above that do not get taxed for Social Security. (Many view this as unfair, and one proposed way to strengthen the Social Security program is to eliminate this cap, or at least increase it.)
Social Security's current design, in which current workers' payroll taxes are paid out to retired beneficiaries, is no longer self-sustaining, because the worker-to-beneficiary ratio has been plunging over time. Back in 1950, the ratio was 16.5, with about 48 million workers supporting close to 3 million beneficiaries. The ratio was recently just 2.8 -- and it's expected to hit 2.2 by 2035. Given this situation, many ways to cut benefits or increase revenue to the program have been proposed.
The current Social Security system may be challenged, but it's not doomed, and it won't stop paying beneficiaries. Between taxes taken in and interest earned on them, less benefit checks written, the Social Security trust funds have been running a surplus in every year since 1982. However, because Social Security will soon be paying out more than it brings in, its cash reserves are forecast to run out by 2034. If no changes are made before that time, then Social Security benefits will likely have to be cut by roughly 25%, leaving beneficiaries with about 75% of what they were promised.
There are lots of ways that the Social Security system can be strengthened -- some more pleasant than others. For example, it's estimated that fully 76% of the trust funds' shortfall could be eliminated by increasing the Social Security tax rate for employers and employees to 7.2% in 2022 and 8.2% in 2052. Raising the full retirement age to 69 is a less popular option. Meanwhile, taxing all of each worker's income, instead of just the first $127,200 of it, would wipe out an estimated 74% of the shortfall, assuming the earnings cap were gradually phased out over a 10-year period.
Social Security won't disappear anytime soon, but it is likely to go through some changes in the coming years, with some politicians aiming to preserve or increase benefits and others more willing to cut benefits and preserve lower tax rates. Keep an eye on proposals and let your representatives in Washington know what you endorse or oppose.
Keep learning more about Social Security, too, because the more you know, the more money you'll probably receive from the program.