You may think you know Social Security, but there's a lot more to it than most people realize. It's worth learning more about the program since it plays a critical role in the future financial security of most Americans.
Here are 25 key things to know about Social Security. They can help you strategize better about your retirement and make smarter Social Security decisions, helping you get much more out of the program.
1: $1 trillion
You know Social Security is big, but you may not appreciate how big. It pays some 63 million Americans about $1 trillion in benefits annually. That $1 trillion makes up fully 5% of our country's entire gross domestic product (GDP), which was about $19 trillion in 2017.
2: 88%
One reason Social Security isn't likely to ever run out of money is because it's financed to a great degree by taxes collected from workers. In 2017, about 87.7% of funds coming into the program came from payroll taxes, while 8.5% came from interest and 3.8% came from taxes on benefits. (Social Security benefits are generally not taxed, but if your income passes a certain level while you're receiving Social Security benefits, those benefits may end up being taxed. No more than 85% of your benefits will ever be taxed, though.)
3: 0.6%
The Social Security program is probably more efficient than you might think. Out of its budget of roughly $1 trillion, only 0.6% is used for administrative expenses.
4: 90%
Close to 90% of people aged 65 and older collect Social Security benefits.
5: 33%
A full third of the income of elderly Americans is made up of Social Security benefits.
6: 90%
According to the Social Security Administration, 21% of married elderly Social Security beneficiaries and 44% of unmarried ones get fully 90% or more of their income from the program. Meanwhile, about 48% of married elderly Social Security beneficiaries and 69% of unmarried ones get 50% or more of their income from Social Security.
7: 22 million
According to a report from the Center on Budget and Policy Priorities, without Social Security income, 22 million Americans would be poor. That's rather meaningful, considering how low the official poverty line is. For 2018, the federal poverty level was $12,140 for individuals and $16,460 for a family of two.
8: 66%
Not surprisingly, 66% of Americans have reported that Social Security is one of the most important government programs, per an AARP survey.
9: 73%
You might think that almost all Social Security benefits go to retirees, but you'd be wrong. A hefty portion -- 73% -- of benefits paid out goes to retirees and their dependents, but 17% goes to disabled workers and their dependents, while 10% goes to survivors of deceased workers.
10: 65-67
The normal (or "full") retirement age for Social Security -- the age at which you're eligible to start collecting your full benefits -- used to be 65, but it has been increased for many of us. For those born in 1937 or earlier, it remains 65; for those born in 1960 or later, it's 67; and for those born between 1937 and 1960, it's somewhere in between. Some lawmakers have proposed increasing the full retirement age further.
11: 62 and 70
No matter what your full retirement age is, though, you can choose to start collecting your benefits as early as age 62. That's actually the most common age at which retirees start collecting their benefits. You also can delay starting to collect your benefits beyond your full retirement age -- until age 70, if you want.
12: 8%
You can make your ultimate retirement benefit check bigger or smaller than what you'll get if you start collecting at your full retirement age by starting to collect earlier or later. For every year beyond your full retirement age that you delay beginning to receive benefits, you'll increase their value by about 8%, until age 70. So delaying from age 67 to 70 can leave you with checks about 24% fatter. That works in reverse if you start collecting early. For every year before your full retirement age that you start collecting, your benefits will shrink by about 7%. So if your full retirement age is 67 and you start collecting benefits at age 62, your checks will be about 30% smaller.
13: $0
It can seem like a no-brainer to delay collecting until age 70, if possible, but it's not. The system is designed so that total benefits received are about the same -- a difference of $0 -- no matter when you start collecting, if you have an average life span. Checks that start arriving at age 62 will be considerably smaller, but you'll receive many more of them. (Of course, if many of your ancestors have lived into their 90s, delaying can be worthwhile.)
14: 1 year
It can be hard to decide exactly when to start collecting your benefits. If you make that decision and then wish you'd made another choice, you can change your mind -- as long as you do so within 12 months of starting to collect your benefits and as long as you pay back all the benefits you've received so far. (Form SSA-521 can get the job done.)
15: 40
In order to qualify for Social Security benefits based on your earnings, you need to collect 40 credits. Each credit represents earnings of at least $1,320 (as of 2018) within a year, and you can earn up to four credits per year. Thus, most of us can qualify simply by working for a decade and earning at least $1,320 per quarter (that amounts to $5,280 for the year) as of 2018. For 2019, the value of a credit rises to $1,360.
