Questions and Answers about Social Security
(#10 is the kicker)
1. How much am I paying for Social Security?
You are paying 6.2% of your wage earnings, and your employer is paying another 6.2% on your behalf, for a total of 12.4%. This Social Security payroll tax applies to the first $76,200 of your earnings. If you are self-employed, you are paying the entire 12.4% directly. Of this amount, 10.6 percentage points is for the government's Old Age and Survivors Insurance program (known as OASI), which finances Social Security retirement benefits. The other 1.8 percentage points is for the government's Disability Insurance program. An additional payroll tax of 2.9% of earnings (with no wage ceiling) is levied for Medicare, making the total payroll tax 15.3%. Only the 10.6% OASI portion is considered by the NCPA Social Security Calculator.
2. What happens to my Social Security payroll tax payments?
Social Security is a pay-as-you-go program. This means that today's tax payments are used to pay benefits to today's retirees. When today's workers retire, their benefits will be fully paid only if the government is able to collect enough in taxes from future workers. In this sense, Social Security differs from most private pensions, which put aside funds and invest in real assets. These are called funded programs. By contrast, every dollar collected in payroll taxes is spent - the very minute, the very hour, the very day it comes in the Treasury's door. No funds are being stashed away in bank vaults. No investments are being made in real assets. Most of the money is spent on Social Security benefits. Any surplus is spent on other programs, or (more recently) is used to buy back government debt. Nothing is saved.
3. What is the Social Security Trust Fund?
The Federal Old-Age and Survivors Insurance Trust Fund is basically an accounting system used to keep track of Social Security taxes and benefits. Many people mistakenly believe that the trust fund collects taxes and pays benefits. In reality, the trust fund performs no real economic function. Every payroll tax check sent to Washington is written to the U.S. Treasury. Every Social Security benefit check is written on the U.S. Treasury. By contrast, the trust fund neither cashes checks nor dispenses them. Technically, the trust fund holds interest-bearing U.S. government bonds, representing the accounting surplus of payroll taxes collected minus benefits paid. But these are very special bonds. They are not counted as part of the government's official outstanding debt. The Social Security trustees cannot sell them on Wall Street or to foreign investors. Nor can they use them to pay benefits. They can only hand them back to the Treasury. In this sense, the bonds are nothing more than IOUs the government has written to itself. And the only thing the government can do with these "assets" is hand them back to itself. Further, every asset of the trust fund is a liability of the Treasury. Summing over the accounts of both agencies of government, the assets and liabilities cancel each other out, adding up to zero. Ultimately, for the government to write a check, it must first tax or borrow. For this reason, knowing how many IOUs are in the trust fund does not convey any useful information about the government's ability to pay Social Security benefits. If the trust fund were simply abolished, real economic activity would be unaffected. No private bondholders would suffer. The government would not be relieved of any of its existing obligations or commitments. The late economist Robert Eisner (a staunch defender of Social Security) suggested that we abolish the trust fund or, with the stroke of a pen, double or triple the number of IOUs it holds. Either option, according to Eisner, would allow us to dispense with artificial crises (whether the trust fund is running out of IOUs) and get on to the real problem: how is the Treasury going to pay the government's bills?
4. Do I have a legally enforceable right to Social Security benefits?
No. In a 1960 case, the U.S. Supreme Court ruled that the mere fact that you have paid taxes does not by itself create a legally enforceable claim to benefits. The Court also ruled that a future Congress has no obligation to keep promises made by a past Congress. So the only right to benefits you have is whatever the government decides to give you during your retirement. Note that this is very different from a private pension. If your employer fails to keep pension promises you can take your claim to court. Unlike private employers, however, the government can unilaterally break its promises to pay.
5. What is the Social Security retirement age?
The normal retirement age for persons born before 1938 is 65. The normal retirement age for those born in 1938 and later will be increased in gradual steps, beginning in 2003, until it reaches 67 for those born in 1960 and later.
6. What is early retirement?
You can start receiving Social Security benefits as early as age 62, but the amount you receive will be permanently reduced by a certain percent for every month you fall short of your normal retirement age.
