Social Security is a pay-as-you-go U.S. program that was signed into law on August 14, 1935. The goal of the program was to provide benefits to retirees and those who were unemployed at the time. A lump-sum benefit would also be paid upon death to help offset some of an individual’s final costs.
In 2017, about 169 million people were paying into the Social Security program in the United States. About 61 million people were collecting monthly benefits. About 25% of households in the U.S. receives a portion, if not all, of their income from this program.
The current average benefit for retired workers is about $1,400 per month. Disabled workers receive more than $1,100 per month. For a widowed mother with two children qualifying for the program, the average benefit was over $2,600 per month.
All programs like this have certain advantages and disadvantages to examine. Here are the key pros and cons of Social Security.
List of the Pros of Social Security
1. It provides a monthly income to those who need it.
Under the current structure of Social Security, about 85% of the funds that are paid into the program are distributed to retirees or qualifying individuals. That ensures those who may need an income during their retirement years are able to have one. Although Social Security is not a complete income replacement for most retirees, it does provide supplemental income that can help individuals, couples, and families maintain their lifestyle.
2. It offers a scalable set of benefits.
With Social Security, you are permitted to retire and claim benefits as early as age 62. That does mean you would receive a smaller monthly payment than someone who waits until the full retirement age to collect benefits. If you wait until you turn age 70, then you will maximize the benefits you’re able to receive. That structure allows for each person or household to choose a structure that works best for them.
3. It offers minimums for qualified individuals.
Since 1973, the Social Security Administration has used an alternative method of calculating benefits for low-income workers based on their years of coverage. In 2018, 11 years of coverage offered a special minimum primary insurance amount of just $40.80. With 30 years of coverage, however, the special minimum was $848.80.
4. It allows spouses to collect benefits.
Although Social Security was designed as a program to reward those in the workforce with a guaranteed income at retirement or for certain disabilities, non-working spouses are also eligible to collect benefits. Under the current rules at the time of writing, a non-working spouse is entitled to an amount that is equivalent to 50% of their working spouse’s benefit. The only stipulation is that the couple must be married for a minimum of 12 months before submitting the application.
5. It provides a tax-free benefit to many people.
No one in the United States pays federal income tax on more than 85% of their Social Security benefits based on current rules. If you file a joint return and your combined income is at least $32,000, then up to 50% of your benefits may be subject to income tax. If you earn more than $44,000, then up to 85% of the benefits could be taxable.
6. It allows you to continue working during your retirement.
If you decide to keep working during your retirement, then you can potentially earn a larger benefit over time. That is because you’ll keep earning credits, if needed, to your benefit. Working can also delay the need to claim Social Security, which can increase the benefit as well. Although this may mean that your Social Security benefits would be taxed under this circumstance, it is a way to ensure you have enough income each month.
7. It is a guaranteed lifetime income.
Once your application for Social Security is approved, you are guaranteed a monthly benefit for the rest of your life. Even if you claim an early retirement, you’ll still receive that guaranteed check each month. That means you will have a definite income you can rely upon to meet your daily living needs each month. You can even invest this money if you choose.
List of the Cons of Social Security
1. It is a system that is not fully funded.
By 2028, the number of people claiming benefits through Social Security are expected to exceed the number of people paying into it. Some estimates have this event occurring as early as 2022. Although a good portion of the national debt in the U.S. is to the Social Security program through Treasury securities, redeeming those securities requires funds. That may result in higher tax rates, a larger federal deficit, or other financial consequences.
2. It is not available to everyone.
Under the current system of Social Security, individuals must earn credits to qualify for benefits. If you do not earn a minimum of 40 credits, then you are not entitled to a retirement benefit through the program. If this disadvantage applies to you, the Social Security Administration advises you to consider working more to earn more credits that can be applied to your personal account. To earn credits, under 2018 rules, you must earn a minimum of $5,280 over a 12-month period for the maximum 4 credits allowed. That means it takes 10 years to qualify for the minimum number of credits.
3. It rewards high-income earners.
Social Security calculates your monthly benefit based on the average income you’ve reported over your lifetime. Once you’ve reached the minimum number of credits, additional credits have no bearing on the amount of your benefit. At the time of writing, the equation to calculate your monthly benefit from your monthly average wage is this: 90% of the first $896, then 32% of the amount between $897 and $5,399, then 15% of the amount above $5,399. Most Americans do not earn enough to reach the 15% calculation. That means someone who earned an average of $4,000 per month receives a benefit of less than $1,800.
4. It is offered when it may be difficult to use or enjoy its benefits.
As people age, the number of health issues they face continues to increase. If you’re trying to maximize your benefits by delaying a claim until the age of 70, then you may not be able to travel like you want or enjoy the other perks of retirement. Sometimes, it is better to take the benefits that are available, even if they are lower, to enjoy it while you can. Even then, you may face a major health issue later on in life where a larger benefit would be helpful, so there are big risks to consider on both sides of the equation.
5. It may not give you a chance to break even on what you’ve paid into the program.
At the time of writing, it takes more than 10 years to make up for the 8 years of benefits lost if you make a Social Security claim at age 70 instead of age 62. That means you’d need to live longer than the average lifespan in the United States to break even financially from the decision to claim benefits. You could invest your early retirement benefits instead, although that may cause tax complications that could be costly as well.
6. It can change the full retirement age of the program.
People are living longer than they were in 1935 when this program was first started. For those born between 1943-1954, their full retirement age in the program is 66. The full retirement age for those born in 1937 or earlier is 65. For everyone born 1960 or later, the full retirement age is 67. The retirement age of the program keeps going up, so those who were born in 1980 or later may face a requirement of age 68 or older to make a “standard” claim for benefits, which would be 3 full years later than previous generations.
7. It offers permanent differences in benefits.
Although you can make a claim at age 62 for Social Security benefits, you’ll receive a 25% reduction in the overall benefit amount you’d receive if you waited until your full retirement age. Any reductions in the benefit amount are permanent. If you lived to the age of 85 and made an early claim, you’d actually receive less in benefit dollars than if you’d waited until your normal retirement age.
The pros and cons of Social Security are important to examine at any age because it is an essential component of a retirement plant. If you have an idea of how much your benefit will be, then you’ll know how much you will need to save to meet your retirement goals. Keep in mind that the benefits awarded, and even the structure of the program, are subject to change. That means a periodic review of these pros and cons should occur at least once per year.