What Is Social Security?

Main Idea: Lost in the political shuffle, Social Security is a misunderstood topic and is a program millions of Americans depend on after paying into for decades that is operated differently than most believe.

Today I want to talk about one of the most popular financial topics discussed around this time (and always, actually), Social Security. Remarkably exciting topic, I know, but if you live in America, you're paying for it. That alone warrants at least a central idea of what it is.

In a quick elevator pitch, you may know Social Security is a monthly paycheck you receive in retirement.

From the media and other sources, you may also hear it's bound to run out soon or that it's a drain on our tax dollars and increasing national debt.

Well, I want to briefly comment on a few of those hot button items, as well as stay fairly objective in the process. I hope to not make this too long, so I'm using the headlines to allow you to choose what will be the most helpful for your situation.

Why is it in existence?

1935. At the height of the Great Depression, Pres. FDR instituted the SS program, as his main goal was to create a way for the gov't to take care of its elderly citizens.

Every year, the amount that a participant is sent from the gov't is increased relative to current inflation numbers, meaning the paycheck is much more significant now than in 1935.

In addition to elder care, the program can also be used by those who cannot work because of disability OR those who lose their breadwinner by death.

How It Works

You have a portion of your paycheck deducted every single time you get paid. If you are a business owner, you must cover yourself AND your business.

While many politicians claim SS is adding to our 35+ trillion in debt, the program technically does not add to it at all, but rather the entirety of it's pool of money comes from these very payroll deductions mentioned above.

(See below for an article that argues the opposite)

Essentially, the gov't takes your money today and "gives it back to you" in 30 years when you're 67. (Although currently you can begin at 62 with a lower pay out)

Fair enough? Not so fast.

Why People Don't Like It

I guess I shouldn't say "people" as in all people, because if I'm one of the millions of citizens over 65 who depend on SS making up over 50% of my income, I love it.

With that being said, the government is the worst money manager of all time.

Some individuals and companies have gone bankrupt and drained the investments of their clients, no other entity has racked up $35 trillion in under two centuries.

While I like to believe even a politician would not want to deprive an elderly person of their paycheck to live, there are concerns that by 2035 the Social Security trust funds could be depleted, potentially leading to benefit cuts or reliance on the federal budget if no legislative changes are made.

5 Main Points of Social Security

1) It can be taken by all because everyone must pay into it.

There used to be a rule within the program that those who made over a certain amount received no benefit at all from SS. It was not until 2000 that this was changed, and now regardless of salary, you will receive at least some benefit from the program.

How prior to 2000 the government expected a large group of people to pay into a program by force without receiving any benefit confuses me, but I guess there are some people who like the idea of socialism even today.

2) It is taxable. Again.

Yes, the money that the gov't taxed you on 25 years ago is now being taxed again, but only as much as 85% of it. Why? It goes back into the pool.

Regardless, you are guaranteed to make income, regardless of what the economy does. Once you begin the flow of income, you continue to receive payments for life. As I mentioned earlier, it will gradually increase depending on inflation.

3) Your amount depends on your career.

The SS administration takes your top 35 years of income to decide your benefit. We do not have the time to get into this in detail, but essentially you earn a "credit" for the years you work, and you must come up with 10 years worked.

4) You can also take payment based off your spouse.

As mentioned earlier, if your spouse dies early and they are the primary income, the spouse left behind can still take what's known as "survivor benefit." Typically, this is the same as what the deceased would have received if still alive, but will depend on the situation.

Similarly, if a mother stayed home to look after their house and raise the kids, she can typically receive half of her husband's amount. Some other factors matter here, but keep this in mind.

5) SS provides for special cases as well.

Whether a child or an adult is disabled, they can also enter the program. Because the government is ridiculously inefficient, it takes a long time to be accepted into the program, but one can absolutely qualify if the needs are there.

CONCLUSION

Phew, that's a lot of governmental jargon and legislation speak. Sorry if I lost ya. Even this confuses me at times. Please don't hesitate to reach out if you have any questions.

Basically what we're dealing with here is a program that began nearly 100 years ago to serve an urgent need, which probably should have ended after that need went away, but now we're stuck with this giant flaming ball of fire that we can't put out because people have paid into it...but at the same time it's probably not going to end well, either.

What's the worst that could happen?

^ Famous last words.

Good follow up to read/watch: Here's that article that I mentioned argues it actually is adding to national debt followed by a video that comments on the program running out of $$$.

Action Items: Sign up for your SS account regardless of age. Here, you will be able to get a personal estimate of what you might make per year. Click here.

This content reflects the opinions of the author and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as financial, legal, tax, or investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not indicative of future results. All investing involves risk, including the potential for loss of principal. The information contained in the commentaries is derived from sources deemed to be reliable, but its accuracy and completeness cannot be guaranteed. This material does not have regard to specific investment objectives, financial situation, or the particular needs of any specific reader. Any views regarding future prospects may or may not be realized. Neither Asset Allocation nor Diversification guarantees a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.