Understanding the Social Security system

If you're like most workers, a portion of each paycheck is taken out to help pay for our Social Security System. Someday you'll want to retire from work, and when that day comes you'll need to know how much money will be available to you.

First, you must recognize that Social Security retirement benefits will probably not be large enough to fund all of your retirement expenses. For this reason, it is important to consider other ways to save for income in retirement, such as your employer's savings plan, or Roth or Traditional IRA plans.

You should also make sure your Social Security records are accurate. The government has started a program of providing everyone with an annual statement that shows your income and contribution history and provides an estimate of retirement benefits. This report is called a Personal Earnings and Benefits Estimate Statement. You can also request this report by getting a form from a Social Security office.

Finally, you should make sure that as you begin planning for retirement, you are realistic in estimating how much of your needed income Social Security will provide.

An overview

The Social Security System has been a large and visible part of the American financial system since the 1930s. When President Franklin Roosevelt signed the law, it was designed to be a financial security net for older Americans, the system was set up with workers paying into it and beneficiaries getting retirement and other benefits. Since then, the demographic base of the country has changed, the system has grown and can be a controversial topic.

In 2015, the Social Security Administration estimated that over 59 million Americans received over $863 billion in Social Security benefits. Retired workers and their dependents will receive about 82% of that amount with disabled workers and survivors of deceased workers receiving the remainder.

Current issues

The controversy over the financial soundness of the system comes from the aging American population. Since the system is a pay-as-you-go system, the contributions of current workers are used to pay current benefits to those already retired and to accumulate for the benefit of those working. The difficulty comes from the reduction in the number of contributors for each person receiving benefits. In 2014 there were only 2.8 contributors for each recipient and the Social Security Administration estimates that there will be only 2.1 contributing for each recipient by 2033.

Ultimately, to fund the retirements for today's workers, either contributions must increase, benefits must decrease, the earnings on accumulations must increase or additional money must come into the system. There are also proposals that would enable individuals to have more control over how portions of their funds would be invested.

Average monthly benefits in 2015

  • Retired workers - about $1,341
  • Retired couples - about $2,212
  • Young widow with 2 eligible children - about $2,680
  • Aged widow with no children - about $1,285

Benefit levels are adjusted annually for the cost of living. The adjustment for 2015 was 1.7% and 0% for 2016.

Contribution rates

The system receives income from employees as well as employers. Over the years the tax rate has increased as well as the earnings base subject to the tax. The rates in 2015 are:

For workers Social Security tax of 6.20% on the first $118,500 of wages. Medicare tax of 1.45% on all wages plus an additional 0.9% Medicare surtax on wages above $200,000 for single filers and above $250,000 for joint filers.
For employers Social Security tax of 6.20% on the first $118,500 of wages. Medicare tax of 1.45% on all wages.
For the self employed Social Security tax of 12.40% on the first $118,500 of wages. Medicare tax of 2.90% on all wages plus an additional 0.9% Medicare surtax on wages above $200,000 for single filers and above $250,000 for joint filers.

*Only income up to $118,500 is subject to Social Security taxes while all income is subject to the Medicare tax.

Taxation of Benefits

Since the middle 1980s, some portion of Social Security benefits has been subject to income tax. This taxation is based on the overall level of income the individual has. The rules are somewhat complex, but generally speaking, if you are married and file a joint federal income tax return and your adjusted gross income is above $34,000, one half of your retirement benefits are subject to tax. As your income rises, increasing portions of your benefits are taxed. The portion subject to tax increases to 85% if a married couple filing a joint tax return has income above $44,000. Consult your tax advisor to learn how this may apply to you.

For more information, contact your local Social Security Office.

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