16: 35
The formula that the Social Security Administration uses to calculate your benefits is based on your earnings in the 35 years in which you earned the most money (adjusted for inflation). So for maximum benefits, aim to work a full 35 years. If you only earned income in 28 years, the formula will be incorporating seven zeros, which will shrink your benefits considerably.
17: 40%
Social Security retirement benefits are designed to replace about 40% of your preretirement income if you earned an average income during your working life, so don't expect it to mostly replace your current income. The percentage is higher for lower-income folks and lower for higher earners. Note, too, that while 40% is more than some countries offer, it's a significantly smaller portion of earnings than many other countries offer via their retirement programs. Spain and the Netherlands, for example, offer more than 80%, while France, Italy, Sweden and Finland, among many others, offer more than 50%.
18: $1,417
The average monthly retirement benefit was recently $1,417. That amounts to about $17,000 per year. If your earnings have been above average, you'll collect more than that -- but not a whole lot more.
19: $1,565 vs. $1,244
The benefits retirees receive differ widely by gender. As of the end of 2017, the average retirement benefit for men was $1,565, while the average for women was considerably less, at $1,244. That's because women are typically paid significantly less than men and are often out of the workforce for some years, too, raising children or caring for family members.
20: $2,788
The overall maximum monthly Social Security benefit for those retiring at their full retirement age was recently $2,788 -- or about $33,500 for the whole year. You can collect even more than that if you earned the maximum wages on which the government collects Social Security payroll taxes and start collecting at age 70. In that case, the most recent maximum monthly benefit was $3,698, or $44,376 for the year. For 2019, the maximum benefit for those retiring at their full retirement age rises to $2,861, and the maximum for those who wait until age 70 rises to $3,777.
21: 2.8%
Social Security benefits are designed to increase in step with inflation, and annual cost-of-living adjustments (COLAs) are common. For 2019, benefits will get the biggest boost they've seen in a while -- a 2.8% increase. The increase in 2018 was just 2%, which was much higher than 2017's 0.3% increase, and 2016, when there was no increase at all.
22: 12.4%
Employee income is taxed at 6.2% for Social Security. That figure may seem familiar from your pay stubs. What you may not appreciate, though, is that employers cough up a corresponding 6.2%. That's not news to self-employed people, unfortunately, as they have to pay both the employer and employee portions, forking over a whopping 12.4% of earnings. (The combined rate when Social Security was created was just 2%!)
23: $128,400
Someone earning $128,400 in 2018 and someone earning $5 million will pay the same Social Security tax. That's because the amount of our earnings that are taxed for Social Security is capped -- at $128,400 for 2018. Any earnings above that do not get taxed for Social Security. (Many view this as unfair, and one proposed way to bolster the Social Security funds is to eliminate this cap or at least increase it substantially.) For 2019, the cap will rise to $132,900.
24: 2.8
One troubling trend for Social Security is that the ratio of contributing workers to beneficiaries has been plunging over time. Back in 1950, the ratio was 16.5, with about 48 million workers supporting close to 3 million beneficiaries. The ratio was recently just 2.8 -- and it's expected to hit 2.2 by 2035. This is making the program in its current configuration no longer self-sustaining over the long run. Thus, many ways to cut benefits or increase income to the program are being proposed.
25: $725,000
Social Security also offers survivor benefits for family members of eligible workers who die. The Center for Budget and Policy Priorities notes that, "For a young worker with average earnings, a spouse, and two children, that's equivalent to a life insurance policy with a face value of over $725,000 in 2018, according to Social Security's actuaries."
Clearly, Social Security has a lot to offer not only retirees, but also disabled workers, their dependents, and survivors of workers. The more you know about Social Security, the more you may be able to get from the program.
...
8 Ways the Government Can Cut Your Social Security Benefit
There's arguably no program more important to senior citizens during retirement than Social Security. Though Medicare's importance is growing over time, no social program tops the guaranteed monthly payout that nearly all seniors receive from Social Security in retirement. And 62% of aged beneficiaries lean on this benefit to provide at least half of their monthly income.
