For seniors, there's probably no social program that's held in higher regard than Social Security. That's because more than three out of five retired workers currently lean on their monthly check from Social Security to account for at least half of their income. Further, it's singlehandedly responsible for keeping an estimated 22 million people out of poverty each month.
It's also a program that's bound to change significantly by the time your children or grandchildren hit their eligible claiming age. But that doesn't mean there aren't valuable lessons you can pass along now to help them better understand this all-important social program. Here are the seven most important things you can teach your children and grandchildren about Social Security right now.
1. It's not an entitlement program
To begin with, teach your kids and grandkids that they aren't simply given Social Security benefits because they're citizens. The way benefits are earned is by working.
In order to receive Social Security benefits, your kids and grandkids will need 40 lifetime work credits, of which a maximum of four can be earned each year. Though they'll have to work at least 10 years to reach the amount needed to receive a retired worker benefit, the Social Security Administration has set the bar pretty low for reaching these work credits.
For example, in 2019, $1,360 in earned income will earn one work credit. Thus, it only takes $5,440 in earned income to max out next year's work credits. If they do this for a decade, your kids and grandkids will be on track to receive a Social Security retirement benefit decades down the road.
2. It's about far more than just retired workers
It'd also be a good idea to teach your kids and/or grandkids that Social Security does a lot more than simply provide most seniors with a monthly check.
For instance, around 90% of all workers between the ages of 21 and 64 are covered in the event of a long-term disability by Social Security. Statistics from the Social Security Administration (SSA) show that more than a quarter of all 20-year-olds will become disabled prior to reaching their full retirement age, which would be their 67th birthday. In other words, Social Security steps in and ensures that folks who have worked but no longer can have some form of monthly income.
The same can be said for survivor's insurance protection. Approximately 96% of today's workers between the ages of 20 and 49 have survivor's insurance protection for their spouse and/or young children in the event of an untimely death. While we may not like to think about these things, it's important to know that Social Security has your kids' and grandkids' backs in more ways than one.
3. It'll be there when you retire
Very important: Social Security isn't going bankrupt, and it will be there for your children and grandchildren when they retire.
There's no pussyfooting around it: Social Security is in trouble. The latest Board of Trustees report calls for the program's $2.89 trillion in asset reserves to be completely gone by 2034. But this doesn't mean Social Security is going bankrupt. The reality is that Social Security has two sources of recurring revenue that'll ensure money continues flowing into the program for disbursement to eligible beneficiaries.
First, there's the 12.4% payroll tax on earned income of up to $128,400 (as of 2018). And second, there's the taxation of Social Security benefits over specific earning thresholds. The taxation of benefits currently impacts 56% of all households with seniors aged 62 and over. In sum, as long as Americans keep working, Social Security will continue collecting revenue. It's virtually incapable of bankruptcy, which means it'll be there for many generations to come.
4. It's only designed to be a secondary or tertiary income source
On the other hand, Social Security was never designed to be a primary income source, even for lower-income workers. The SSA suggests that the average retiree can expect the program to replace about 40% of their working wages. Even after a 2.8% "raise" in 2019, the average retired worker will only be bringing home $1,461 a month, which isn't going to stretch very far in many states.
Making matters worse, the expected depletion of Social Security's asset reserves in 2034 may lead to an across-the-board cut in benefits of up to 21%. Folks who are heavily reliant on Social Security income to make ends meet could face all sorts of problems should this happen.
Long story short, you'll want to be clear to your kids and grandkids that this is a program designed to supplement your primary income source. It's not meant to be a main source of income and will likely disappoint if leaned on as such.
5. You should work at least 35 years
Next, you'll want to instill in your kids and grandkids the importance of working over a long period of time. Though there are actually more than a half dozen factors that can directly and indirectly impact a person's payout, their work and earnings history are the most tangible.
When calculating an individual's full retirement benefit, the SSA will take into account their 35 highest-earning, inflation-adjusted years. If a person hasn't worked 35 years, then the SSA will average in $0 for each year less than 35. This can quickly drag down a retiree's eventual benefit, which is why working a minimum of 35 years, if not longer, is important.
It probably goes without saying, but you may also want to explain the importance of earning as much as possible each year. Again, even though the SSA is using an inflation-adjusted formula, the more they earn (up to the payroll tax cap), the higher their eventual payout should be, assuming they've worked at least 35 years.
6. Your claiming age has a big impact on your eventual payout
Aside from work and earnings history, no factor is more of a Social Security wild card than a person's claiming age. That's because the SSA incents workers to hold off on their claim by providing an 8% annual increase to their eventual payout, beginning at age 62 and ending at age 70. If we were looking at two identical individuals (i.e., same work history, earnings history, and birth year), the one claiming at age 70 could net 76% more per month than the one claiming at age 62.
You'll want to teach your children and grandchildren to weigh the importance of factors that matter to them in determining their eventual claiming age. For instance, if they're married, they'll want to coordinate their claiming decision with their spouse to optimize household income over the long run. Other factors like health and financial well-being will be important, too.
Likewise, remind your kids and grandkids that their monthly payout figure isn't nearly as important as the amount they receive over their lifetime. Though it's a bit of a crapshoot since we (thankfully) don't know our expiration date, the goal is to generate as much lifetime income as possible from Social Security. Sometimes that might mean claiming early and accepting a permanent monthly reduction to your payout; and other times it might mean waiting until age 70 or somewhere in between.
7. You can't rely on the government to fix Social Security's problems
Last but not least, teach your kids and grandkids that they shouldn't be counting on the federal government to resolve Social Security's estimated cash shortfall of $13.2 trillion between 2034 and 2092.
Don't get me wrong: Congress has two viable solutions currently on the table that would almost assuredly fix Social Security. Democrats have proposed raising revenue by increasing or lifting the payroll tax cap. Essentially, it would require the wealthy to pay more into the system. Meanwhile, Republicans want to increase the full retirement age, thereby requiring workers to wait longer to receive their full payout or to accept a steeper reduction in their monthly payout if claiming early. Either way, it would lower long-term expenditures.
Both of these solutions would fix Social Security's cash shortfall, and they'd work even more optimally together. Unfortunately, since neither party has a supermajority vote in the Senate, and both parties believe they have the only correct answer, we're witnessing a stalemate of lengthy proportions. It'd be great if Congress addressed Social Security's shortcomings, but the next generations shouldn't count on it.
Set your kids and grandkids up for success by passing along what you've learned.