How often do you hear that Social Security will not be around in the foreseeable future? As long as we still have the payroll tax dollars income from Federal Insurance Contributions Act (FICA) there will always be Social Security.
Social Security is a program initiated by President Franklin Roosevelt in 1935. It was designed as a safety net to support retirees and elderly. After law came into effect paychecks were sent to individuals age 65 or older who were no longer working. At the time only 1% of an employee income went to Social Security.
The main source of funding for Social Security comes from FICA tax. Take a look at your leave and earnings statement and you will see that a percentage of your earnings is withheld to pay the FICA tax, currently 12.4% You pay 6.2% and your employer pays 6.2%. If you’re self employed, you’re responsible for the whole 12.4%.
Yes, Social Security benefits will still be paid out but it may be at a lower rate which the estimate is 79% as of this year. So in effect everyone will receive 79% of their benefit unless Congress does a Social Security overhaul. If the amount paid out in benefits is greater than the amount collected each year, the Social Security Administration makes up the shortfall by dipping into the trust funds. Congress is still addressing Social Security but don’t worry it will still be around for the foreseeable future.
If you haven’t been including Social Security in your long term financial plan, you should factor it in, keeping in mind the possibility of a reduced benefit. One thing to note, Social Security was never intended to be the only source of income for people when they retire. Rather, Social Security replaces a percentage of your retirement income based on your lifetime earnings.
If you wait until full retirement age, Social Security can replace up to 75% of income for low earnings, about 40% for medium earners, and about 27% for high earners (Source Social Security website). Every year you delay claiming benefits, these percentages increase. A good rule of thumb, aim to replace 80% of your retirement income from a combination of investments, savings, and Social Security.
