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Monday, June 16, 2014

That Was Then....This is Now

“Will Social Security exist when I retire?” 

We have all have heard this debate numerous times or likely have thought about it personally.   There is a huge concern that Social Security will begin to pay out more in benefits than it brings in, as the baby-boomers begin to retire.

To Understand the Future – Look to The Past

Before the 1930s, support for the elderly was more a family matter than a Federal concern. Enter the Great Depression which, in addition to widespread national financial devastation entered proposals for a national old-age insurance system. On August 15, 1935, President Roosevelt signed the Social Security Act into law.

Unlike some European nations, the U.S.’s version of Social Security "insurance" was funded from "contributions" in the form of taxes on wages and employers’ payrolls rather than directly from the Government. The act also provided funds to assist children, the blind, and the unemployed; and to institute vocational training programs and provide family health programs.   

Prior to Social Security, the elderly routinely faced the prospect of poverty upon retiring and this program was seen as the answer to that problem.  But Social Security was never meant to be the only source of retirement income! Social Security only replaces about 40% of income and many financial advisors say retirees may need 80% or more of pre-retirement earnings to live comfortably.

The Present

The current Social Security system works like this:
 ·       when you work - you pay taxes into Social Security;
·         the tax money is used to pay benefits to;
·         people who already have retired;
·         people who are disabled;
·         survivors of workers who have died; and
·         the dependents of beneficiaries.

The money you pay in taxes is not held in a personal account for you to use in the future. Your taxes are being used right now to pay people who are currently receiving benefits. Any unused money goes to the Social Security trust fund, not a personal account with your name on it.

You pay Social Security taxes on your earnings up to a certain amount and in 2014, that amount is $117,000. Any earnings over that amount are not subject to Social Security tax. So, if you earn $234,000 and I earn $117,000, we both pay the exact same dollar amount of Social Security tax.

Where your Social Security tax dollars go?

85 cents of every Social Security tax dollar you pay goes to a trust fund that pays for the benefits to current retirees and their families and to surviving spouses and children of workers who have died.  The other 15 cents goes to a trust fund that pays benefits to people with disabilities and their families.

Receiving Retirement Benefits

Delayed retirement

If you choose to delay taking your benefit when you reach your full retirement age (which differs depending on when you were born), your eventual benefit will be increased.

Early retirement

You may also start receiving benefits early - at age 62. However, if you opt for early Social Security retirement, your benefits are permanently reduced. It is reduced about one-half of 1% for each month you start your Social Security before your full retirement age. For example: if your full retirement age is 66 and you begin to receive your benefit when you are 62, you would only get 75% of your full amount.  This percentage reduction does not change when you finally reach full retirement age if you choose early retirement. It is a forever kind of thing!

If you work and get benefits

You can continue to work and still receive your retirement benefit. Your earnings in the month you reach your full retirement age will not reduce your Social Security benefits. However, your benefits will be reduced if your earnings exceed certain limits for the months before you reach your full retirement age.

If you work but start receiving benefits before full retirement age, $1 in benefits will be deducted for each $2 in earnings you have above the annual limit. In 2014, the limit is $15,480.

In the year you reach your full retirement age, your benefits will be reduced $1 for every $3 you earn over a different annual limit ($41,400 in 2014) until the month you reach full retirement age.

The Future

The government’s position seems to be that there is enough money coming in and in the trust fund to pay all benefits on schedule until 2033 but after that it is likely that benefits will be reduced. This is because the next decade will see a large drop in worker-to-beneficiary ratios. 

Once the trust fund is depleted, there will be no surplus remaining and the amount paid out can only match what's coming in through employment taxes. The problem gets compounded when you consider that people's life-spans are growing longer, the birth rate is declining, and the cost of living is increasing.

When Social Security was first established, the worker to beneficiary ratio was over 15 to 1; while today it's closer to 3 to 1. This means that less money will be put into the system, while more gets taken out.

For additional information on Social Security go to:

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