Social Security Facts vs. Fiction


You’ve seen Social Security pop up on all your paychecks and in many financial guides and news articles over the years, but despite how familiar it may seem, very few people actually know its true history and projected future. Below is some information that can help you separate fact from fiction.

The origin of Social Security is a subject shrouded in mystery and myth, the biggest one being the supposition that President Franklin D. Roosevelt himself promised that participation in the Social Security program would be voluntary. That myth is unfounded, according to the U.S. Social Security Administration (SSA).

You’ve seen Social Security pop up on all your paychecks and in many financial guides and news articles over the years, but despite how familiar it may seem, very few people actually know its true history and projected future. Below is some information that can help you separate fact from fiction.“Persons working in employment covered by Social Security are subject to the FICA payroll tax,” says the SSA website. “Like all taxes, this has never been voluntary.”

When the program first began, only approximately half of all jobs were covered by Social Security and anyone who wasn’t covered wasn’t expected to contribute to the fund they couldn’t benefit from. This fact is likely where the confusion comes from.

Nowadays, people are less concerned with the past of Social Security and more concerned with its future. One of the most commonly touted myths to that effect is that Social Security will be completely used up by the time today’s workers retire, but this is definitely not fact.

The reason you might be hearing horror stories about Social Security going away in the next couple of decades is simply because they make for catchy headlines that get a lot of clicks. The truth is that Social Security is funded by the taxpayers, so that as long as people continue to contribute to it in the form of payroll taxes, Social Security won’t dry up completely.

That isn’t to say that there have been no changes in the ability of the government to pay out Social Security benefits in recent years. It also doesn’t mean that the available funds will always surpass the need, as was the case until recently.

“Until 2010, payroll taxes brought in more than enough to cover benefits for retirees and other recipients,” stated Jane Bennett Clark, Kiplinger senior editor.

When money was left over, it was put into a trust fund that was invested in special Treasury securities, which was then able to grow through earned interest. As the money paid out in Social Security surpassed the money brought in through taxes, the funds raised through interest were tapped to make up the difference. Relying on the interest is a good solution but it’s one that can’t last forever, particularly if the securities themselves need to be redeemed.

Clark stated that the government “will have to start redeeming the securities themselves by 2020. Failing a fix by Congress to raise taxes or cut benefits, or both, the trust fund will run out of money in 2034.”

That projected timeline doesn’t mean that there will be no money left at all, because people contributing payroll taxes will still exist to infuse Social Security with new funds.

“Payroll taxes will still be enough to cover 79 percent of promised benefits,” Clark said.

That number leaves many people wondering how the remaining percentage will be dealt with—specifically whether they will benefit less than the generations that retired before them.

“Will a 21 percent reduction in benefits really happen? Probably not,” Clark stated. “Much as Congress dislikes confronting hard choices, it is not likely to risk the reaction of millions of Social Security beneficiaries (read voters) to the idea of such a cut.”

However, changes will need to be made to make up the deficit between taxes collected and benefits given, so you would be wise to talk to your financial institution to ensure that you are saving efficiently for retirement, and to open a retirement account if you haven’t started saving yet.

 

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