7. Can I delay my retirement?
You may continue working past the full retirement age and delay receiving Social Security benefits. In that case, your benefit amount will be increased by a certain percent for every month that you are past your normal retirement age but do not receive benefits. These increases are automatically added to your benefit until you reach age 70.
8. What happens if I continue working past the time I begin receiving Social Security benefits?
Once you begin receiving Social Security benefits, if you are between the ages of 62 and 64 and have wage earnings of more than $10,080 in a year, your benefits are reduced by $1 for every $2 you earn above that amount. Prior to 2000, benefits of retirees ages 65 through 69 were reduced by $1 for every $3 in wage earnings above a certain amount ($15,500 in 1999). The restriction on those ages 65 through 69 was removed in 2000.
9. Why is the future soundness of Social Security in doubt?
When the first Social Security check was issued in 1940, there were 42 workers for each retiree. Today there are just over three, and by the time today's 18-year-olds reach retirement age, there will be only about two active workers for each retiree. Since the money to pay benefits comes from payroll taxes on active workers, this implies that the tax burden for workers will continue to rise, that future retirement benefits will have to be reduced, or both. The Social Security trustees' intermediate assumptions imply that the Social Security payroll tax will have to be increased by 72% by 2045 to pay benefits equal to today's - and Medicare and other government benefits for the elderly will require still other increases in payroll taxes.
10. What happens if I die before I reach retirement?
Your Social Security contributions are not part of your estate. When you die, you lose everything. If you have dependents, a special one-time payment of $255 may be made to your spouse or minor children when you die. Your dependents may also be eligible for benefits if you earned enough Social Security credits while you were working. Your spouse can receive full benefits at the normal retirement age, or reduced benefits as early as age 60. If you are divorced, your ex-spouse could be eligible for a benefit based on your record.
11. What benefits does a non-working spouse receive?
A non-working spouse is entitled to a monthly payment equal to half the monthly benefit of the working spouse. If the working spouse dies, the non-working spouse is entitled to 100 percent of the working spouse's monthly benefit.
12. My spouse and I both work. Can each of us draw Social Security benefits based on our earnings?
You can. But you each have the option of drawing a spouse's benefit instead. Since a spouse's benefits is 50% of a primary worker's benefit, the two of you can claim 150% of the largest benefit. So if one of you has earned more than twice as much as the other, your total benefit will be larger if you choose this approach. Otherwise, your total benefit will be larger if each of you draws a benefit based on your own earnings. When one of you dies, the survivor is entitled to the larger of the two individual benefits.
13. How do I find out about my Social Security earnings record?
If you are over 25 years of age, you are supposed to receive a statement from the Social Security Administration showing what earnings have ever been credited to you. The statement should be mailed to you about three months before your birthday each year. You can request one at any time.
14. Does Social Security treat everyone the same?
The Social Security system pays vastly different rates of return to different populations. Some people do better than others. For the most part, people born before World War II are getting a decent return on their Social Security tax dollars. By contrast, most people born after World War II would have been better off investing their Social Security dollars - even in government bonds!
15. What determines my 'rate of return?'
The amount of money you pay into the Social Security system, your monthly benefit and the number of years you are able to collect the benefit (your life expectancy) determine your rate of return. The Social Security benefit structure is tilted in favor of lower incomes. Thus, other things equal, people who earn higher incomes tend to get a lower return than those with lower incomes. However, this disadvantage is offset somewhat because those with higher incomes generally have a longer life expectancy, and those with lower incomes (and less education) tend to pay taxes for more years. Someone who drops out of high school and begins working, for example, may pay taxes from age 16 to age 67. A medical doctor, by contrast, may not start paying taxes until he or she is in the late 20s. Since Social Security benefits are based on the 35 highest earning years, extra taxes paid by those who begin work early do not earn any additional benefits. In general, people born prior to World War II paid much less in taxes relative to what they can expect to receive in benefits. On the other hand, a recent college graduate with a high tech degree can expect a rate of return that is slightly negative.
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