Working is, well, hard work. Some of us joke that we spend more waking hours at work than we do in our own homes. In many cases, that is true. While most people probably don’t relish the idea of getting older, the part that does sound appealing is retirement.
One way retirees can continue to afford the necessities of life is by receiving benefits from various sources. These include pensions, investments, savings, and Social Security. Pensions, investments, and savings are dependent upon the individual opting into the plan. Taxes that all U.S. employees pay fund Social Security.
Considering that in 2017 there were nearly 126 million people employed in the U.S. on a full-time basis, it would be easy to assume that there would be more than enough funds for indefinite distribution. That is not the case, however.
The asset reserves for Social Security for U.S. workers is shrinking at an alarming rate. A rate that makes many people uncertain about the future of social security. Understanding what’s happening can help arm you with information to help prepare yourself. Tap into other sources of income, so you can continue living out that paper-umbrella-in-an-icy-drink dream long after you finish toiling.
The purpose of Social Security
Social Security is much more than a financial cushion to fall back on during retirement. The concept of Social Security is nothing new either. In fact, Social Security has taken many forms over the centuries, including the stockpiling of certain resources (assets), the feudal system (labor), and relatives to take care of one another (family).
All of this in an effort to give people a sense of security in the event of a personal tragedy, unfortunate life event, or even the transition into old age. The “Poor Laws,” developed by the English in the 1600s, provided assistance to needy members of their communities.
These laws arrived with the founders of the United States. It wasn’t until long after our country’s establishment that they set up something official. For us to live out the pursuit of happiness, our government wanted to ensure U.S. workers had a safety net in times of need. They wanted a fairer system than the “Poor Laws,” which often discriminated between “worthy” and “unworthy” recipients of benefits.
So, in August of 1935, President Franklin D. Roosevelt enacted the Social Security Act as part of the New Deal, in response to the post-depression events and sentiments. And just like that, the future of Social Security was born!
How to calculate Social Security
Now, with any kind of benefit received, the funds must come from somewhere. Nothing simply appears magically without a source to draw from. You don’t have to look too far to see the source of Social Security—it’s you.
Perhaps you’ve seen the codes FIT and FICA on your pay stubs. Well, FIT is the acronym for Federal Income Tax, which is the income-based tax. FICA is the acronym for Federal Income Contributions Act. FICA is part Medicare, part Social Security.
Medicare makes up 1.45% of FICA (you will also see Medicare referred to as HI, which stands for Health Insurance). Social Security is 6.2% of FICA (you will also see Social Security referred to as OASDI, or Old Age, Survivors, and Disability Insurance), for a total tax of 7.65%. Employees of a company will pay the 7.65% FICA tax rate, while their employer pays the same price.
Self-employed individuals are responsible for their own portion and the employer portion of FICA. So they pay a 15.3% FICA tax rate, which is the employee and employer portions combined. One thing to note is that while the Medicare portion of FICA is taxed on all income levels, the Social Security portion is only imposed on income up to $128,400 (in 2018).
Income over $128, 400 is not subject to taxation for the purposes of Social Security. Also, there are certain situations where payments are not subject to Social Security tax, and special attention needs to be given to these exclusions to make sure they are properly assessed.
Past Social Security
Back in the day, when people retired after decades of contribution to the U.S. labor force, they could count on benefits from Social Security. This allowed retirees to maintain a semblance of the life they had been living. That wasn’t, however, without constant reassessment of the programs in place.
To ensure Social Security benefits payments could continue, the government had to conduct reviews of the beneficiaries of Social Security funds to make sure they met the eligibility requirements. The need for these reviews was due to situations such as the bad economy during the early 1970s, for example, coupled with the effects of the baby boom.
Experts foresaw the exhaustion of the funds by the end of the 1970s, which meant the programs needed a re-calibration in order to prevent the accounts from drying up.
Present Social Security
Taxpayer contributions that collect these funds still face social and economic implications. The government must re calibrate still, anticipating the toll of certain events on the future of the Social Security reserve. The current worry is that the $2.9 trillion in asset reserves won’t last as long as initially expected. If something isn’t done soon, the result could be catastrophic for beneficiaries of aid programs.
The future of Social Security
One major area of contention is the fact that there’s a wage base for taxation for Social Security. Some politicians argue that you can solve the depletion of the Social Security pool by eliminating the cap on the income base.
In other words, if the government did tax wages over the cap (which is estimated at $132,900 for 2019), we wouldn’t see such a drastic reduction in Social Security. They argue that this would be the least painful method of replenishing Social Security because it would only affect the wealthier people in the U.S.
How to supplement social security
An old adage encourages us not to count our chickens before they hatch. When it comes to Social Security, that is really great advice. As we well know, nothing in life is guaranteed (except death and taxes, of course… thanks for the reminder, Benny Franklin).
Just because we’ve been paying into Social Security for our entire working lives, does not mean we will necessarily reap the benefits—or at least see the full benefit of our contribution. So, we need to prepare ourselves in other ways. We have mentioned opting into pensions, investments, and savings accounts.
So, what to do?
All of these options have different rates of return, so there isn’t simply a one-size-fits-all approach to saving for the unexpected. We need first to recognize that our age and our savings/investment goals largely determine the method for saving and investing. As always, it is helpful to talk with a professional financial advisor to understand all of our options.
Sarah Willox, Payroll Operations Manager for Journey Colorado, explains;
Though everyone in the workforce pays into Social Security and nobody is exempt from it, that doesn’t mean the funds will be there for the current workforce to use or benefit from when it comes time for retirement. It’s important to invest in your future in other ways such as 401k plans, IRA’s, or just a simple savings account. Talk to your payroll specialist if you are interested in offering these benefits to your employee’s and need a reference to one of our well trusted financial partners.
The objective is to ensure we’re equipped for any unexpected events life throws at us. In a perfect world, all our contributions would result in that paper-umbrella-in-an-icy-drink dream. Fingers crossed that’s where we would see the fruits of our labor.
However, funding a variety of accounts for various purposes will hopefully take the sting out of some of the painful events we might encounter as we work toward retirement. Should the government agree upon an approach for replenishing the asset reserves for Social Security, the payout will simply be icing on the cake.