I can’t believe I’m trying to tackle the subject of social security right now. It’s super complex in it’s history, very controversial by nature, and the future of it’s solvency and makeup are unknown.
But, regardless of all of that, you and I both pay into the Social Security system. So it’s worth it to look close enough to at least provide an estimate of how much of your money you’ll be getting back, right?
Social Security 101
- When people use the term social security they are actually referring to the social insurance program, the Federal Old-Age, Survivors, and Disability Insurance program established by the Social Security Act of 1935.
- Social Security is collected through FICA payroll taxes, which is 7.65% of your earnings up to $106,800.
- The current normal retirement age for full Social Security benefits is 67.
- The average monthly benefit for current retirees is around $1,100 a month.
- Social Security is the single biggest expenditure of the federal government.
From my understanding, Social Security started out as a social program to help those with the most dire needs in our country. Now it seems that social security has become the retirement program for just about everyone. Check out this chart from a recent Social Security survey put on by the University of New Hampshire Survey Center.
That’s crazy. Almost 50% say they are at least very likely to need Social Security in retirement. What about 401Ks, IRAs, etc. Is all this just lost on everyone? Maybe I’m misinterpreting what “need” means in this survey. But I don’t think I’m misinterpreting the fact that Social Security has grown to be more than it’s original intention.
How Much Are You Estimated to Get?
If you want to know how much you can expect in retirement from Social Security, visit the SSA’s estimator page.
They also have a life expectancy calculator there. Puts me at 86 when I finally croak. You should also be receiving an annual statement from the SSA. You’ll be able to tell from that statement what you can expect in retirement.
But all this depends on the future solvency of Social Security. Will they continue cost of living increases (no increases for the last 2 years)? Will they start paying only a % of your benefit? Will they have to change the normal retirement date?
The Future of Social Security?
You hear a lot of hype about how Social Security is failing, or that it won’t be around by the time I retire. What’s the truth? Well, by the above chart I’d say that American’s won’t let it fail. When you have that many people depending on it, it’s going to remain a priority.
I just don’t see Social Security ever going away. It’s a ponzi scheme of sorts in that the earnings of the currently employed are needed to pay to those receiving the benefits. That being the case, everyone who has paid in at least 10 years of Social Security feels like they deserve to get those funds returned to them as benefits. So, once you work for 10 years, there’s no way in heck you’d say drop the whole thing. You put your money into the system, therefore, you don’t want it canceled.
The Trustees Report
Enough of my ramblings. What do the actuaries say? The Social Security trustees put out an annual report opining on the future of social security. They are required to do this just like any other investment house. Here’s what they said in their 2009 report.
“Under the long-range intermediate assumptions, annual cost will begin to exceed tax income in 2016 for the combined OASDI Trust Funds. The combined funds are then projected to become exhausted and thus unable to pay scheduled benefits in full on a timely basis in 2037. The separate DI Trust Fund, however, is projected to become exhausted in 2020.
For the combined OASDI Trust Funds to remain solvent throughout the 75-year projection period, the combined payroll tax rate could be increased during the period in a manner equivalent to an immediate and permanent increase of 2.01 percentage points, benefits could be reduced during the period in a manner equivalent to an immediate and permanent reduction of 13.3 percent, general revenue transfers equivalent to $5.3 trillion in present value could be made during the period, or some combination of approaches could be adopted. Significantly larger changes would be required to maintain solvency beyond 75 years.”
Side note: Where is the 2010 report? The 2010 trustees report has been severely delayed. That doesn’t sound good.
Can You Count on It?
If you go by the 2009 report, it looks like if you are retiring in less than 27 years (age 40 or older) you will receive your full benefit. Of course, I can’t imagine the 2010 report being better than 2009, so we’ll have to see if that holds up.
But let’s say you do get your full benefit. Is the future equivalent of $1,100 a month going to be enough for you in retirement? If that’s all you have at that time, then you’ll likely still be poor. Studies show that 12% of those on Social Security still live below the poverty line. Not a dream retirement for sure.
The moral of the story is that there a lot of moving parts here, but most of us can probably count on the future equivalent of at least $1,100 in retirement from Uncle Sam.
My advice is to play it ultra-conservative and forget about Social Security. Don’t count on it. If you get it, great. If not, no worries because you have your retirement set using your 401K and your IRA.
What’s your take on Social Security? How big of a roll do you think it will play in your retirement?