By Patricia Jones, Alliance Poverty Task Force
Social Security benefits play a vital role in reducing poverty, lifting more Americans above the poverty line than any other program. A hundred years ago most Americans worked until they died, and they died at younger ages. When a wage earner died or became disabled, the rest of the family was thrown into poverty and often became homeless. Most people couldn’t afford to retire unless other family members chose to support them.
Social Security was signed into law in 1935 by President Franklin Roosevelt as part of the New Deal programs of the Great Depression. President Eisenhower expanded Social Security in 1956 to include the disabled. It is a vital source of inflation-adjusted income for retired and disabled workers, their dependents and their survivors. For many who live in poverty, it may be the only income they receive.
The current Social Security system works like this: when you work, you pay taxes into Social Security. The money is used to pay benefits to • People who have already retired, • People who are disabled, • Survivors of workers who have died, • Dependents of beneficiaries. Benefits are adjusted for inflation.
You pay Social Security taxes of 6.2% of your earnings, up to $142,800. It’s listed as FICA (Federal Insurance Contributions Act) on your paycheck. Your employer matches what you pay. You and your employer pay Medicare taxes of 1.45% on all your wages or net earnings from self-employment; this is used for Medicare health insurance coverage.
The money you pay isn’t held in a personal account for you to use when you get benefits. The Social Security Administration uses your taxes to pay people who are getting benefits right now. Any unused money goes to the Social Security trust fund, not a personal account with your name on it.
Social Security bases your benefit payment on how much you earned during your working career. Your age when you start claiming benefits also affects how much you will receive. You can begin drawing retirement any time from age 62 to 70, and the longer you wait, the more you will receive each month. Full social security retirement age is currently 66 years, 2 months. If you start benefits in 2021 at your full retirement age, this percentage ranges from as much as 78 percent for very low earners, to about 42 percent for medium earners, to about 28 percent for high earners. If you start benefits after full retirement age, these percentages would be higher. If you start benefits earlier, these percentages would be lower.
Social Security is not the only source of income for most people when they retire. Most financial advisers say you will need about 70 percent of pre-retirement income to live comfortably in retirement. This income might include your Social Security benefits, pension, retirement accounts, investments, and personal savings.
A lot of people think Social Security is going bankrupt now that Baby Boomers are retiring. Realize that there is $2.9 trillion in the Social Security trust fund – far from bankrupt! Even
though 65 million people receive payments every month, the money is still coming in from payroll withholding.
It is true that a few years ago Social Security began paying out more than they receive each month. But in 1983, under President Reagan, Social Security was restructured with a higher tax rate and retirement age to establish the trust fund to be prepared for this. If more funds are needed in the future, Congress can change the withholding rate, raise or eliminate the maximum earnings limit, or have people pay Social Security on other forms of income, not just paychecks. Wealthy people who live off dividends or capital gains but never received paychecks from a job may have to begin to pay into the system.
Social Security is an important program in the United States. The taxes we pay keep millions of retirees, disabled, and surviving dependents out of poverty.