Is There Security in Social Security?

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Many of us are pretty familiar with the concept of Social Security. Webster defines it as: “a federal system of old-age, unemployment, or disability insurance for various categories of employed and dependent persons, financed by a fund maintained jointly by employees, employers and the government.” For most of us, it’s simply a government-run plan meant to help us in retirement. But how does it work? Here’s a rather simple explanation …

  • Calculations—the monthly benefit you get at full retirement (your primary insurance amount—PIA) is based on your Average Indexed Monthly earnings (AIME). It is applied to an inflation-adjusted formula. The PIA is also adjusted according to whether you take retirement before or after your normal retirement age, which is 66 at this time, but is being gradually adjusted to age 67 for those born after 1954. You can begin drawing Social security as early as 62.

  • Spouses—a husband/wife who earns quite a bit less than his/her partner can collect what is referred to as spousal benefits. This simply means the lower-earning spouse can take his/her own benefit, or 50 percent of his/her spouse’s, whichever is greater. Click here for more in-depth information.
  • Funding—in a simple sense, Social Security is a piggy bank holding IOUs from the government. Your specific contributions are not set aside for you, rather they go into a bigger pot from which all eligible citizens draw. One of the problems we’re running into now is, as the population ages, we have fewer workers to fund a greater number of retirees. Plus, the recent recession with its unemployment has meant even fewer workers and funding.
  • Three-Legged Stool—Social Security was never meant to be a singular fund for retirement. When it was created, it was viewed as part of a “three-legged stool” made up of 1) Social Security, 2) pensions and 3) personal savings (such as 401(k)s and IRAs). Today’s workplaces offer few pensions, though, so the stool is a bit wobbly with more stability needed between the other two legs—Social Security and personal savings.

O.K., the big question—will Social Security be around when you’re ready to retire? Opinions vary, depending on your age today. Some experts say the program will be in the red in a few short years, and the system’s trust fund will run dry in 2037. At that point, Social security would be able to pay out only about three-fourths of its promised benefits … through 2083.

What can be done to prolong the system? Experts like MSN Money say there are chiefly two ways to ensure longevity to a failing system like Social Security, and neither is very pleasant.

One way is benefit cuts. With Americans living longer than they were when the program was created in 1935, they’re drawing more benefits over their lifetimes. One way of reducing benefits has been to raise the retirement age. The American Academy of Actuaries has said that gradually raising retirement age by two months per year from 67 to 70 could take care of about half of the long-term deficit.

Deep breath … tax increases. Yep, that’s another solution, with raising payroll taxes or creating a new tax dedicated to Social Security as two options.

While the idea of Social Security may seem simple, the reality of a system in a financial squeeze is multi-layered. For more in-depth Social Security information, visit the website of the Social Security Administration.

Did You Know?

  • Most federal employees hired before 1984 are not eligible for Social Security. They instead are covered under the Civil Service Retirement System.
  • Railroad workers and their families also often benefit from a separate retirement system. The U.S. Railroad Retirement Board administers a program that provides retirement benefits to the country's railroad workers.
  • The maximum monthly benefit that could be received in 2010 was $2,346.

How’s your retirement plan going?
If your “retirement stool” doesn’t have three legs, it should at least have two. Schedule a complimentary financial analysis with our Vantage Investment Services Group. We can help set you on the right course to retirement.