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Understanding
the Social Security System
The Social Security
System has been a large and visible part of the American financial system
since the 1930s. When President Franklin Roosevelt signed the law, it
was designed to be a financial security net for older Americans. The system
was set up with workers paying into it and beneficiaries getting retirement
and other benefits. Since then, the demographic base of the country has
changed, the system has grown and become a visible and controversial topic.
With the current government deficit, maintaining the financial integrity
of the system has become an important political issue.
In 2016, the Social Security Administration estimated that over 64 million
Americans received over $911 billion in Social Security benefits. Retired
workers and their dependents will receive about 82% of that amount with
disabled workers and survivors of deceased workers receiving the remainder.
Current issues
The controversy over the financial soundness of the system comes from
the aging American population. Since the system is a pay-as-you-go system,
the contributions of current workers are used to pay current benefits
to those already retired and to accumulate for the benefit of those working.
The difficulty comes from the reduction in the number of contributors
for each person receiving benefits. Currently, there are only 3.3 contributors
for each recipient and there will be only 2.1 contributing for each recipient
in 2030.
Ultimately, to fund the retirements for today's workers, either contributions
must increase, benefits must decrease, the earnings on accumulations must
increase or additional money must come into the system. The big debate
raging currently is whether and how the current surplus being generated
by income taxes should be used for this purpose. There are also proposals
that would enable individuals to have more control over how portions of
their funds would be invested.
Here is some information that will help you understand how the system
works.
Average monthly benefits for 2018.
- Retired workers
- about $1,404
- Retired couples
- about $2,340
- Young widow with
2 eligible children - about $2,771
- Aged widow with
no children - about $1,336
Benefit levels are
adjusted annually for the cost of living. The adjustment for 2018 was
2%.
Contribution rates
The system receives income from employees as well as employers. Over the
years the tax rate has increased as well as the earnings base subject
to the tax. Currently, the rates for 2018 are:
| For
workers |
Social
Security tax of 6.20% on the first $128,400 of wages. Medicare tax
of 1.45% on all wages plus an additional 0.9% on wages above $200,000
for single filers and above $250,000 for joint filers. |
| For
employers |
Social
Security tax of 6.20% on the first $128,400 of wages. Medicare tax
of 1.45% on all wages. |
| For
the self employed |
Social
Security tax of 12.40% on the first $128,400 of wages. Medicare tax
of 2.90% on all wages plus an additional 0.9% on wages above $200,000
for single filers and above $250,000 for joint filers. |
Here is a chart showing
what you, as an employee would pay at different levels of wages in 2018.
| Wage
level |
Social
Security (6.20%) |
Medicare
(1.45%) |
Total |
| $25,000 |
$1,550 |
$362 |
$1,912 |
| $40,000 |
$2,480 |
$580 |
$3,060 |
| $80,000 |
$4,960 |
$1,160 |
$6,120 |
| $140,000 |
$7,961* |
$2,030 |
$9,991 |
| *Only
income up to $128,400 is subject to Social Security taxes while all
income is subject to the Medicare tax. |
Here is another chart
showing what a self-employed individual would pay in 2018.
| Wage
level |
Social
Security (12.40%) |
Medicare
(2.90%) |
Total |
| $25,000 |
$3,100 |
$725 |
$3,825 |
| $40,000 |
$4,960 |
$1,160 |
$6,120 |
| $80,000 |
$9,920 |
$2,320 |
$12,240 |
| $140,000 |
$15,922* |
$4,060 |
$19,982 |
| *Only
income up to $128,400 is subject to Social Security taxes while all
income is subject to the Medicare tax. |
Taxation of Benefits
Since the middle 1980s, some portion of Social Security benefits has been
subject to income tax. This taxation is based on the overall level of
income the individual has. The rules are somewhat complex, but generally
speaking, if you are married and file a joint federal income tax return
and your adjusted gross income is above $32,000, one half of your retirement
benefits are subject to tax. As your income rises, increasing portions
of your benefits are taxed. The portion subject to tax increases to 85%
if a married couple filing a joint tax return has income above $44,000.
Consult your tax advisor to learn how this may apply to you.
How should you
look at Social Security?
First, you must recognize
that Social Security retirement benefits will probably not be large enough
to fund all of your retirement expenses.
Second, you should
make sure your Social Security records are accurate. The government has
a program of providing everyone with an annual statement that shows your
income and contribution history and provides an estimate of retirement
benefits. This report is called a Personal Earnings and Benefits Estimate
Statement. You can also request this report by getting a form from a Social
Security office.
Finally, you should
make sure that as you review your financial plans for retirement, you
are realistic in estimating how much of your needed income Social Security
will provide.
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