Social Security

Social Security refers to a set of benefit programs established and run by the federal government. The Social Security program is commonly identified with old age or retirement benefits and with disability benefits. The program was created in 1935 as part of Franklin Roosevelt’s New Deal initiative. Medicare and Medicaid are also social insurance programs established and administered by the federal government, but they are separate from Social Security. Social Security is a “pay-as-you-go” entitlement program. This means that current tax revenue is used to support current beneficiaries. In other words, there are no assets set aside to fund future benefit payments. When combined with demographic trends (i.e. an aging society), the pay-as-you-go funding approach is a feature that brings into question the sustainability of Social Security. Currently, Social Security is funded largely through payroll or “FICA” taxes which are a blend of employee and employer contributions that come from taxes on the wages of workers and the self-employed. Whether you’re employed or are self-employed, Social Security taxes amount to 10.4% of earnings, with the applicable earnings capped by a ceiling that is adjusted every year. The earliest age to get retirement benefits is 62, but the longer you wait, the higher the benefits. The average Social Security benefit in January 2012 is $1,229 per month. Social Security benefits are inflation-adjusted with increases pegged to the consumer price index (CPI). Social Security is the sole source of retirement income for 22 percent of beneficiaries, and the program is the majority (greater than 50 percent) source of retirement income for 66 percent of beneficiaries.

How does Social Security work?

Working individuals contribute a portion of their annual earnings in the form of payroll tax deductions to the Social Security system.  The contributions from those who are currently working are used to fund the benefits of those who are currently retired or disabled.  Each worker has access to the Social Security system under qualifying circumstances, regardless of their financial need or circumstance. Individuals become eligible for Social Security payments based upon age, disability or death.

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What is Social Security?

Social Security is social welfare program established and maintained by the U.S. federal government. Social Security provides financial benefit to individuals during retirement who have reached the qualifying age, and to some survivors in need of financial assistance and to some considered disabled. The Social Security program is funded via payroll tax deductions from current workers.

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How to Value Your Social Security Benefit

What is the present value of a $2,521 Social Security benefit to a woman who starts receiving the benefit at age 66 and has those payments last until she passes away at age 90? The answer is $412,896. This figure likely surprises many people. The reality, though, is that $412,896 is the amount you would need to purchase an annuity --if, that is, an annuity like this actually existed--that offers the $2,521 payment. It is also important for people to understand that the $412,896 should be...
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Comparison Shopping for Annuities

A good question and answer piece from the Chicago Tribune. The reader had just purchased a $400,000 immediate annuity at a relatively young age. The purchase was also made from one insurer in a relatively low interest rate environment. Having both a pension and Social Security (both are lifetime annuities), I would not have committed half my portfolio to an income annuity at the relatively young age of 63 and during a period of low interest rates . It does not appear that the annuity came with...
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Dramatic Changes in Retirement Landscape

The picture for near and current retirees has changed 180 degrees in the past couple of years. Questions such as where to retire and what do do during retirement are replaced with whether to retire and how to make sure one does not run out of money during retirement. Working longer, waiting to draw on Social Security, and understanding longevity risk are front and center for the vast majority of retirees. Decumulation or drawing sustainable income from accumulated financial assets is one of the...

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