If you are retired or near retirement, you've probably got something to worry about; your Social Security benefits will likely be paid to you in the amount you have planned on (at least that's what most politicians say). But what about the rest of us?
The media onslaught
Watching the news, listening to the radio, or read the newspaper, you probably come across story after story about the health of Social Security. And depending on the actuarial assumptions used and the political twist, the Social Security been described as everything from a program needs only minor adjustments of a crisis that requires immediate and drastic reforms.
It is clear that the underlying assumptions used can wring one's perception of Social Security solvency, and even experts disagree on the best solution. So let's take a look at what we know.
According to the Social Security Administration (SSA), approximately 54 million Americans currently collects some form of social security retirement, disability or death benefit. Social Security is a pay-as-you-go system with today's current workers paying benefits to today's retirees.
How much do today workers pay? Well, the first $ 102,000 of a person's annual salary is covered by a 12.4% Social Security payroll tax, with half being paid by the employee and half by the employer (self-employed individuals pay the whole thing). This money is put into a large holding tank, the Social Security Trust Fund and used to pay current benefits.
The amount of your retirement benefit is based on your average earnings over your working career. Higher lifetime earnings result in higher benefits, so if you have some years with no earnings or low earnings, your benefit amount may be lower than if you had worked steadily.
Your age at the time you begin receiving benefits also affects your aid. Currently, the full retirement age is about to rise from 65 to 67 in two months at a time, as shown in following diagram:
Date of birth
Normal retirement age
1940
65 and 6 months
1941
65 and 8 months
1942
65 and ten months
1943-1954
66
1955
66 and two months
1956
66 and 4 months
1957
66 and 6 months
1958
66 and 8 months
1959
66 and 10 months
1960 and later
67
You can start benefits before your full retirement age, as early as age sixty-second But if you retire early, your Social Security benefit be less than if you had waited until your full retirement age to begin receiving benefits. Specifically, your retirement benefit will be reduced by 5/9ths of 1 percent for each month between your retirement and your full retirement age, up to 36 months, then by 5/12ths 1 percent thereafter. For example, if your full retirement age is 67 you get about 30 percent less if you retire at age 62 than if you wait until age 67 to retire. This reduction is permanent, you will not be eligible for a benefit increase once you reach full retirement age.
Demographic trends
Even those on opposite sides of the political spectrum can agree that demographic factors can worsen Social Security's problems, namely, the life expectancy increases and birth rates are declining. That means that over time, fewer workers have to support more retirees. According to the Social Security Administration (SSA), in 1950 there were 16 workers per beneficiary, today there are three employees per beneficiary, and within 40 years there will be only two workers per beneficiary.
The SSA predicts that by 2017 will Social Security begin to pay more money than it takes in. But by drawing on the Social Security trust fund that on paper is supposed to receive today's payroll surplus, the SSA estimates that Social Security should be able to pay promised benefits until the 2041st
The warning is that the money in the fund is not quite the same money in pocket, various administrations have used the money to pay for general government spending, leaving the trust fund with only a legal obligation to be repaid. To do so, would the Federal Government need to reduce other expenses, borrow money or raise taxes-a hurdle that could factor into the final solution.
Possible fixes
While no one can say with certainty what will happen (and the political process is certain to be controversial), here are some solutions that can make the final cut:
* Allow individuals to invest some of their current Social Security taxes into "personal retirement accounts" (the core of President Bush's plan)
* Raise the current 12.4% payroll tax
* Raise the current cap on wages currently subject to the payroll
* Raise the retirement age after age 67
* Reduce future benefits, especially for wealthy retirees
* Tie initial benefit levels to a more modest price index instead of the current wage index
* Leave the Social Security program itself to invest in assets other than government bonds
Uncertain outcome
Members of Congress and President Bush still supports efforts to reform Social Security, but the progress on the issue has been slow, and domestic priorities are shifting. But that SSA continue to urge all parties to resolve the issue sooner rather than later, to allow for a gradual phasing of the necessary changes. Although the debate will continue on this polarizing issue, there are no easy answers, and the final result of this decades-old program is still uncertain.
In the meantime, what you doing?
Apart from following the news to learn of any legislative developments, you should regularly check your Social Security earnings record to ensure that your earnings have been properly credited. You can find this information on your Social Security Statement, which SSA mails annually any worker over 25 years. You will receive this statement about three months before your birthday. Review it carefully to make sure your paid earnings were correctly reporting errors are common. Call SSA at (800) 772-1213 for more information.
This statement will also estimate the amount of benefits you will be eligible to receive in the future, based on your actual earnings and forecasts for future earnings. If you do not receive this statement in the mail, you can request one by calling your local SSA office or via the Social Security.
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