5 Answers to Your Most Baffling Social Security Questions
In an era where most Americans have essentially been left to their own devices to pay for retirement, Social Security has become one of the last remaining sources of guaranteed income for millions of retirees. As such, it is an important program that should be understood by anyone looking to maintain a comfortable standard of living during their golden years. However, like most government programs, Social Security was not designed with simplicity in mind. If all the issues concerning Social Security bewilder you, the answers to these pressing questions should help you make sense of some of it.
1. How exactly does Social Security work?
Many people have the impression that their Social Security taxes are placed into a special account that is reserved just for them, but this is not the case. Instead, Social Security is a “pay-as-you-go” system: taxes from today’s workers are used to provide benefits for today’s retirees. Likewise, your retirement benefits will come from the taxes of a younger generation of workers.
2. What is the future of Social Security?
The problem with Social Security is that the taxes from current workers are not sufficient to pay current retires. Indeed, the Social Security system is currently running a deficit of 4% per year, which forces the government to dip into its trust fund — the accumulation of past surpluses — to make up the difference. Unfortunately, that trust fund is expected to be depleted by 2034, at which point the government would only be able to fund approximately 75% to 80% of promised benefits.
3. Does that mean Social Security won’t exist when I retire?
Despite all the dire talk out of Washington, Social Security will almost assuredly still exist when you retire. The program is very popular, which makes the political consequences of inaction far too great for politicians to bear. However, in order to solve the very real financial problems of Social Security, painful choices will have to be made by our nation’s leaders. Although a grand compromise has not arisen yet, future workers should expect some combination of tax increases, benefit cuts, and increases in the retirement age.
4. How much money should I expect to receive?
As currently implemented, your Social Security benefits depend on two main factors: the income that you received while working, and the age at which you begin collecting benefits. The current maximum benefit for workers who retire in 2012 at age 66 is $2,513 per month, but the average benefit for all current retirees is approximately half that amount. These values will increase as payments are adjusted annually to reflect changes in the cost of living, and monthly benefits can be increased substantially — by approximately 7% per year — if you are willing to delay retirement. However, it is important to realize that Congress can potentially change these benefits at any time.
5. What does this mean for my retirement planning?
When you are adding up your sources for retirement income, it’s probably safe to pencil in social security benefits as a part of that total, but you should be rather conservative in your estimate of these benefits. Treat Social Security as a supplement, not a replacement, to other retirement savings. In short, you still need to save money in a 401(k) or IRA if you wish to avoid the rather destitute fate of one-third of all Americans who rely on Social Security for more than 90% of their retirement benefits.
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