However, the federal government through policy action can alter Social Security income. Some actions could raise additional revenue for the program, ultimately buoying or even lifting scheduled payouts. Meanwhile, others are aimed at cutting long-term program expenditures and, in many cases, reducing monthly and/or lifetime benefits.
Whether you realize it or not, there are eight ways the federal government could take this latter approach and cut your Social Security benefit.
Image source: Getty Images.
1. Raise the full retirement age
One of the most commonly suggested solutions by Republicans for resolving Social Security's long-term (75-year) cash shortfall of $13.2 trillion, as estimated by the latest Trustees report, is to raise the full retirement age.
Full retirement age is the age at which eligible beneficiaries can receive their full retired worker benefit, as determined by their birth year. If you begin receiving your entitlement at any point prior to reaching your full retirement age, you'll be accepting a permanent reduction to your monthly payout. On the other hand, if you wait until after your full retirement age to claim benefits, you can actually receive in excess of 100% of your full monthly benefit.
The full retirement age has been gradually increasing at a much slower rate than longevity. We're living longer, and therefore today's seniors are able to receive a Social Security benefit for much longer than their parents or grandparents. But that's a problem, as it has put a strain on the program.
To resolve this, lawmakers could choose to gradually raise the full retirement age from its expected peak of 67 in 2022, for those born in or after 1960, to, say, 68, 69, or 70 years old. Afterward, retirees would either choose to accept a steeper discount in their monthly payout by claiming early, or they could wait longer to receive their full benefit. Either way, it results in a reduced lifetime Social Security benefit.
Image source: Getty Images.
2. Link benefits to longevity
Another approach that's very similar to the idea of raising the full retirement age is to progressively link benefits to longevity.
What does that mean exactly? Rather than simply picking a number out of thin air and saying that by 2040 the full retirement age will be 69, lawmakers would index the full retirement age to U.S. life expectancies so that it changes each year to reflect increasing or decreasing longevity. The advantage here is that this method would eliminate the possibility of the life expectancy outrunning the increase in full retirement age, as we've seen for many decades now.
Additionally, linking benefits to longevity could also allow lawmakers to adjust when delayed-retirement credits max out, which is currently at age 70. Or, in other words, if retirees are willing to wait long enough, they could still earn in excess of 100% of their monthly payout, just as under the current system.
Ultimately, though, progressively linking benefits to longevity would reduce the length of time beneficiaries could collect a payout, thereby lowering their lifetime benefit.
Image source: Getty Images.
3. Switch the inflationary tether to the Chained CPI
A sneaky way the government could choose to reduce Social Security benefits is by switching the tether that measures inflation and therefore determines the annual cost-of-living adjustments (COLA).
Since COLA was introduced in the mid-1970s, it's had the same inflationary measure: the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. Neither the Democrats nor Republicans particularly care for this inflationary measure since it reflects the spending habits of working-age urban and clerical workers and not of seniors, who comprise a majority of Social Security's beneficiaries.
For Republicans, the solution would be to the switch to the Chained CPI. If the name sounds familiar, it's because the Chained CPI is the same inflationary tether that was introduced with the passage of the Tax Cuts and Jobs Act last December. Though the Chained CPI and the CPI-W are very similar, there is one very big difference: The Chained CPI takes into account substitution bias.
Imagine you're walking down the meat aisle in the supermarket and notice that the price for ground beef has soared. Instead of paying the higher price, you trade down to similar but cheaper meats, such as pork and chicken. This is a perfect example of substitution bias. No other major inflationary index takes substitution bias into account, aside from the Chained CPI. And as a result, it tends to report inflationary increases that are lower than the CPI-W. If Social Security's COLA were tethered to the Chained CPI, it would almost assuredly mean smaller annual raises for beneficiaries.
Image source: Getty Images.
4. Freeze the purchasing power of benefits for some, or all, beneficiaries
A fourth way the federal government could reduce Social Security benefits is by freezing the purchasing power of benefits for some, or all, beneficiaries.
In that approach, rather than continue giving eligible beneficiaries an annual raise (i.e., COLA) that's commensurate with the inflation measured by the CPI-W, Congress would simply vote not to pass along an annual COLA. If no raises were given, then benefits would remain frozen from one year to the next, thereby losing purchasing power to the rising price of goods and services.
