A close look at Social Security

Social Security is a critical source of income for many Americans in retirement; however, it is not likely to cover all of your expenses. To make sure you have enough to live on, it’s a good idea to have other sources of retirement savings.

Understanding Social Security

Social Security was created as a mandatory, government-administered retirement and disability insurance fund for all Americans. Prior to its founding, retirees and the disabled relied exclusively on their own savings or the assistance of their families, exposing less-fortunate Americans to financial hardship. Social Security is funded through a tax on income that allocates money into the budget of the Social Security Administration, where it is then immediately paid out to citizens currently eligible for Social Security benefits. When the money produced by these taxes exceeds the amount needed to pay beneficiaries, the remainder goes into the “Social Security Trust Fund,” where it is invested to provide a fallback for years when participant revenues are not as high.

Who qualifies to receive Social Security benefits

The most common type of benefit received from Social Security is the retirement benefit. Individuals qualify for retirement benefits by earning “credits.” It normally takes 10 years working full-time to accumulate enough credits to qualify for this benefit; however, only those over 62 are eligible to receive it.

The amount an individual receives depends on when s/he chooses to start receiving benefits; payments will be higher the longer the individual waits to access them. Most Americans begin taking their benefits as soon as they turn 62. In fact, only 1.4% of men and 2.5% of women wait until they turn 70 to start taking benefits[1]. If a married person passes, the living spouse is eligible to receive the benefits of his/her partner in addition to his/her own. This is referred to as “survivor’s benefits.”

Individuals who have a physical ailment that is included on Social Security’s list of disabilities, and who are at least 18 years of age, have earned the required credits (around $52,000 in previous earned income) and are eligible for Social Security disability benefits until they are able to return to work[2].

Receiving Social Security payments

Social Security payments can be received through a direct deposit to your bank account or via a check sent to your home.

Distributions from your IRA don’t affect your Social Security disbursements. However, they can affect the amount of income taxes paid, which means that you may need to pay taxes on Social Security Benefit disbursements.

  • As of 2020, single filers with a combined income of less than $25,000 will not pay taxes on Social Security benefits. Those with a combined income between $25,000 and $34,000 will pay taxes on up to 50% of their benefits, and those making more than $34,000 will pay taxes on up to 85% of their benefits.
  • It works a bit differently for married couples who are filing jointly. If filing jointly, the couple must add together both the incomes even if one isn’t receiving Social Security benefits. Couples with a combined income of less than $32,000 will not pay taxes on Social Security benefits. Those with a combined income between $32,000 and $44,000 will pay taxes on up to 50% of their benefits, and those making more than $44,000 will pay taxes on up to 85% of their benefits.

The future of Social Security

In theory, the Social Security program can fund itself indefinitely because the working generation is constantly producing enough money to support retirees and the disabled. However, as the retired population continues to grow exponentially relative to the size of the workforce, serious doubts about the program’s sustainability have emerged. While there are competing opinions on the extent of this problem, there is a consensus that future Social Security payments will not be enough to support coming generations of retirees unless there is significant reform.

Because retirement can create a vulnerable financial situation, investing in your retirement future is incredibly important. Social Security can be a helpful contribution to your retirement income, but it may not be enough to sustain your desired quality of life. You may want to view Social Security as an additional benefit and not a requirement when developing a retirement plan.

 

[1] https://www.fool.com/retirement/general/2015/02/22/the-average-american-takes-social-security-at-this.aspx
[2] https://www.ssa.gov/planners/disability/dqualify.html
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