How Secure Is Social Security?


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Concept piece on the financial health of our current Social Security system.

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How Secure Is Social Security?

  1. 1. Page 1 of 2 Ameriprise Financial Greg Younger, CRPC® 14755 N. Outer Chesterfield, MO 63017 636.534.2092 How Secure Is Social Security? If you're retired or close to retiring, then you've probably got Birth date Normal retirement age nothing to worry about--your Social Security benefits will likely be paid to you in the amount you've planned on (at least that's 1940 65 years, 6 months what most of the politicians say). But what 1941 65 years, 8 months about the rest of us? 1942 65 years, 10 months The media onslaught 1943-1954 66 years Watching the news, listening to the radio, or 1955 66 years, 2 months reading the newspaper, 1956 66 years, 4 months you've probably come across story after story 1957 66 years, 6 months on the health of Social Security. And, depending on the actuar- ial assumptions used and the political slant, Social Security 1958 66 years, 8 months has been described as everything from a program in need of 1959 66 years, 10 months only minor adjustments to one in crisis requiring immediate, drastic reform. 1960 and later 67 years Obviously, the underlying assumptions used can skew one's You can begin receiving Social Security benefits before your perception of the solvency of Social Security, and even ex- full retirement age, as early as age 62. However, if you retire perts disagree on the best remedy. So let's take a look at what early, your Social Security benefit will be less than if you had we do know. waited until your full retirement age to begin receiving benefits. Just the facts, ma'am Specifically, your retirement benefit will be reduced by 5/9ths of 1 percent for every month between your retirement date and According to the Social Security Administration (SSA), over 50 your full retirement age, up to 36 months, then by 5/12ths of 1 million Americans currently collect some sort of Social Security percent thereafter. For example, if your full retirement age is retirement, disability or death benefit. Social Security is a pay- 67, you'll receive about 30 percent less if you retire at age 62 as-you-go system, with today's current workers paying the than if you wait until age 67 to retire. This reduction is perma- benefits for today's retirees. nent--you won't be eligible for a benefit increase once you How much do today's workers pay? Well, the first $106,800 of reach full retirement age. an individual's annual wages is subject to a 12.4% Social Se- Demographic trends curity payroll tax, with half being paid by the employee and half by the employer (self-employed individuals pay all of it). This Even those on opposite sides of the political spectrum can money is put into a big holding tank--the Social Security trust agree that demographic factors are exacerbating Social Secu- fund--and is used to pay out current benefits. rity's problems, namely, life expectancy is increasing and the birth rate is decreasing. This means that over time, fewer The amount of your retirement benefit is based on your aver- workers will have to support more retirees. According to the age earnings over your working career. Higher lifetime earn- SSA, in 1950, there were 16 workers per beneficiary, today ings result in higher benefits, so if you have some years of no there are 3 workers per beneficiary, and within 25 years there earnings or low earnings, your benefit amount may be lower will be just 2 workers per beneficiary. than if you had worked steadily. The SSA predicts that in 2017, Social Security will begin pay- Your age at the time you start receiving benefits also affects ing out more money than it takes in. However, by drawing on your benefit amount. Currently, the full retirement age is in the the Social Security trust fund that, on paper, is supposed to process of rising from 65 to 67 in two-month increments, as receive today's payroll surpluses, the SSA estimates that shown in the following chart: See disclaimer on final page May 10, 2009
  2. 2. Page 2 of 2 Ameriprise Financial Social Security should be able to pay promised benefits until Uncertain outcome 2041. Members of Congress and the President still support efforts to The caveat is that money in the trust fund isn't exactly like reform Social Security, but progress on the issue has been money in your pocket--various slow, and domestic priorities are shifting. However, the SSA administrations have used the continues to urge all parties to address the issue sooner rather money to pay for general gov- than later, to allow for a gradual phasing in of any necessary ernment spending, leaving the changes. trust fund with only a legal Although debate will continue on this polarizing topic, there are obligation to be paid back. To no easy answers, and the final outcome for this decades-old do so, the federal government program is still uncertain. would need to reduce other spending, borrow money, or In the meantime, what can you do? raise taxes--a hurdle that might factor into the final solution. Aside from following the news to learn of any legislative devel- Possible fixes opments, you should periodically check your Social Security earnings record to make sure that your earnings have been While no one can say for sure what will happen (and the politi- properly credited. You cal process is sure to be contentious), here are some solutions can find this information that have been proposed: on your Social Security • Statement, which the Allow individuals to invest some of their current Social SSA mails annually to Security taxes in quot;personal retirement accountsquot; every worker over age • Raise the current 12.4% payroll tax 25. You will receive this statement about three • Raise the current ceiling on wages currently subject to the months before your payroll tax birthday. Review it • Raise the retirement age beyond age 67 carefully to make sure your paid earnings were accurately reported--mistakes are common. Call the SSA at (800) 772- • Reduce future benefits, especially for wealthy retirees 1213 for more information. • Tie initial benefit levels to a more modest price index in- This statement will also estimate the amount of Social Security stead of the current wage index benefits you will be eligible to receive in the future, based on your actual earnings and projections of future earnings. If you • Allow the Social Security program itself to invest in assets don’t receive this statement in the mail, you can request one other than government bonds by calling your local SSA office or through the Social Security website at Disclosure Information -- Important -- Please Review The information contained in this material is being provided for general education purposes and with the understanding that it is not intended to be used or interpreted as specific legal, tax or investment advice. It does not address or account for your individual investor circumstances. Investment decisions should always be made based on your specific financial needs and objectives, goals, time horizon and risk tolerance. The information contained in this communication, including attachments, may be provided to support the marketing of a particular product or service. You cannot rely on this to avoid tax penalties that may be imposed under the Internal Revenue Code. Consult your tax advisor or attorney regarding tax issues specific to your circumstances. Neither Ameriprise Financial Services, Inc. nor any of its employees or representatives are authorized to give legal or tax advice. You are encouraged to seek the guidance of your own personal legal or tax counsel. Ameriprise Financial Services, Inc. Member FINRA and SIPC. The information in this document is provided by a third party and has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial Services, Inc. While the publisher has been diligent in attempting to provide accurate information, the accuracy of the information cannot be guaranteed. Laws and regulations change frequently, and are subject to differing legal interpretations. Accordingly, neither the publisher nor any of its licensees or their distributees shall be liable for any loss or damage caused, or alleged to have been caused, by the use or reliance upon this service. Prepared by Forefield Inc, Copyright 2009 May 10, 2009