All Americans know what Social Security is, but too many don't understand some basic information about how the system works. For example, do you know how much your benefit will be at your full retirement age, or how much your Social Security benefits could be affected if Congress doesn't make changes to avoid benefit cuts? Here are a few of the Social Security facts and figures we think all Americans should know.
Of all the Social Security figures that people should know, none is more important than the primary insurance amount. This number tells you how big your monthly Social Security checks will be if you apply for benefits at your full retirement age.
This matters for two reasons. First, it's obviously helpful to know how much you're likely to get each month from Social Security once you apply. It makes planning for retirement that much easier. In fact, given the large share of Americans who rely on Social Security for a significant portion of their income in retirement, one could argue that it's the single-most important number that Americans need to be aware of prior to leaving the workforce.
Secondly, your primary insurance amount serves as a critical reference point for determining when you should take benefits. This follows from the fact that your Social Security benefits are "actuarially adjusted." That is, if you take them prior to your full retirement age, then the Social Security Administration will adjust their size downward to reflect the fact that you're getting them sooner than someone who waits until reaching full retirement. And if you take them later, then the SSA adjusts them upward.
This is a fundamental precept of our Social Security system. As such, every person on the verge of retirement needs to know their primary insurance amount. If you're near retirement and wondering how much you can expect Social Security to send you each month, then you can start by creating an account on my Social Security.
A recent survey indicates that more than 40% of Americans believe there will be no Social Security benefits available when they retire, and this is simply not true. With that in mind, I think everyone needs to know the true worst-case scenario.
In order to keep Social Security paying the current level of benefits, Congress will need to increase the retirement age, increase the Social Security tax rate, or use some combination of the two. Otherwise, the Social Security trust funds will be depleted by 2033.
However, even if Congress does nothing at all (which I believe is unlikely) and the trust funds run out of money, the money flowing in through Social Security taxes will still be enough to cover 77% of current benefits, according to the Social Security and Medicare Trustees' 2014 report. This will decrease slightly as time goes on and people live longer lives, but even as far out as 2088, the program will be able to pay out 72% of current benefits.
So, while Social Security will definitely run out cash reserves if Congress doesn't act, the program won't completely disappear. The takeaway here is that benefits won't be reduced by more than one-fourth, so keep that in mind when planning your retirement.
Few of us should be counting on Social Security to support us in our retirement. After all, as of February, the average monthly benefit was $1,331 per month, which only comes to about $16,000 per year. This financial support is intended to replace about 40% of our pre-retirement earnings. Still, Social Security can be an important income source in retirement. However, it's critical to know what to expect from Social Security so that you can plan effectively and build other income streams.
The Social Security Administration used to mail out annual estimates of what you might expect to collect in retirement based on your work record to date. It has cut back on that, though, and as of late 2014 the SSA only mails these statements to workers a few months before they turn 25, 30, 35, 40, 45, 50, 55, 60, and beyond. It doesn't send estimates to those who have begun receiving benefits, and it also skips those who have set up my Social Security accounts online. It's worth joining the more than 19 million people who have set up such accounts, because they allow you to check your estimated benefits any time you want.
The SSA also offers a handful of calculators to help you estimate and plan future benefits. If you currently earn $75,000 per year and you hope to collect close to that much in retirement, it's useful to learn that you can expect, say, $22,000 annually from Social Security and that you'll have to find another $53,000 in income -- perhaps from dividends, annuities, pensions, or bond interest.
Don't coast through life without a solid sense of your future financial prospects, lest you end up unpleasantly surprised and struggling in your golden years. A little information and effort today can make your tomorrow much more comfortable.