You might not talk about Social Security very often, but it's an enormous part of the national debate -- and your retirement future as well.
What do you need to know about Social Security? As a potential retiree, everything you can. Here are five of the most important things:
It's not ALL that generous
Social Security was never intended to be a pension you could live on. Instead, it was designed to be a supplement to retirees' income. Currently, the average Social Security payout is $1,262 a month, according to the Social Security Administration (SSA). That's an annual income of $15,144.
A remarkable number of people do live nearly entirely on Social Security, however: For about 23% of all married beneficiaries, Social Security represents 90% or more of their income. That soars to 46% of single beneficiaries.
Nevertheless, that $1,262 a month would be tough for individuals to replace, especially because payouts are adjusted for inflation each year. How much?
Most planners recommend that you withdraw no more than 5% from your retirement savings in your first year, assuming you want to adjust withdrawals for inflation each year. Using that assumption, you'd need about $303,000 to generate an inflation-adjusted income of $1,262 a month for the rest of your life.
If you wanted a guarantee, you'd have to buy an immediate annuity with an inflation rider. An inflation-adjusted annuity yielding the same amount would have cost a 65-year-old $325,877 to $348,600 last year, according to Vanguard. That's without benefits to survivors or disability benefits, which Social Security also provides.
It's already means-tested -- somewhat
A common suggestion to make Social Security more financially solvent is to means-test it -- give wealthier recipients smaller payouts and poorer recipients larger ones.
To some extent, benefits are already means-tested, via the tax code. Under current law, individuals don't have to pay taxes on Social Security benefits if their total income is less than $25,000. For couples, the limit is $32,000. If you make more than that, however, you'll pay income taxes on a portion of your benefits, and that portion rises as your income does.
- Individuals with income of $25,000 to $34,000 and couples with income of $32,000 to $44,000 may have to pay taxes on half their benefits.
- Individuals with income of more than $34,000 and couples with income of more than $44,000 may have to pay taxes on 85% of their benefits.
Those provisions, some of which date back as far as the Reagan administration, haven't been adjusted for inflation since they were implemented, says Ray Ferrara, a financial planner in Clearwater, Fla. "You're always getting more people every year whose Social Security payments are taxable," Ferrara says.
Life expectancy hasn't increased that much
You often hear that one reason Social Security could run out of money is that people are living longer than they were in 1935, when the system was created. And that's true, especially if you measure a worker's life span from birth. The increase in life span is smaller, however, if you measure from 65, the traditional retirement age. For example, a man born in 1940 could expect to live to 70.4, according to Social Security's actuarial tables. A male born in 2011, however, can expect to live to 82.2 years old -- a pickup of nearly 12 years.
But much of the pickup in average longevity is from a decrease in infant mortality. A man who reached age 65 in 1940 could expect to live an additional 12.7 years. A man who turned 65 in 2011 could expect to live an additional 18.7 years -- six years longer than the man who retired in 1940.
It can pay to wait
Generally speaking, you can retire early and collect lower Social Security payouts for a long time, or you can retire later and collect higher payments for a longer time. In theory, it all adds up to about the same.
But the main purpose of Social Security is providing a stream of income into your old age. While the average 65-year-old woman can expect to live an additional 21 years, that's just the average. Half of all women will live longer. And, while you may be able to work into your late 60s and 70s, that ability declines as you hit your 80s and 90s.
To the extent that you can, then, it makes sense to get as high an income as you can by delaying retirement. The difference can be substantial. For example, if you retire at 62, you'll get about $750 a month, according to Social Security. Wait to 66, you'll get $1,000. Wait until 70, you'll get $1,320, nearly double what you would have gotten at 62.
Check your options carefully, says Ferrara, and check that Social Security has tracked your income correctly at least every year or so.
It's not in immediate danger
For most years of its existence, the Social Security Administration has collected more in taxes than it has paid out in benefits. The additional funds have been allocated to the Social Security Trust Funds. According to the most recent report by the Social Security Trustees, Social Security payouts will outstrip its tax revenues after 2021, and the Social Security Trust Funds will run out of money in 2033, at which point benefits would have to be reduced.
Why do so many doubt that Social Security will be around? One reason: The trust funds are invested entirely in special government securities -- which, in essence, are IOUs the government has written to itself. The Treasury must honor those IOUs when Social Security redeems them, which means it will either have to take money from the nation's general budget, which could squeeze other programs, or borrow more funds.
Fixing the trust funds would require either raising Social Security taxes by 2.61 percentage points, to 15.01%, reducing benefits by 16.2%, or some combination. Other fixes could include raising the amount of income that Social Security tax applies to. Currently, you pay Social Security tax on your first $113,700 of income.
None of the fixes is likely to be popular, or easy. On the other hand, abandoning Social Security or slashing its benefits are highly unlikely as well: It's an enormously popular program, and one that has slashed the poverty rate among the elderly.
"I think we'll continue to have it," says Ferrara. "But we'll have something different than what we have today. We'll have some sort of safety net. It's so ingrained after these 80 years since it came about, it would be awfully hard to get rid of it."