Preparing for the future is important, especially when it comes to finances.
Whether you are just beginning a career, switching career paths, or getting ready to retire, everyone should have a clear understanding of what Social Security is and how the benefits work.
Established in 1935, Social Security benefits act as a support system for older American citizens, with the goal being to provide economic support. it was expanded to include support for the disabled.
Even though Social Security has been around for nearly 90 years, people still sometimes find themselves asking how these benefits work.
Social Security is one of the largest programs in the federal budget — taking up roughly one-quarter of the total federal spending.
The program provides benefits to approximately 65 million Americans including retired workers, disabled workers and their dependents, and survivors of deceased workers.
How Does Social Security Work & How is it Funded?
Social Security benefits are primarily funded through a dedicated payroll tax that was created by the Federal Insurance Contributions Act (FICA).
Employees and employers each pay more than 6% of wages, with a cap on the amount that is adjusted annually for growth in economy-wide wages.
People who are self-employed will pay both the employee and employer share of the tax.
But the taxes you pay are not set aside in your own personal account. Instead, the money is used to cover current beneficiaries.
We become eligible for benefits for ourselves and our families by working and paying Social Security taxes.
Typically, a worker needs to have 10 years of employment to become eligible for retirement benefits.
Disability benefits will vary depending on the worker’s earnings before disability and the worker’s age at disability.
Full benefits are payable at the age of retirement, which is usually between the ages of 65 and 67.
The Future of Social Security
As of 2020, Social Security will remain fully funded until the year 2035. According to a publication from the Social Security Administration, after 2035 there will be enough money to fund approximately 79% of the scheduled benefits.
This means, without restructuring the program, most Americans won’t receive the full benefits of Social Security when they retire.
Part of this concern is caused by the number of baby boomers, adults born between 1946 and 1964, that are expected to retire in the next decade.
It is estimated that by the year 2035, the number of Americans aged 65 or older will increase from 56 million to an astounding 78 million.
Even though that sounds discouraging, we can’t predict what will happen in the next few decades.
Prepare for the Future
And, whether you receive the full Social Security benefit when you retire or you only receive part of it, you will still need other sources of income to comfortably enjoy retirement.
Currently, the estimated average monthly Social Security payment is $1,543. For many Americans, this would not cover the cost of rent or utilities.
It’s important to build your own retirement savings by investing a portion of your income in a 401(k) through work or a Roth IRA.