Social Security 101
Social Security is often misunderstood in both its original intent when signed into law in 1935, and its future viability. What is clear is the impact on Americans, as more than 66 million (1 in 5) people received Social Security benefits in February 2024 alone†.
Original intent
As the U.S. was deep into the Great Depression, the Franklin Roosevelt administration conceived of what was called at the time "social insurance" for elderly people. This help was intended to be one support of a "three-legged stool," along with an employer pension and personal savings and investments∞.
The original act only provided retirement benefits to individual workers, regardless of amount. It's thought that the first lumpsum payment was made to a Cleveland streetcar driver who retired one day after the program began. Five cents was withheld from his paycheck, but he received a lumpsum payment of 17 cents‡!
Soon thereafter, "dependent benefits" were made available to eligible spouses and children, while also increasing payments. Eventually, benefits were expanded to include cost-of-living increases and disability payments.
How Social Security works
The vast majority of workers, 180 million in 2023, work in Social Security-covered jobs and pay 6.2% of their income (of a maximum annual earnings of $168,600) into Social Security. Employers pay an additional 6.2%.
As of 2024, about 85 cents of each dollar paid into Social Security goes into a trust fund, that in turn pays those retirees, and surviving spouses and children. Approximately 15 cents of that same dollar goes into a trust fund for people with disabilities and their families§.
The amount of Social Security payments workers are eligible to receive depends on how much they earned, how long they worked, and at what age they apply for benefits. Social Security payments can be paid to those as young as 62, but those payments will be permanently reduced by up to 30%. If one delays receiving benefits until age 70, one will receive a delayed retirement credit for every month deferred between full retirement age and 70 years old. Also, delaying Social Security benefits past the age of 70 will not increase benefits.
Basically, the longer one waits to apply for Social Security, the more they'll receive when they do. A few factors will come into play regarding what's best for an individual, including health, life expectancy, and other income sources.
Age-related impacts to your Social Security retirement benefits:
- At 62, a person can begin receiving Social Security benefits.
- Many people retire at 65 because they can apply for Medicare, thus replacing an employer-provided healthcare. Social Security can make up for the lost paycheck.
- Full retirement age (FRA), currently 67 if born in 1960 or later, is the age at which you are entitled to your maximum monthly benefit amount.
- Retirees who wait until 70 to receive benefits can expect as much as 76% higher retirement benefits than if taken at 62.
Social Security benefits are based on one's highest 35 years of earnings. The Social Security Administration will recalculate your benefits each year you continue working beyond FRA. For example, if you're still working at age 67, and assuming you're having a good earnings year, this year will be calculated as part of one of your "best 35 years" and your benefits will be adjusted upwards.
It's strongly recommended to check with the Social Security Administration for any potential errors to your earnings history prior to taking Social Security Retirement benefits.
Future viability
Concern for the long-term funding of Social Security is well founded. Projections suggest that the increasing number of people receiving benefits are outpacing contributing workers. Therefore, deficits caused by more going out than going in to Social Security are expected to deplete the reserves of the main Social Security trust fund in 2035Ұ.
It's estimated that in 2023, there were 2.7 contributing workers for each Social Security beneficiary, and by 2035, there will be an estimated 2.4 workers for each beneficiary¥.
Social Security will still exist in 2035, but officials believe that without changes recipients should expect to receive about 83% of their full benefits.
Congress is the only body that can alter the stability of Social Security, likely incorporating one or more of the following tactics, none of which may be pleasant to consider:
- Cut benefits
- Increase the payroll tax
- Increase age when participants can claim benefits
Congress did pass bipartisan legislation in 1983 increasing the full retirement age from 65 to 67 and made it subject to federal income tax≠.
Secondary income
As stated, Social Security was meant to cover only a portion of expenses after one leaves the workforce. The Social Security Administration states that it is estimated to replace about 40% of pre-retirement incomeⱢ, although many rely on it for at least half, if not more of their income¥.
Because the future of Social Security is tenuous, the fact that it makes up a large part of so many individuals' income, and the average monthly payment is $1,920Ⱡ, one might consider further savings and investments in their financial plan.
Social Security benefits could be taxable at a federal level for certain individuals. The amount of taxes you may be subject to will vary depending on your total income. Also, eight states tax Social Security benefits as of 2024. Please consult a professional tax advisor for more information.
