What to Expect
There are a lot of unfortunate realities of Social Security benefits, the first of which is that most people don’t understand how it works. And that is a sad fact because the federal government forces almost everyone to contribute part of their income. It is the largest item in the Federal Budget and incredibly complicated.
If it wasn’t so necessary to most people’s retirement security, it would be easy to say the heck with it. But you can’t do that. You have to know how to work the system. It’s one of those things in life that you have to understand how to use, or it will make use of you. So how in the world could the system “use you?”
Well, you have been used if you pay into the system for years and don’t use what you paid for.
What is Social Security?
Many people think that Social Security Benefits are social welfare. In other words, they believe it is a program to care for older people who can’t care for themselves. That could not be farther from the truth.
The reality is that Social Security Benefits are bought and paid for by almost everybody! In your working years, you have three choices when it comes to paying into Social Security. About 94% of working Americans pay into the Social Security System. The remaining 6% are participating in some other type of retirement system, such as some state teacher retirement systems. In addition, some pastors opt out due to religious objections to receiving government benefits.
So, in reality, most of Social Security is paid for by the working population.
The Big Lie
There is a big lie that a lot of politicians like to use to scare people. I need to clarify that by saying one of the lies that some politicians use to scare people is that the government is going to run out of money and not be able to pay Social Security. I know I am being cynical, but the rest of that scare tactic is to vote for that particular politician, and they will save your Social Security. Regretfully we’ve all heard it from both sides of the aisle.
Well, the big lie is that the majority of Social Security is NOT paid for by the government. They are merely the administrator. About 74% of Social Security Benefits are paid by the FICA taxes from people’s payroll.
That 26% comes from a government-run trust fund that pays a portion of Social Security Benefits. With that in mind, yes, the federal government does pay for SOME of Social Security retirement benefits. But not the majority of the benefit.
What can you expect?
How much Social Security Benefit you can expect is one of the most critical retirement planning questions to know. It is easy to overlook what to expect from Social Security retirement because the Social Security Administration only sends out a statement every five years beginning at age 25. If you can’t remember getting a statement, you can go the SSA.gov and register to see what benefits you can expect based on your current earnings.
But here is a general range of what to expect based on today’s calculations from the SSA.gov calculator. If you are making about $20,000 per year, you can expect Social Security to pay about 56% of your income when you get to full retirement age. FYI, most people have a full retirement age between ages 66 and 67. Additionally, it is always possible for Congress to move that age too.
If you are a higher income earner, you will qualify for more, but it will still fall short of your average income. For example, if you are at full retirement age and have had an average income of about $100,000, you can expect to receive about 29% of your average income.
To give you some relevance, look at what Joe Biden and his wife receive. It’s no secret that he is older and receiving Social Security. He disclosed his earnings in his tax returns. According to Motley Fool, the Bidens received $49,545 in Social Security retirement benefits in 2018 as part of their $4.6 million income. But the reality is that the average American receiving a monthly check from Social Security is only getting about $1,660.
So what is one to do?
With no judgment of your choices, here is the reality. You can work and not retire. Or you can save more money. On the other hand, some do save or make enough not to claim Social Security. Not surprisingly, there are not too many people like that.
The Bottom Line
The most efficient way to save for retirement is through a tax-qualified retirement plan, either on your own or through your employer.