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SOCIAL (IN)SECURITY

Social Security plays a critical role in our society. For more than 65% of those over 65, the monthly Social Security benefit checks provide more than half of their total income. With all its flaws, Social Security is the main pillar of financial security for most retirees and it’s the only source of guaranteed lifetime income for most Americans.

Social Security BoardThe following is a brief description of how the Social Security system works, the challenges it faces in coming years, and some common myths about it.

Social Security Benefits are funded primarily by the payroll tax of 12.4% on wages up to $113,700.  Employees pay half and employers pay the other half of this tax.   Riding on the wave of baby boomers in the workplace, Social Security income from payroll taxes boomed from the 70’s through the early part of this millennium, creating a massive surplus.   This surplus is in a trust fund which, by law, is invested in interest-bearing US Treasury Bonds.   The Social Security Trust Fund is currently valued at approximately $2.7 Trillion.

Here are some common myths about Social Security.

Myth #1:  Social Security will be bankrupt by the time I start taking it.

Boosted by the interest earnings of the Trust Fund bonds, the Social Security system is expected to continue running surpluses until the year 2023, at which point the Trust Fund is expected to have grown to $3.7 Trillion.   However, the volume of baby boomers reaching retirement during that decade is such that if no other changes are made to the system, this surplus is expected to be exhausted by 2033.  This has led some people to question whether Social Security will still be there when they reach retirement.

On the bright side, though, there are a number of relatively simple changes that have been suggested that would keep Social Security solvent for many more years.    In 2013, the payroll tax rate increased by 2%, so more money is being collected to pay Social Security benefits.   Many have suggested raising or eliminating the wage cap on payroll taxes.   This and other proposed changes would dramatically increase the longevity of the Trust Fund.  There are lots of feasible solutions.   As long as there is the political will to implement some of these solutions, Social Security will continue to be a pillar of financial security for retirees.

It’s also helpful to keep in mind that this will not be the first time Social Security has faced solvency challenges.  There have been many changes made to the system along the way to help keep it in the black.

MYTH #2:  Social Security Trust Fund assets are worthless

Social Security Trust Fund assets are invested in US Treasury Bonds – still considered one of the safest investments on the planet.    Interest from these bonds is currently generating over $100 billion in revenue for the Social Security system.  The government has never defaulted on its bonds, and the bonds issued to the Social Security Trust Fund are special issue, at least as secure as regular US Treasury Bonds.

social-secutiry-dollarNo investment in the world is 100% guaranteed to maintain its value.  However, the Social Security Trust Fund assets are truly about as safe as you can get.


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Myth #3: I can make more on my own

Social Security is designed to be a GUARANTEED source of retirement income that cannot be outlived.   For most people, it’s their only source of guaranteed lifetime income.

It didn’t use to be that way.   30 years ago, in addition to receiving Social Security, over 60% of employees were covered by company pension plans that guaranteed a lifetime income.  Now, less than 17% of employees are covered by such plans.  In its place, employees were given the keys to their own retirement funds via 401K and other qualified plans.  However, the assets in these employee-controlled funds have been devastated over the last 13 years by market crashes and market stagnation.Social Security assets are immune from these shocks.

In addition, Social Security benefits are indexed for inflation.  The benefits go up with inflation.   This is a precious feature that is practically unavailable in other investments.

Since most of the bonds in the Social SecurityTrust Fund were purchased years ago, they’re still earning a decent interest rate.  On average, these assets currently earn 4.1% – not bad at all in today’s low interest environment.

Finally, the administrative costs for Social Security are low, less than 1% for every dollar collected, significantly lower than most mutual funds, 401K funds,and broker-managed accounts.

When and How Should I Take My Benefits?

Social Security is and will remain a vital component of retirees’ finances, and people who are now or will soon be eligible to claim their benefitsshould  be diligently exploring how best to maximize those benefits.

Choosing when and how to claim your Social Security Benefits are among the most important financial decisions of your life.   There are many different strategies for getting the most benefits that you’re entitled to.  There are, for instance, over 300 different ways a married or couple can decide to take their benefits.  Many of these strategies allow you to change how you take your benefits mid-stream, or start and stop taking money now in order to take more money later.

The rules are complicated, and the stakes are high.  Making the wrong choice can cost you many thousands of dollars in benefits.