This idea has been loosely tossed around on Capitol Hill in two forms. First, there's the idea of freezing benefits for well-to-do individuals who are far less likely to be reliant on Social Security income. The second idea was simply to apply it to all Social Security beneficiaries. Both methods, as noted, would reduce the purchasing power of Social Security income over time, but also reduce long-term expenditures for Social Security.
5. Means-test for benefits
One idea that's made the rounds on Capitol Hill with both Democrats and Republicans is means-testing for benefits. Means-testing is simply a way of saying that benefits would begin to phase out, or be eliminated completely, over a certain annual income level.
During the early stages of presidential campaigning in 2015, former Republican New Jersey Governor Chris Christie suggested implementing means-testing as a way to reduce Social Security's long-term expenditures. Specifically, he suggested a system whereby reduced payouts would go into effect once earned income crossed the $80,000 threshold, and benefits would be phased out completely for retirees with incomes north of $200,000. The thinking here was that the wealthy were far less likely to be reliant on Social Security income if they're bringing in $80,000 or over $200,000 a year in income, so why not reduce or eliminate monthly payouts entirely.
During his presidential campaign, Donald Trump also touched on the subject, saying that he'd forgo taking Social Security benefits, and also implied that other wealthy Americans should do the same. Though means-testing would affect only a relatively small percentage of beneficiaries, it nonetheless is a way to reduce payouts.
Image source: Getty Images.
6. Fully or partially privatize the program
The sixth way the government could reduce Social Security benefits is by partially or fully privatizing the program. This is a solution that former President George W. Bush pushed for in the mid-2000s, and that President Trump and Vice President Mike Pence once supported.
The idea behind privatization is simple: A portion of an individual's retirement benefits would be placed into a retirement account that they could invest as they see fit. This account may have limited investment options, similar to a 401(k) that offers mutual funds, or it could have a wide gamut of options with few restrictions. In this system, proponents argue, workers would have an opportunity to grow their benefit at a faster rate than the 2.9% yield the Social Security program is currently receiving on its nearly $2.9 trillion in asset reserves.
Though privatization would give Americans an opportunity to do more with their retirement benefit, it has two important implications. First, Americans tend to score poorly when it comes to financial literacy, so there's a real possibility some could wind up losing money, putting themselves in worse shape come retirement. And second, it's really a way of reducing the federal government's responsibility of providing benefits to retired workers later in life.
Image source: Getty Images.
7. Use Social Security as a future-loan program
Social Security benefits could also be used as a loan program today that could reduce payouts in the future, which is the cornerstone of a recently introduced Republican plan.
The Economic Security for New Parents Act, introduced roughly a month ago by Marco Rubio, a senator from Florida, would allow parents the option of using future Social Security benefits to take extended leave following the birth of a child. In theory, this would take the burden of paying for leave off of employers, as well as provide a new source of income for parents. In return, parents using this "loan" would be required to wait longer to receive their retired worker benefit when they hit their claiming age.
Among the numerous issues with this bill, one of the biggest problems is that it would reduce the lifetime benefits of those who took advantage of extended leave. An analysis from the Urban Institute, a think tank, found that a single 12-week leave could reduce lifetime benefits by 3%. For a family with four kids, four 12-week absences would reduce lifetime payouts by a whopping 10%.
Image source: Getty Images.
8. Flat-out cut benefits to preserve long-term payouts
Last but not least, lawmakers could simply amend Social Security's payout schedule and reduce benefits across the board. Though this is an extremely unpopular option to resolve Social Security's imminent cash crunch, it's nonetheless an option that is on the table.
According to the Social Security Board of Trustees' 2018 report, the program will begin burning through its $2.89 trillion in asset reserves this year, with total expenditures slightly outpacing expected revenue. However, in 2020 and beyond, this net cash outflow will really accelerate. By 2034, Social Security excess cash is expected to be completely exhausted.
The good news: Social Security's noninterest income -- the 12.4% payroll tax on earned income and the taxation of benefits -- ensures that it won't go bankrupt, and that payouts can continue to be made ad infinitum. The downside is that the current payout schedule is proving to be unsustainable. If Congress doesn't figure out a way to raise additional revenue or cut expenditures in time, an across-the-board benefits cut of up to 21% may be needed by 2034.
Though no one wants to see their Social Security benefit cut, the federal government sure does have a plethora of options to do just that.
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