Social Security

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In common usage, Social Security ("SS") refers to the Retirement Insurance Program,[1] which is one of the social insurance programs run by the United States Social Security Administration. SS provides income benefits to older Americans and is intended to replace approximately 40%[2] of the income that retirees used to receive from their jobs.

How Social Security Is Funded

SS is funded by the proceeds from the payroll taxes of current workers. Every time employees are paid by their employer, a certain percentage of their pay is deducted for FICA (Federal Insurance Contributions Act) tax. In 2009, this amount is equal to 7.65% of gross compensation. The employer contributes a matching amount, so the total FICA tax received by the government is equal to 15.3% of gross compensation.[3]

Those who are self-employed pay a special tax called "Self-Employment Tax", which by itself is equal to a full 15.3% of their income.[3] In order to make this tax more equitable to the FICA tax paid by regular employees, half of the Self-Employment tax is deductible from federal income tax.[4]

Of the 15.3% of each person's compensation that the government receives in taxes, 12.4% is used to pay social security benefits to retirees. The remaining 2.9% is earmarked for Medicare, another of the Social Security Administration's programs, which provides health insurance to retirees.[3]

The Benefits

Who Receives Them?

In order to be eligible for SS benefits, you must earn 40 credits (fewer for people born before 1929). You earn 1 credit for every $1,050 you earn, up to a maximum of 4 per year. The amount of earnings needed to earn each credit only increases slightly to keep pace with inflation, so for most people, it will take 10 years to become eligible for retirement benefits.[5]

SS benefits are primarily intended for retirees. However, certain family members of retirees are also eligible to receive benefits. These family members include spouses, former spouses, children up to age 18 (19 for full-time students who have not yet completed 12th grade), and disabled children of any age. These family benefits have a set limit - usually from 150-180% of the retiree's own personal benefit. However, family benefits do not have any affect on the retiree's benefits. [6]

When Are They Received?

'Full retirement age', as far as the Social Security Administration is concerned, is 67 years old for people born in 1960 or later. The original age was 65 years old, and that still applies to people born prior to 1938; however, the age increases gradually for people born between 1938 and 1960, arriving at the current full retirement age of 67 years.[7]

You can increase or decrease the amount of your monthly social security benefit depending on when you begin receiving benefits relative to your full retirement age. For instance, as long as you have enough credits, you may apply for benefits starting at age 62; however, your monthly benefit will be substantially lower than if you wait until you reach your full retirement age. Similarly, if you wait until you are 70 to apply for social security, your monthly benefit will be even greater than what you would have received at your full retirement age.[8]

How Are They Determined?

Your PIA (primary insurance amount) forms the basis of your monthly SS benefit. The PIA is primarily based on your average earnings in your 35 top earning years. The PIA gives more weight to the first dollars you earned than the later ones, making it a progressive system; i.e. SS replaces a larger percentage of pre-retirement income for low earners than for higher earners. The PIA is also adjusted by specific percentages if you begin receiving benefits either before or after full retirement age, or if you continue to work while receiving benefits. Finally, a COLA (cost of living adjustment) is added to your SS benefits each year, based on the rate of inflation.[9]

An inflation-adjusted limit is set for the maximum monthly SS benefit for someone who retires at full retirement age; in 2009, this figure is $2,323.[10]

The Uncertain Future

SS has become a major policy issue lately because it has become apparent that the system is not sustainable. This is due to the fact that contrary to what many people believe, the payroll taxes of today's workers are not held in a safe account to pay for their future retirement benefits; rather, the tax revenues from today's payroll taxes are used to pay the benefits of current retirees. This has been a sustainable arrangement for most of the history of SS because sustained population growth meant that there were more workers in each successive generation, and therefore, there were more people paying payroll taxes than collecting SS benefits at any given time.

However, the large 'baby boomer' generation is nearing retirement age, and life expectancy has increased. Because of these factors, the worker-to-beneificiary ratio has fallen from 16.5:1 in 1950 to 3.3:1 today, and is expected to reach 2:1 within 40 years.[11] Current estimates predict that SS will operate on an ever-smaller surplus until 2018, at which point it will begin to run at a deficit. Furthermore, while it is true that past surpluses were saved in a trust fund, this fund will be depleted by 2042.[12]

Possible Solutions

There are a few basic solutions that have been proposed to address the problems with social security. They include: reducing benefits; raising payroll taxes; using money from other taxes; and raising the retirement age. US President Barack Obama stated during his campaign that his preferred method of dealing with the SS issue would be to raise the cap on earnings that are liable for payroll taxes[13] - currently, payroll taxes are only assessed on the first $97,500 that a worker earns annually.[13]

References

  1. Social Security Online - Retirement Benefits - ssa.gov
  2. The Future Of Social Security - ssa.gov
  3. 3.0 3.1 3.2 FICA & SECA Tax Rates - ssa.gov
  4. Self-Employment Tax - irs.gov
  5. How Your Earn Credits: How Long Must You Work To Qualify For Social Security? - ssa.gov, June 2008
  6. Retirement Benefits: Family Benefits - ssa.gov, October 2008
  7. Retirement Benefits: Your Retirement Benefits - ssa.gov, October 2008
  8. Understanding The Benefits - ssa.gov
  9. How Much Social Security Will You Get? - Investopedia.com
  10. Social Security Online - FAQ - ssa.gov
  11. Social Security's Future - ssa.gov
  12. Why Social Security's Problems begin in 2018 - The Heritage Foundation
  13. 13.0 13.1 Barack Obama On Social Security - ontheissues.org
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