Tuesday, January 25, 2011

The Status of Social Security Retirement Funds - What You Need to Know

Thinking of retiring and enjoying the fruits of your contributions to Social Security?  Not so fast.

What is Social Security?

Social Security is a mandatory program (Est. 1937 by FDR) that requires you and your employer to contribute a percentage of your earnings (contributions are only required/permitted on the first $106,800 of earnings) to a fund established by the U.S. Government; the fund is used to help: 1) people who become disabled prior to retirement 2) the families of those who pass away prior to retirement; and, 3) those that reach retirement age. 

Medicare (subsidized medical insurance) also falls under the Social Security umbrella.

This Blog is primarily concerned with the status of Social Security for those who reach retirement age.
How Are the Funds I Contribute to Social Security Used by the U.S. Government?

Any excess funds (read: funds not immediately required to pay existing fund obligations) are invested into two Trust Funds. Initially, Social Security was a "pay as you go" program; that is, all benefits were paid out of current contributions by working Americans.  By 1983, it became apparent that this concept would not work as initially intended, so they increased payroll taxes and advised that the system would be good for the next 75 years. As of January 2009, the accumulated surplus in the Social Security Trusts is $2.4 trillion.

Current projections are that the current amounts collected will exceed the amounts being paid out until 2017.  At that point, if nothing changes, we will begin to tap into the Trust Funds.  Currently, the Social Security Administration says that the surplus will not be depleted until 2042.  However, that could change, depending upon how the U.S. economy (and thus the securities that make up the Trust Funds) perform.  Good economy - securities worth more - surplus continues perhaps indefinitely.  Bad economy - securities worth less - trust funds depleted prior to 2042.

Whether the Trust Funds actually exist (as opposed to being an accounting fiction) is a subject of debate.  Conspiracy theorists argue that the Funds have been used to fight wars and to hide federal deficits.  There really is no evidence of such raiding. That being said, it is clear that the program is stressed at some level, and that there is a real threat that it may not be sufficient to achieve its goals where future retiree generations are concerned.

What is the Retirement Age Under Social Security?

Perhaps the first question should be: when can I first receive retirement benefits from Social Security.  The answer is: at age 62.  However, you will not receive full retirement benefits if you stop working at 62. Presently, to receive the full value of your contributions to Social Security, you must wait until you are either age 65 (if you are born prior to 1960) or 67 (if you are born after 1960).

What is the Government Doing to Insure Social Security Will be There When I Need it?

There are a couple of "quick fixes" being considered by the Government, none of which are particularly appealing to most of us.  Generally, they consist of 1) raising the "full benefit" retirement age; 2) reducing benefits for higher wage earners; and 3) reducing the "cost of living" index for Social Security benefits, thereby reducing the amount of benefits to which you are entitled.

All of this is on the table right now.  Although Presidents are loathe to even talk about Social Security, it may even be addressed in President Obama's State of the Union address this evening.

The attached Article by Janet Novack of Forbes.com provides an excellent overview of the Social Security program, and what the future may hold for Baby Boomers (1946-1964), Generation X (1965-1982), the Millennial Generation (1982-2000) and the Techno-Generation (which is how I refer to those born after 2000).  She suggests that, to play it safe, we should all be investing in our own private retirement funds if we can afford to do so.  I tend to agree.  This idea is at the root of the recent movement to permit Americans to reduce their Social Security contributions so that they could invest the money themselves....Then, the Stock Market Crash of October 2008 hit....

The problem with establishing a private retirement fund is: many Americans don't have a job!  Corporate America has frozen pay raises for the past several years!  Many Americans will have to wait years to have any chance of  getting a job that pays them what they were earning in 2007!  And did I mention that the Great Recession has really put a dent in the amount of money contributed into the Social Security Funds over the past several years?

All right, all right - this does sound like doom and gloom.  However, we all have a right to be informed, and to hold the feet of our legislators and leaders  to the fire to make sure the common good is served.  That means opening up the economy so that new businesses and jobs can be created.  It looks like President Obama recognizes that, and I expect that will be his theme tonight. 

I have seen too many good, hard-working talented people come through my door seeking unemployment benefits over the past several years; now, I want to see them coming through with new job offers to analyze.

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