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What is Social Security?
Anyone who has a parent or grandparent has most likely heard about social security, but how much do you actually know about it? Social Security was created by the U.S. government to promote the economic security of U.S. citizens and is designed to pay retired workers aged 65 and older a continuous income after retirement (you can find their PowerPoint here). Approximately 1 in 5 Americans currently receive Social Security benefits and ⅓ are disabled, dependents, or survivors.
How does Social Security work?
Social Security is funded primarily through payroll taxes like the Federal Insurance Contributions Act (FICA) tax and the Self Employed Contributions Act (SECA) tax. Approximately 94% of individuals who are paid by an employer, in some form or another, are taxed into Social Security. In 2021, there were 176 million people taxed into Social Security, while only 65 million received monthly benefits.
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Who receives Social Security?
To receive Social Security, you have to have paid into the system for at least 10 years and be at least 62 years old or are disabled or blind. Spouses and children can also receive benefits of a deceased retiree that was formally receiving benefits. As of December 31, 2020, approximately 9 out of 10 people aged 65 or older received a Social Security benefit. Further, Among elderly Social Security beneficiaries, 37% of men and 42% of women receive 50% or more of their income from Social Security.
Is Social Security Enough?
Calculate your monthly expenses - including your rent/mortgage, bills, and all other costs of living. What do you come up with? According to the U.S. News, “the average Social Security benefit is $1,657 per month in January 2022.” Will this amount cover all of your living costs?
From a personal perspective, this amount would roughly cover my rent, internet, and auto insurance each month but would leave me nothing for other living expenses like groceries and gasoline. To make a long story short, if you want to live comfortably in retirement, you’ll likely need something more than Social Security.
What is the Future of Social Security?
Some experts worry that the aging population in the United States will require more funding than the Social Security system can afford. In a 2021 report, the Social Security Board of Trustees forecasted that the retirement fund (OASI Trust Fund) reserves will be depleted in 2033; in their 2020 report they predicted this would happen in 2034.
If this prediction holds, Congress will either need to increase taxes, lower benefits, raise age requirements, or find alternative funding mechanisms for Social Security. The 2021 report assumes that the COVID-19 pandemic will have long term effects on Social Security funding. Also, Social Security benefits have increased by 9% due to increased costs of living, so inflation can also have a dramatic effect on the remaining benefits (with higher/longer-lasting inflation leading to faster depletion). Based on the age demographics of the U.S. and current economic trends, relying solely on Social Security in retirement seems somewhat risky moving forward.
It’s never too early to start saving for retirement
As we said in our introduction to this series, if you take one thing from this series on retirement investing, let it be this: it’s never too early to start saving for retirement - it may seem like a lifetime away, but time will go fast and your future self will be glad you started saving early! As always, we hope that you will find this series useful and please don’t hesitate to reach out with comments or questions about the content! Here is a running list of the articles included in this series:
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Finish out the week strong!
Dan & Brandon
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock, asset, or cryptocurrency. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.