Winston Churchill once described Soviet Russia as "a riddle, wrapped in a mystery, inside an enigma." While that was a politically motivated statement, it may also aptly described Social Security, the federal program designed to provide financial support to our nation's workers in retirement.
Much of the Social Security program remains a mystery to the American public, both working and retired; and if the American public doesn't understand how the program can help them, they'll be unable to take full advantage of its benefits. An AARP survey of financial advisors last year showed that just 1% believed their clients were "very knowledgeable" about Social Security.
With this in mind, let's take a closer look at 20 things you should know about Social Security.
1. It's been paying out benefits for decades: The Social Security Act was first signed into law by President Franklin D. Roosevelt on Aug. 14, 1935, with payroll taxes first collected in 1937 and monthly benefits beginning in January 1940. The program's been paying out benefits for more than 75 years, and it'll continue to pay out benefits for decades to come. Between 1937 and 2009 the program paid out a cumulative $11.3 trillion.
2. It only invests in guaranteed assets: The money held by the Social Security Trust Funds is invested, but only in securities with guaranteed principal and interest. This pretty much limits investments to short- and long-term U.S. Treasuries and special obligation securities issued only to federal trust funds.
3. Both you and your employer are paying into Social Security: Social Security is funded through the payroll tax, which currently sits at 12.4%. You and your employer each pay half of that -- 6.2% of your wages. Self-employed people are responsible for paying all 12.4%.
4. There's a payroll tax cap: The aforementioned 12.4% payroll tax is collected on income up to $118,500 as of 2016. Every dollar earned above and beyond $118,500 is free and clear of the payroll tax.
5. It's not exactly an entitlement: Social Security covers 94% of American workers, but in order to qualify, a worker will need to collect 40 "work credits" over their lifetime. A maximum of four work credits can be earned each year, with one work credit equating to $1,260 in 2016. Thus, $5,040 in income in 2016 would max out your work credits for the year. Some exceptions for younger workers who become disabled or pass away may apply.
6. It covers more than just workers: Social Security is best known for covering retirees, but it also provides benefits to some workers' spouses and their qualified children, as well as to the disabled, and to eligible family members of deceased workers. Nearly 60 million people received a Social Security benefit payment in December 2015, 40 million of whom were retired workers.
7. Here's about how much of your prior salary the benefits cover: According to the Social Security Administration, benefits paid are designed to replace about 40% of a worker's income during retirement. Based on data from the SSA, this figure is currently closer to 55% for low-income earners, and 27% for maximum earners.
8. You can claim benefits earlier ...: Retirees are eligible to file for benefits as early as age 62, as late as age 70, and anywhere in between.
9. ... But you probably shouldn't, because benefits grow over time: The longer an individual waits to file for benefits, the more their benefits will increase in value. On average, for every year an eligible individual holds off on filing for benefits, their benefit amount will increase by 8%.
10. The full retirement age isn't static: The full retirement age, or FRA, is the level at which an eligible beneficiary can start taking 100% of their calculated benefit. However, the FRA is a moving target: It's changing based on the year you were born. Currently, the FRA is 66 years, but it'll be rising by two months each year for Americans born between 1955 and 1959, officially hitting 67 for those born in 1960 and later. Individuals claiming after their FRA could receive in excess of 100% of their benefit.
11. There's no minimum benefit: It takes at least 10 years for a worker to qualify for lifetime Social Security benefits, but there's no minimum benefit they'll be eligible for. If a worker earns very little over their lifetime, their monthly benefit payment might be less than $100.
12. There is, however, a maximum benefit: On the flip side, regardless of how much you make during your lifetime, the maximum monthly benefit a worker retiring at full retirement age can expect in 2016 is $2,639 per month. That's actually $24 less than 2015 levels, due to an unusual combination of events: A dip in the Consumer Price Index meant there was no cost of living adjustment (see item 15), while the national average wage index (which is used to calculate SSI benefits) rose.
13. The average retiree's monthly benefit payment is ... : According to data from January 2016, retired workers were receiving an average of $1,341 per month, or about $16,100 per year. Married couples who are both receiving benefits averaged $2,212 a month, or about $26,500 per year.
14. How long you work matters: The Social Security Administration determines your benefit by averaging your annual income over your highest-earning 35 years of work. If you worked fewer than 35 years, the SSA will average in goose eggs (i.e., $0) for each year below 35 that you didn't work, potentially reducing your benefit by a sizable amount.
15. COLA helps you keep up: The SSA typically adjusts benefits annually to keep them in step with inflation – this is known as a cost-of-living adjustment, or COLA. The indicator that determines COLA is the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. In 2016, the CPI-W fell, so no inflationary increase was awarded to beneficiaries.
16. Mulligans do exist: Regret filing for benefits at an early age? There's actually a solution. Form SSA-521, also known as "Request for Withdrawal of Application," allows filers to take a mulligan -- but they can only do this within the first 12 months after filing for benefits. They also have to pay back every cent of the benefits received after they filed. But by doing this, their request for benefits will be undone, and their benefits will again be allowed to grow.
17. There's a cash shortfall on the horizon: What Social Security takes in from payroll taxes stopped being enough to cover what it pays out some years ago. And, according to the latest Trustees' report, the Old-Age, Survivors and Disability Insurance Trust (OASDI) that covers the difference is projected to burn through its reserves by 2035. This does not mean the program is going bankrupt, but it could mean benefit cuts, tax increases, or some combination of the two are coming.
18. Blame demographic shifts for the cash shortfall: Two demographic shifts are responsible for the ongoing depletion of the OASDI. First, baby boomers are retiring in greater numbers and there simply aren't enough new workers to take their places. As the worker-to-beneficiary ratio fell, the cash inflow turned into a cash outflow. Secondly, people are living longer than ever, meaning retirees are, on average, drawing down on the Trust for more years.
19. It's actually a very efficient program: As noted last year, the SSA is administered with exceptionally low overhead. The program paid out nearly $840 billion in benefits in 2014; that year, its expenditures totaled a mere $5.6 billion, or 0.7% of total benefits paid.
20. Your Social Security number says something about your past (but new ones won't): Lastly, prior to June 2011 Social Security numbers (SSNs) were doled out partially based on geography. The first three digits were assigned based on the geographic region you were living in when the number was assigned, with lower numbers on the East Coast and higher numbers as you moved West. The remaining six digits were random. Beginning June 25, 2011, the entire process of SSN assignment became randomized. And no, the program does not reuse SSNs after the people assigned them pass away. You truly are unique!
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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