10 Things You Should Know About Social Security
Friday, August 27, 2010
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The Social Security program turns 75 this month. Since President Franklin D. Roosevelt signed the Social Security Act on Aug. 14, 1935, few workers have not been impacted by the program. Almost all working Americans pay into Social Security, and it’s the largest source of income for U.S. citizens age 65 and older. Yet this huge entitlement has many facets, some of which are not widely known.
The system is larger than the economy of most countries. For the past 20 years, the Social Security program has been the biggest single item in the federal government’s budget. The amount of money flowing through the Social Security system each year is larger than the total economies of all but the 16 richest nations in the world. Between the collection of the first Social Security taxes in 1937 and 2007, the retirement system took in $13 trillion and made payments of $10.6 trillion. That’s an amount that Social Security’s first beneficiary, Ida May Fuller of Ludlow, Vt. — who received benefits averaging about $650 a year over 35 years — probably never dreamed of.
It’s not just a retirement program. The original Social Security program paid benefits only to retired workers. Later, disability benefits and payments to a beneficiary’s spouse and children were added to the program. If you graduated from college four years ago, you are already protected against disability,If you are married and have children, your dependents are protected. Annual Social Security Administration mailings to all workers age 25 and older include an estimate of the amount you would be paid if you became disabled, as well as how much your spouse and children would receive should you pass away.
You pay 6.2% of your income into the system. Almost all (94%) American workers pay 6.2% of their taxable income, up to $106,800 annually, into the Social Security trust fund. Employers pay a matching 6.2% for each worker. Self-employed workers must contribute 12.4% of their income annually.
There haven’t always been cost-of-living increases. Annual cost-of-living adjustments didn’t become a part of Social Security until 1975 (as a result of amendments passed in 1972). Prior to 1975, an act of Congress was required to increase benefits to keep up with consumer prices. Before then, benefits were protected from inflation only when Congress chose to notice it. Now increases in payments are tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers. Annual increases have ranged from 1.3% in 1996 and 1998 to 14.3% in 1980. This year, for the first time since 1975, there was no cost-of-living boost, because the index did not increase between the third quarter of 2008 and 2009.
Retirees can increase annual payments by waiting to claim benefits. You can begin receiving Social Security checks as early as age 62. But payouts increase 7% to 8% for each year you delay your start date, up to age 70. Workers who sign up early receive smaller monthly checks, but potentially for more years, than those who delay claiming but receive bigger payouts for the rest of their lives. Baby boomers who know they are going to have a long life are much better off waiting. Epstein, who is spending down her Roth individual retirement account in order to delay claiming Social Security, says her benefits will increase by about $500 a month by waiting until age 70 to sign up.
Couples have additional options. A retiree is entitled to Social Security benefits of up to 50% of a higher-earning spouse’s payout if that amount is greater than benefits based on his or her own working record. Widows and widowers are entitled to the higher earner’s full retirement payout. Dual-earner couples who have reached their full retirement ages can even claim twice if each first signs up for a spousal payment, then claims again later based on his or her own work record (which will then be higher due to delayed claiming). Ex-spouses are also eligible for benefits if the marriage lasted at least 10 years.
Existing beneficiaries can get do-overs — at least for now. If you’ve already signed up for Social Security and are receiving a reduced payout, it’s not too late to boost your check. If you pay back the entire amount you have already received from Social Security (without interest), you can then re-enroll and qualify for higher payments for the rest of your life. That could change, however. This week Kiplinger reported that the payback option may soon be eliminated.
Social Security numbers have significance. The first three digits of your Social Security number are assigned based on geographical region, with the lowest numbers being assigned in the Northeast. The middle two digits, called the group number, are allocated in a precise but nonconsecutive order from 01 to 99. The last four digits are issued in a sequential order. More than 420 million unique numbers have been assigned, and they are not reused after a person’s death. Since 1989, Social Security numbers have been issued to Americans shortly after they’re born, which makes younger people’s Social Security numbers somewhat predictable, if you know a person’s date of birth and hometown. And that’s information people commonly list on social-networking websites, according to research by Alessandro Acquisti, an associate professor of information technology and public policy at Carnegie Mellon University. Do not offer personal information such as date of birth and hometown publicly.
Paper Social Security checks will soon be retired. New recipients will be required to collect payments by direct deposit into a bank account or a government Direct Express Debit MasterCard beginning March 1, 2011. Existing beneficiaries must switch to electronic payments by March 1, 2013. Paperless payments are expected to save $300 million over five years, according to Treasury Department estimates.
The trust fund has a projected deficit. The Social Security trust fund is currently projected to be sufficient to provide payments through 2037. Unless changes are made to the program, after that year, resources will be sufficient to pay out only about 78% of scheduled benefits. Congress is considering a variety of potential changes to address the projected shortfall, including tax increases, benefit cuts and a rise in the retirement age. A Senate Special Committee on Aging report released in May found that relatively minor tweaks could put the trust fund back on sound financial ground for at least 75 more years. It’s a shame that the tone of the 75th celebration is sort of nostalgic. I would hope that the 75th anniversary is not only about how good things used to be but also about how good things could still be in the future.
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