SAVING FOR RETIREMENT How Much Will Social Security Pay You? by Cameron Huddleston
The Social Security Administration has been sending benefits statements to workers age 25 and older since 1999. Not only do these statements estimate what your monthly retirement benefits will be; they also show how much your disability and survivors benefits would be, provide you with your earnings record and explain the basics of social security and medicare.
Some of you might toss these annual statements because you figure you probably won't be getting a piece of the social security pie. But you should be paying more attention to these statements because, even if Congress doesn't fix the drain on the system, there will be some money for you.
Plus, the earnings record is important to check to make sure there are no mistakes. And the statement shows you what sort of disability or survivors payments you'd get. But there's an even more important reason: It shows how little social security pays and how much more you need to be saving for retirement.
"All of this is designed to make you think about retirement and understand that social security shouldn't be your sole source," agrees Social Security Administration spokesman Mark Lassiter. "The earlier you start planning and start saving for your future, the more prepared you'll be."
The basics
Social security taxes pay for five categories of benefits: retirement, disability, family, survivors and medicare. Currently, workers pay a 6.2% tax rate (plus 1.45% for Medicare) on income below $90,000 (employers kick in an equal amount and the self-employed pay a 15.3% rate). As you work, you earn credits -- up to four a year -- that count toward your eligibility for benefits. People born in 1929 or later need at least 40 credits to receive retirement benefits. It is your actual earnings, though, that determine the amount of benefits you'll receive.
The social security benefits estimate provided in the annual four-page statement sent to you can help you with your retirement planning -- even if you're nowhere close to retirement age. The closer you are to retirement, the more accurate the estimated dollar amount for your monthly benefit is because the number is based on your average lifetime earnings. And the younger you are, the rougher your benefits estimate will be because the estimate assumes that your income in future years will be about the same as it was the past year.
The estimated benefits provided by the social security statement are in today's dollars. To get an idea of what your benefits would be in future, or inflated, dollars, you can use one of the three calculators on the Social Security Administration Web site. The quick calculator requires the least amount of information from you but provides just a simple, rough estimate. The estimate from the online calculator is similar to the one provided in your annual statement because you must enter your complete earnings history. The detailed calculator provides the most precise estimates, but it must be downloaded and installed in your computer.
The statement also gives you a chance to review your earnings history and other crucial information, such as your name. If there are mistakes, it is better to fix them now rather than 20 or 30 years down the road when you may no longer have your W-2s to support your claim that errors were made.
Fixing the system
Because the program is funded by taxes on workers' income, it will be stretched to the limit when 79 million baby boomers start retiring in 2010. By 2017, the Social Security Administration will pay more in benefits than it collects in taxes, Lassiter says. Then the administration will have to start using money in its trust fund to pay benefits. If Congress takes no action to repair the system, the trust fund will be exhausted by 2041, and the social security taxes collected will be enough to pay only 73 cents on each dollar owed.
If Congress fails to act and social security does get the squeeze, the estimate on your statement likely overstates your benefits. Nonetheless, you get an idea of how much you should be saving for retirement to supplement social security benefits.
There are a variety of small fixes that could ensure the future solvency of social security. All involve either raising the FICA payroll tax (already a very regressive tax -- that is, unfair to the poor) or slowing the growth of future benefits.
A more palatable idea is personal retirement accounts, funded by a portion of your social security taxes and invested in stocks and bonds. That is the cornerstone recommendation of the bipartisan President's Commission to Strengthen Social Security.
A combination of withdrawals from your personal account and a modest guaranteed benefit from social security would likely produce a much higher monthly income in retirement for all of today's younger workers than the current security system ever could.
As envisioned by the president's reform commission, personal retirement accounts would be voluntary. Participating workers could divert a portion of their payroll tax (something like two to four percentage points of FICA) into their personal accounts. You could invest those taxes in a mix of U.S. index funds, ranging from all bonds or all stocks to a mix of stocks and bonds. But you could not invest in individual stocks or sector funds, so there would be no risk of losing everything.
Your money could not be withdrawn before retirement. And you could bequeath the remainder of your account to anyone you chose -- your children, friends or charities.
When you cash in
Starting in 2003, the full retirement age began to gradually rise to 67, depending on your year of birth. You can start receiving benefits at age 62, but the amount you receive will be reduced. Or you can hold off until age 70 to get a larger monthly check. Your social security statement provides an estimate for all three retirement scenarios.
The Social Security Administration recommends talking to one of its representatives a year before you retire to learn about the process and decide when you want to start collecting benefits. The actual application process is fairly simple, Lassiter says. You can apply online or in your field office, or by calling 800-772-1213. You'll have to submit documents such as a birth certificate to show you are eligible.
One more thing: You might have to pay taxes on your benefits depending on how much income you receive from a part-time job, savings and other taxable sources.
GETTING STARTED
