A Social Security True/False — Understanding what to expect—and what not to expect—from Social Security is the first step in building the best possible retirement strategy

By Kate Peterson

Social Security has been called the “third rail of American politics,” infamous for derailing any politician who touched it. Yet in 2005 we’ve had a national debate over potential changes to the program. It’s a sign that Social Security’s long-term financial problems can’t be ignored forever.

No matter where you stand on personal accounts, reducing benefits or any other option on the table, the fact is this: You have to take saving and investing for retirement into your own hands.

The reason: Social Security never was intended to fully fund your retirement or disability income. As it says directly on your benefits statement: “Social Security benefits were not intended to be the only source of income for you and your family when you retire. You’ll need to supplement your benefits from a pension, savings or investments.”

So what can you expect from Social Security? Whether you’re collecting benefits now or have decades before you cash in, let’s review the truth.

1. True or false: Social Security is your own government-held personal savings account.
False. In 1989, Congress passed legislation requiring the SSA to send annual statements to all American workers. When you’ve looked at your statement, you’ve no doubt noticed a dollar figure that appears to be in your name.

But hold it right there. The benefit amounts, taxation and retirement age for eligibility you see on your statement can be misleading—these are all just estimates and can be changed by an act of Congress at any time.

Equally important, while Social Security tracks and reports to individuals how much money they have contributed to the program through payroll taxes, individual workers are not “credited” with that savings. Instead, the total amount of Social Security taxes paid over a worker’s lifetime helps determine the level of benefits he or she is eligible to receive upon retirement.

Because Social Security is not a personal savings account, upon the death of a spouse, the surviving spouse is not entitled to any compensation above a one-time $255 benefit. (A surviving spouse may be eligible to receive monthly benefits at their deceased spouse’s higher contribution level—but only instead of, and not in addition to, their own benefits.)

2. True or false: Social Security’s trust funds have your money in them, just waiting for you to retire.
False.The money you, as an American worker, contribute to Social Security through payroll taxes is not held in a personal account. Instead, the money collected through payroll taxes is being used right now to pay for those who are currently receiving benefits.

At this time, the Social Security system receives more in payroll taxes than it pays out in benefits. The excess is borrowed by the U.S. Treasury, which in turn issues special-issue Treasury bonds to the SSA.

The hitch: The Social Security Board of Trustees reports that in 2017, when the baby boomer retirement wave crests, the Social Security system will go from the black into the red. By 2041, the trust funds used to make payments to beneficiaries may be exhausted. Congress has time to create a fix, but it’s prudent to start saving now in case you receive reduced benefits when it’s your time to retire.

3. True or false: Social Security was never intended to fund a complete retirement.
True.The SSA has been clear: Social Security never was intended to be your sole source of income in retirement. According to a study by Mercer, a human resource consulting firm, for the average American, monthly benefits at full retirement age only replace about 42 percent of pre-retirement pay.

That means Americans need to use other investment vehicles to accumulate the resources they need for retirement. Melanie Clay, a regional sales consultant for Thrivent Financial for Lutherans, says she discourages young workers—those in their mid-30s or younger—from thinking of Social Security as a certain source of income in retirement. “I would definitely focus on other saving opportunities,” she says.

The first thing workers should do is take advantage of employer-sponsored retirement plans, Clay says. Many plans give employees the benefit of an employer match, and all plans allow employees to contribute on a pre-tax basis, which means they can lower their tax bills immediately.

Tom Noon, a financial associate with Thrivent Financial in Birmingham, Alabama, says after funding an employer-sponsored plan, workers should contribute to a Roth IRA. “That’s the most versatile savings vehicle out there,” he says, noting that an increased contribution limit means that workers can now put up to $4,000 a year in Roth IRAs.

After taking advantage of these two investment options, Clay suggests non-qualified mutual funds and annuities as other possible solutions.

4. True or false: Social Security includes disability coverage.
True.Disabled workers are eligible to receive benefits from Social Security, although the SSA points out that its definition of disability is strict compared to other programs—covering only a total disability that is expected to last for at least a year, or result in death.

Kim Anderson, a Thrivent Financial product marketing specialist, says Social Security denies most initial disability applications. After all filings and appeals, 52 percent are still denied, according to a recent Social Security Bulletin Annual Statistical Supplement. “Social Security is not a very reliable source of coverage because of the strict definition of disability,” Anderson says.

In addition, the benefit amount paid to disabled workers typically does not provide sufficient monthly income. In 2005, a disabled worker with annual earnings of $50,000 would receive a monthly benefit of $1,608, according to the Mercer study. Workers with a spouse and/or children might be eligible for additional benefits, but the total family benefit would be capped.

Anderson suggests employees enhance their disability coverage by taking advantage of any group policies offered through their employers. They should also supplement that coverage with an individual policy. She suggests total coverage should yield payments that replace approximately 60 percent to 70 percent of income. Because individual benefits are typically not taxable, that level of coverage may translate into income replacement of 80 percent to 90 percent of after-tax dollars.

5. True or false: You should plan for Social Security to look the same in 2050 as it does today.
False.The SSA says the program’s financing problems are long-term and will not affect today’s retirees and near-retirees. Still, Social Security faces serious problems in future years. The SSA reports that the worker-to-beneficiary ratio has fallen from 16.5-to-1 in 1950 to 3.3-to-1 today. Within 40 years, the SSA says it may be 2-to-1. At this ratio, there will not be enough workers to pay scheduled benefits at current tax rates.

Unless changes are made before 2041, the SSA says scheduled benefits could be reduced by 26 percent and could continue to be reduced every year beyond that.

Kate Peterson is a personal-finance writer based in Granger, Indiana.

Find help here

For help with your retirement planning, visit www.thrivent.com/planning/tools/retirement.html

Key Dates in Social Security History

1935
Social Security Act signed into law by President Franklin Roosevelt.

1950
First cost-of-living adjustment (COLA) increase was adopted.

1956
Disability benefits were established.

1972
First automatic COLA increase was adopted, giving beneficiaries reliable benefit increases in line with inflation.

1983
Social Security amendments enacted to address rising short-and long-term costs in the program, including the gradual increase in the retirement age from 65 to 67.

1989
Law passed to require Social Security Administration to send annual statements, including benefits estimates, to all American workers.

1993
Change in tax law increases potential tax liability on all retirement income, including Social Security benefits.

2000
Congress eliminates Retirement Earnings Test for those over full retirement age, allowing them to earn income without reduced benefits.

2017
Social Security system will begin paying out more than it collects in payroll taxes.

2041
If benefit payouts are unchanged, the Social Security trust funds will be depleted.

Source: U.S. Social Security Administration.

What to Expect vs. What You Need

Comparing what the Social Security program provides vs. what most beneficiaries need can be especially useful in long-range retirement planning.

Sources: Mercer Guide to Social Security and Medicare 2005, National Funeral Directors’ Association and the U.S. Social Security Administration.