10 Facts About Social Security Every American Should Know

By Markets Fool.com


Source: Social Security Administration.

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Put plainly, Social Security, the social program that acts as a financial backdrop for millions upon millions of retirees, survivors, and disabled individuals in the United States, isn't very well understood. Despite having a direct effect on a vast majority of the nation's workforce, the implied benefits, when those benefits kick in, and who qualifies for those benefits tend to be a big mystery to some people.

However, following the recent release of the 2015 Social Security, Supplemental Security Income, and Medicare report just last week, we have fresh data that can potentially resolve a number of basic questions and concerns about the Social Security program. Without further ado, here are 10 facts from this latest report every American should know about Social Security.

1. It covers nearly the entire U.S. workforce
According to data from the Social Security Administration, or SSA, the Old Age, Survivors and Disability Insurance (OASDI) Program -- which is a combination of the Old Age and Survivors Trust (OASI) and the Disability Insurance Trust (DI), covers 94% of the working population. This includes 156.2 million wage-based workers and 19.2 million self-employed individuals. Although Social Security may not be directly putting money in your pocket if you're in your 20s or 30s, it's still protecting you if, for example, you become disabled and need long-term financial assistance.


Source: Social Security Administration.

2. But, more than just workers are covered
The Social Security system does more than just cover retired workers. It also ensures that the spouses and children of qualified retired workers, disabled workers, and even deceased workers, have access to benefits. Of the 59 million OASDI beneficiaries as of Nov. 2014, 4.34 million were children (3.18 million of which were below the age of 18), and another approximately 6.6 million were spouses.

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3. Self-employed people pay double the Social Security taxes of employees
For those 19.2 million of you who are self-employed (like me), I offer you my deepest condolences. Whereas wage-based employees pay half of their Social Security and Medicare payroll tax, and their employer picks up the other half, self-employed individuals bear the full cost of Social Security and Medicare taxes on their own. This means instead of paying a 7.65% payroll tax (6.2% OASDI and 1.45% for Medicare), as wage-based employees do, you'll owe the full 15.3% payroll tax (12.4% OASDI and 2.9% Medicare).

It's worth noting, too, that Social Security payroll taxes cap at $118,500 in 2015, so nothing beyond this point is taxed with regard to the Social Security program. Medicare, however, has no payroll cap.

Source: Social Security Administration, Facebook.

4. It's easy to earn a full year of credits
Earning Social Security credits is actually really easy, and it's based on the amount you earn each year. In order to qualify for one quarter of your annual benefits, you only need to earn $1,220 in income. To earn the maximum of four credits in a calendar year, you only need $4,880 ($1,220 times four). Once you've reached 40 credits, you've qualified for Social Security benefits in some amount for life upon retirement or qualified disability. Of course, the longer you work and the more you earn, the higher your annual benefit will be.

5. Social Security benefits will cover about this much of your prior salary
Social Security benefits aren't meant to replace a significant chunk of your income from when you worked, although it's a substantial help to lower-income retirees than it is for maximum earners. Based on the latest data, Social Security income for a scaled low-income earner will replace about 55% of his income, whereas Social Security income will only replace 27% of a maximum earner's prior salary. For added context, at full retirement age, we're talking about an average benefit of $1,004 for a scaled low-income individual and $2,663 for a maximum earner.

6. The full retirement age is moving up
The full retirement age, or FRA, is a critical number within the program as it's the point at which a retiree is entitled to 100% of her benefits. Although a retiree can file to Social Security benefits anytime between ages 62 and 70, the longer she waits, the higher her eventual benefit will be.

Currently, the FRA is 66 years. However, this figure will soon be on the rise. Beginning with people born in 1955 and running through 1960, the full retirement age will increase by two months each year until it reaches age 67 for people born in 1960 and later. A later FRA takes into account longer life expectancies and encourages people to potentially work longer.


Source: Social Security Administration.

7. The Disability Trust Fund's cash reserves will run out next year
While Social Security is helping countless millions annually and covering a vast majority of the U.S. workforce, it's also in fairly serious financial straits. The 10.9 million beneficiaries as of Nov. 2014 who were receiving disability benefits could see those benefits cut by approximately 20% in 2016, which is when the excess cash reserves of the DI are expected to run out.

In years past, Congress has allowed payroll tax revenue to be reapportioned from the OASI to the DI, and vice versa, when cash reserves begin to run low. However, the current Congress has made it clear that it does not support such a move. If no solution is reached, qualified disability recipients and their spouses or children could see their benefits fall 20% next year.

8. The worker beneficiary ratio is falling
One of the primary reasons the Social Security system is in such trouble over the long run is the retirement of baby boomers from the workforce. There simply aren't enough workers to take their place when they step aside. Furthermore, people are living longer than ever, meaning the average retiree could be receiving a benefits check for a very long time. As the SSA notes, between 2014 and 2040, the estimated worker to beneficiary ratio is expected to drop from 2.8-to-1 to 2.1-to-1.

9. The OASDI Trust will burn through its cash reserves by 2033
Even if Congress decides to reapportion how Social Security payroll tax revenue is received, by 2020, the total expenditures of the program, or what it pays out in benefits, will exceed what it's bringing in annually.

Source: TaxRebate.org.uk via Flickr.

By 2033, the OASDI, or the combination of OASI and DI, will be facing a benefits cut of about 25% if nothing is done. There are about a dozen different ways the program could be fixed, and most options revolve around the idea of either cutting benefits or boosting taxation (or perhaps some combination of the two). One thing for certain is that this shortfall is the major reason you shouldn't count on Social Security to be your primary source of income in retirement.

10. It's an extremely efficient program
Finally, the Social Security system is actually really efficient in relation to expense as a percentage of benefits paid. Excluding Treasury administrative costs, the OASI had $2.9 billion in annual expenditures in 2014, and the DI had $2.7 billion, for a total of $5.6 billion last year. That might sound like a lot on the surface, but the SSA paid out $839.6 billion in benefits payments last year. This works out to an administrative expense of just 0.7% of all benefit payments in 2014. In other words, it means more than 99% of the money you pay into the Social Security program is going directly to qualified recipients.

The article 10 Facts About Social Security Every American Should Know originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.