In my 30-plus years as a certified public accountant (CPA), I have discussed taxes, Social Security and retirement planning with thousands of clients. When addressing Social Security with clients, particularly those under 40, I am often told, There will never be anything there for me. This statement has always bothered me because it illustrates a basic lack of understanding on the part of the American consumer (and often their financial adviser) on what benefits are provided by the Social Security System.
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Lets look at a basic example: If average Joe earned $4,480 or more during 2011, he received the maximum four credits in the Social Security system for the year 2011. This cost him $343 if he was a W-2 employee (his employer matched his share) or $686 if he was self employed. If Joe repeats this for nine more years during his life, he has earned complete, minimum coverage under the system. In other words, for a minimum of $3,430 (10 years at $343 per year), average Joe has received total retirement and medical coverage.
But what does Joe really get for $3,430? The Social Security System provides the following benefits to this average Joe for his 10 years (40 quarters) of minimum, entry-level coverage:
1) A retirement income for Joe starting as early as age 62;
2) A retirement income for Joe's wife, as early as her age 62, even if she has never had earned income;
3) A full medical system at age 65 (Medicare) for the remainder of his life;
4) A full medical system for his wife at age 65, even if she has never had earned income;
5) Disability benefits for Joe in the event of injury today;
6) Disability benefits for his wife even if she has never paid into the system;
7) Dependent benefits for a disabled, minor, or dependent children, even after Joes death;
8) Dependent benefits for his dependent parents;
9) Child care benefit for Joe's wife to care for any children at home under age 16 in the event of Joe's death, disability, or drawing of his retirement benefit;
10) Death benefit for Joes widow.
Joe gets all of this for $3,430? Yes. Our Social Security System--possibly the greatest financial investment available to every American--has been misunderstood, maligned and ignored by nearly everyone. The system is not meant to be just a retirement plan, it is more precisely a safety net for all Americans providing rudimentary retirement, disability and medical coverage at all ages to nearly all Americans.
What Joe, his wife and most Americans overlook is the tremendous safety net provided by this system. Lets look at a few examples.
What if Joe dies tomorrow? His widow still gets a retirement benefit, as early as age 60. If she is personally disabled, she could get benefits as early as age 50. She also still retains her full Medicare coverage at age 65, (as Joes widow), even if she has never paid a dime into the system.
What if Joe is disabled by a car accident at age 50? Joe still qualifies for a full, unreduced Social Security disability check as if he had waited until his full retirement age to stop working, and Joes wife does not lose a single benefit. And if Joe is fully disabled, after two years he also will qualify for Medicare even though he is well under 65.
What if Joe and his wife divorce? Once they have been married for at least 10 years, Joes wife is covered under Social Security, even if she has never paid into the system. This means she retains her retirement, disability and Medicare coverage forever.
Finally, what if Joe decides to continue to work even after reaching his retirement age of about 66? For each year that Joe postpones his retirement, his annual benefit goes up by roughly 8%. This 8% return is sure better than most Americans can do with their own investments, and Joes delay does not hurt his wifes benefit or their Medicare coverage.
Most Americans are aware that Social Security provides them with a retirement benefit. What they do not realize is that it also provides disability, medical and dependent coverage for themselves, their spouses, their parents and their children. Are there funding problems with Social Security? Absolutely--but these problems can be easily overcome if Congress acts soon. Whether or not you agree with Congressman Ryans, (R-WI), Medicare and Social Security proposals, he appears to be the first congressman to arise with a proposal to fix some of Social Securitys problems. Lets hope a few more join him in the urge to avoid this Congressional Frogger impasse.