Q: I often hear that the Social Security system is underfunded. Is that true? And as a younger worker, what can I expect from Social Security when I retire, if anything?
A: Social Security benefits currently represent approximately 33% of the aggregate total income of Americans aged 65 and older, according to the Social Security Administration. For future generations of retirees, Social Security may represent an even smaller percentage of retirement income. Here’s what you need to know.
A System at Risk
When Social Security was established in 1935, the average life span among Americans was 63 years. Today, the average lifespan is almost 79 years, according to the Center for Disease Control mortality statistics.
In 1950, 16.5 workers paid retirement benefits for each retiree. By the year 2037, the ratio may be just 2.2 workers to every one retiree.1 By then, the burden of taxes on each worker may well be unmanageable. This aging of the population has led some experts to predict that the Social Security Old Age and Survivors Insurance Trust Fund may run out of assets by the year 2034 without some legislative changes to the system. At that time, income coming into Social Security from taxes on current workers will only cover around 80% of promised benefits. This is one reason why building your own funds for retirement is still more important than ever.
| Shares of Aggregate Retirement Income | |
| For all people age 65 and older: | |
| Social Security Benefits | 33% |
| Pensions | 21% |
| Earnings | 34% |
| Assets and Other Sources of Income | 12% |
| Source: Social Security Administration, Fast Facts & Figures About Social Security, 2017. |
Even under the best scenario, the Social Security system was created as the foundation for retirement, but it was never intended to provide the sum total of financial security during the retirement years. So the more you can do for yourself to save and invest for retirement, the better off you may be.
How Much Will Social Security Pay?
The exact amount of your Social Security benefit will depend upon your earnings history. You can obtain an estimate of your benefits using the Social Security Administration’s online estimator at www.ssa.gov. You can also create a personal mySocial Security account online or call the Social Security toll-free number at (800) 772-1213 and request form SSA-7004, the “Request for Social Security Statement” to get a personalized estimate of your benefits, plus a record of your annual earnings. Like reconciling your bank statement, your Social Security summary of annual earnings should be verified against your tax return statements, W2 forms, or your own records. If there are any discrepancies, report them at once.
How Social Security Works
Social Security contributions are paid by you and your employer. Your contributions have been deducted from your paychecks since the day you started working and are matched by an equal amount paid by your employer. These contributions pay for:
- Retirement benefits — Collectible at any time after age 62 and based on the number of years you’ve been working and the amount you’ve earned. In some cases, your children and your spouse may also be eligible for benefits on your account.
- Survivor’s benefits — A kind of life insurance coverage available to your spouse and dependents.
- Disability insurance — Provides a monthly income in the event you are unable to work due to a disability. Eligibility depends on the number of “credits” you have earned and your age.
When you receive Social Security benefits, other payments may also be made to:
- A spouse age 62 or older.
- A spouse under age 62 who is caring for a child under 16 or a disabled child who is receiving benefits from your earnings.
- Unmarried children under 18 (or under 19) if they are enrolled full time in high school.
When you retire and your earnings history will both determine what you get:
- Currently, you can retire at normal retirement age (between age 66 and age 67 depending on when you were born) and receive full benefits.
- Retire between 62 and normal retirement age and receive a reduced benefit.
- Continue working and delay the receipt of benefits and get a bonus for each year of work past normal retirement age, up to age 70. “Delayed retirement credits” currently amount to 8% a year in order to encourage later retirement.
Changes in Your Monthly Benefits
Your monthly Social Security check may change to reflect the following:
- Cost-of-living increases.
- Eligibility for disability benefits after retirement but before you reach normal retirement age.
Make the Most of Your Benefits
You must apply for Social Security benefits. When you apply, you’ll want to:
- Decide whether you’ll collect your own Social Security benefits, based on your earnings and work history, or your spouse’s. Presumably, you’ll want to choose the one that pays the most. If you retire before a spouse, you can collect your own benefits, then switch and choose the spousal benefits if they are greater when your spouse has filed for benefits.
- Remember to apply for retirement benefits a few months before you want them to start. Some time is required to process all the paperwork, including Social Security number, proof of age, and evidence of recent earnings (W-2 forms from the last two years, or, if you’re self-employed, copies of your two most recent tax returns).
- Reconcile your Social Security earnings report with your own records at three-year intervals. Report any discrepancies.
- Bear in mind that “earnings limitations” (which change each year) may limit the amount you may earn while still receiving Social Security benefits if you apply early. Those limitations end when you reach normal retirement age.
- Keep Social Security records up to date if you change your name in order to have your earnings credited properly.
Regardless of your Social Security options, think of Social Security as only a small percentage of your total retirement plan, and set aside a portion of your income on a regular basis. Saving and investing for your own retirement nest egg is a “must.” I recommend speaking with your financial advisor to make sure you understand your personal Social Security filing options and strategy.
Notes
1Fast Facts & Figures About Social Security, 2020, Social Security Administration, July 2020
Jeremy R. Gussick is a Certified Financial Planner™ professional affiliated with LPL Financial, the nation’s largest independent broker-dealer.* Jeremy specializes in the financial planning and retirement income needs of the LGBT community and was recently named a 2020 FIVE STAR Wealth Manager as mentioned in Philadelphia Magazine.** He is active with several LGBT organizations in the Philadelphia region, including DVLF (Delaware Valley Legacy Fund) and the Independence Business Alliance (IBA), the Philadelphia Region’s LGBT Chamber of Commerce. OutMoney appears monthly. If you have a question for Jeremy, you can contact him via email at [email protected].
Jeremy R. Gussick is a Registered Representative with, and securities and advisory services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
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