Most Americans do not understand Social Security, because the system has been misrepresented to the American people from the beginning. Following the passage of the Social Security Act of 1935, for the first time it became morally acceptable for the government to confiscate money from one group of citizens for the sole purpose of giving it to another group of citizens. Responsibility for the elderly was transferred from the family to the whole of society.
Social Security is not an "insurance" program, because there is no correlation between the amount you put in and the amount you receive. Rather, it is a mandatory tax that distributes allocations discriminatorily. As such, it is similar to a welfare program: it takes money from one group of citizens (active workers) and gives it to another group of citizens (inactive workers).
We're led to believe that our years of payments give us specific entitlement rights when we retire. Unfortunately, that's not the case. The fact is, the government can change the rules anytime it wants. With a stroke of a pen, Congress can give and Congress can take away. Presently, a majority of Americans pay more in obligatory Social Security tax withholdings than they do in federal income taxes. Although few workers agree with the Social Security withholding tax burden, they can do nothing about it—it is the law. So, like it or not, workers in America are under obligation to fund Social Security, although there are provisions available that allow certain individuals to opt out of Social Security for reasons of conscientious objection (consult IRS Form 4361 for details). No rescinding of the law is likely in the foreseeable future.
Nonetheless, probably no single piece of legislation affects the retirement of employers, employees, the self-employed, and their families more than the Social Security Act. Yet, few businesses and fewer workers in America understand the basic retirement and survivor provisions of this law and how it can influence their businesses and lives.
Scope of the law
The Social Security Act actually covers 12 major programs, but the retirement and survivor benefits of most concern to employers and workers are (1) retirement benefits, (2) survivor benefits, (3) disability benefits, and (4) lump-sum payment at death.
- Retirement benefits. The retirement portion of the system generally provides for retirement payment to workers who have paid Social Security taxes on their earnings. Workers age 65 or older will receive 100 percent of the basic benefits. Those age 62 will receive 80 percent. Spouses age 65 or over or age 62 with children under the age of 18 or with a disabled child living at home will receive 50 percent of their spouse's basic benefits. Spouses age 62 with no children at home will receive 37.5 percent of their spouse's basic benefits.
- Survivor benefits. Widows age 65 or older will receive 100 percent of their spouse's basic benefits. Widows age 60 will receive 71.5 percent of basic benefits. Widows age 60 and the disabled will receive 50 percent of basic benefits. Surviving children under age 18 or disabled children, if disability was before age 22, will receive 50 percent of basic benefits if there is still a wage earner in the household or 75 percent if there is no wage earner.
- Disability benefits. Although covered workers can collect disability benefits at any age, the rules that must be met to be fully insured are so complex and rigid that consultation with a Social Security representative or an attorney is highly advised.
- Lump-sum payment. Regardless of a worker's age, if the worker was either fully or currently insured at the time of death, a one-time, lump-sum payment of $255 is payable to the eligible surviving spouse. Children will receive the lump-sum benefit if there is no surviving spouse.
Social Security shortcomings
Although Social Security provides a base of security for workers and their families, it was never intended to be families' sole retirement income. Rather it should be a supplemental income. There are numerous shortcomings with Social Security that should be considered when preparing for retirement. One major concern is that widows' benefits are not applicable unless widows are over age 60 or have a child under age 18 living at home. Another concern is that lump-sum payments can take up to two years before being received by survivors; therefore, these benefits cannot be utilized when making funeral and burial arrangements. For this reason, workers need to consider life insurance programs to compensate for the shortcomings of Social Security.
Disability benefits should also be an area of concern. Because the government's definition of disability is so strict and rigid, it is often very difficult to collect disability benefits. Therefore, workers should seriously consider buying private disability insurance.
Although the number of Social Security credits that workers have paid into the system determines retirement benefits, many times retirees must drastically downgrade their standard of living if they intend to live solely off of their Social Security retirement benefits. In order to maintain an established standard of living at retirement, workers should consider self-funded retirement accounts, employer sponsored retirement plans, personal savings, part-time supplemental employment, or income-generating investments in assets that appreciate in value, such as rental property, stocks, mutual funds, or municipal bonds. Nevertheless, the most important thing workers can do to prepare for retirement is to strive to become debt free. Being debt free during the retirement years can greatly increase retirees' ability to live and enjoy the quality of life they choose for themselves. Debt would likely restrict the joy of retirement.
Conclusion
Although most American workers have no choice in the matter—paying Social Security tax is not an option; it is mandatory—few workers have a grasp of what Social Security retirement and survivor benefits are available to them. For the most accurate information regarding Social Security benefits we encourage you to contact the local representative of the Social Security Administration or call toll free (800) 772-1213. You also can contact them online at www.ssa.gov.
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