Understanding Social Security

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Social Security was created by Franklin Delano Roosevelt during the great depression. The true name of Social Security is the Old Age, Survivors, and Disability Insurance Program. It was designed as a safety net for the old, widowed, and disabled during a time when everyone had to fend for themselves and these groups were typically poverty stricken. By the time America finally adopted its social security program in 1935 there were already at least 20 European nations operating similar types of social insurance. The actual Social Security Act was signed into law on August 14, 1935. The Social Security Board then had to register all employers and workers in the US by January 1, 1937, which was the time when workers would begin earning credits towards the Old Age insurance. In 1939 amendments were made to account for the spouses of retired workers and the widowed. In 1950 the Social Security Administration was born and Cost of Living increases were instated. The next major change happened in 1954 with the addition of disability benefits to Social Security.

The Social Security system is funded through the collection of FICA taxes on you wages. Both you and your employer pay the FICA tax on a percentage of your wages. The portions of FICA going towards social security is 12.4%. Of the 12.4% you pay 6.2% and your employer pays 6.2%.The remaining portion of your FICA money is paid towards Medicare. One thing to keep in mind is that you only pay FICA on income up to $106,800.00 per year. Any amount of money you earn above that ceiling is excluded from Social Security from both a taxation and distribution stand point. One good thing about FICA is that you only pay it on wages you earn. Your investment income is not subject to FICA and therefore you won’t have to pay FICA when you retire and start living off your investments. This reduced tax burden will allow you to live on less money than your salary at the time you retire. Once you begin working and have started earning wages you will start receiving yearly statements from the Social Security Administration outlining your eligible benefits based on your earnings to day. The statement shows you your income by year, the amount of money you have paid into Social Security, and the benefit you could expect to receive based on your current income. The age at which you can start receiving benefits differs based on the year you were born. If you were born prior to 1937 you are eligible to retire with full distribution at age 65. If you were born between 1938-1959 you can retire somewhere between 65-67. After 1960 you are stuck with waiting until 67 to receive full benefits. You have the option to retire at 62 but you will receive less benefits than if you wait until 67. To bridge that gap you should have sufficient alternative savings to last from when you retire to when you start pulling Social Security benefits.

Social Security is a pay as you go system. In other words the money that we are putting in today is going to pay today’s retiree’s. This type of system works well as long as the number of retirees and the amounts of their benefits don’t exceed the the number of wage earners and their contributions to the plan. Currently the amount being taken in by the Social Security Administration exceeds their obligations to retirees. The overage in payment is maintained in the Social Security Fund. Funds in the Social Security Fund are “borrowed” by the Treasury Department who in turn provides the fund with U.S. Treasury Bonds.

The problem with the current Social Security system is a result of an projected increase in retirees and decrease in wage earners. Under the current system the U.S. Social Security system will eventually reach a point where the funds coming in from wage earners will fail to meet the administrations obligations to retirees. The 2009 Social Security Trust Fund Report estimates that the current system should be able to meet their obligations through 2037 (2009 Trust Fund Summary Report). Without changes in legislation the Social Security Administration will be unable to meet their obligations after 2037. The fear of the loss of social security benefits is exacerbated by the fact the law provides no guarantee of benefits. It feasible, although unlikely, that the government could just up and do away with social security one day. There is no binding agreement that says you will get back what you put in. Your benefits are entirely at the mercy of your elected officials, choose them wisely.

In my humble little opinion the best thing we could do would be to adopt individual social security accounts where the funds we put in are attributed directly to us. The funds would still be managed by the government but they would “my” funds and would be paid back to me at retirement. This essentially creates a forced government savings account where you are guaranteed to receive back what you put in adjusted for inflation. There are so many details to be considered when deciding on how to improve the system that I won’t pretend to have a full understanding of the system or how best to improve it. What I do know is that without changes it is going to go belly up. EVERYONE know this is going to happen yet legislators continue to put off doing anything about it. The longer we sit and wait the less time the government is going to have to put a solution in place. I encourage everyone to keep this in mind when voting for their elected officials.

Photo: (James Buck)

{ 1 comment }

1 Evan December 29, 2009 at 2:01 pm

The government runs SS so well, we should probably let them handle our health care also

/sarcasm lol

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