Special Edition: How Well Do You Know Social Security?

3 Surprising Things You May Not Know About the Program

Despite the fact that almost every working adult (and teenager) pays into Social Security, and that millions of us count on it for at least part – if not all – of our retirement income, there’s a lot Americans don’t know about their public financial safety net.

“Do you know how much money comes out of your paycheck each week to go into the Old Age and Survivors Insurance Trust Fund?” asks Allen Smith, professor emeritus of economics at Eastern Illinois University and author of “SOCIAL SECURITY: Will It Be There For You?”

It’s important for Americans to learn about the Social Security system long before they’re thinking about retiring, Smith says.

“Public outcry has been effective in provoking the Social Security Administration to correct wrongs in the past,” says Smith. “For example, recently, when it became known that Social Security was seizing tax refunds from the children of deceased beneficiaries it claims were overpaid more than a decade ago, the public howled. The administration announced an immediate halt to the practice on April 14.”

It will take just such a massive public outcry to get the government to repay its $2.7 trillion debt to Social Security, he says.

Smith, who taught economics for 30 years and has focused his research and writing on government finance and Social Security for the past 15, shares three surprising facts that Americans should know about the program.

• The more money you make in earnings, the less you get back!

People who earn less in their working life get more money back in Social Security retirement benefits when you view the annual benefit as a percentage of their highest annual salary.

“So, a person born in 1960 who’s earning $107,000 a year now could receive about $29,230 a year if they retire at age 67 – assuming they had a steadily increasing income since age 18,” Smith says. “That’s 27 percent of their current salary.

“A person the same age earning $40,000 a year today can expect about $16,460, which is 41 percent of their current salary.”

Furthermore, since benefits are calculated only on a maximum average salary of $106,800, the person who earned $500,000 receives the same benefit as the person who earned $106,800.

• Reports indicate the $2.7 trillion trust fund established for baby boomers’ retirement is gone

It will take just such a massive public outcry to get the government to repay its $2.7 trillion debt to Social Security

In 1983, the Reagan administration approved amendments to generate a Social Security surplus that would help pay benefits for the thousands of baby boomers who began retiring in 2011. The changes included accelerating Social Security payroll tax increases; allowing a portion of benefits to be taxed; and delaying cost-of-living adjustments from June to December.

“Those changes generated $2.7 trillion in surplus, which is supposed to be in the Social Security Trust Fund,” Smith says. “But there’s been abundant evidence over the past two decades that no money was being put in the Trust Fund. Based on my research, what’s sitting thereis non-marketable government IOUs.

Statements to that effect were made in a 2009 Social Security trustees report, and by Sen. Tom Coburn and then-President George W. Bush, who in 2005 said, “There is no trust fund, just IOUs that I saw firsthand.”

There was no indignant outcry “because too many Americans just don’t know a lot about Social Security,” Smith says. “This is the most serious and urgent of the problems we face with Social Security.”

• Many people would benefit from hitting their retirement fund first and delaying collecting Social Security

Waiting until you’re 70 to tap your Social Security retirement benefits can make you eligible for a much fatter check – up to 8 percent more a year. That’s a big payoff.

“Many people want to delay drawing income from their retirement fund, but if doing that allows you to wait till you’re 70 to take Social Security, the payoff is tremendous,” Smith says.

“Wait at least until you’re eligible for the full amount, if possible,” Smith says. “That’s age 66 if you were born 1943-54, and age 67 if you were born in 1960 and later. If you’re in the older group, retiring at 62 cuts your benefits by a quarter; for the younger group it’s nearly a third.”




About Allen W. Smith, Ph.D.
Allen W. Smith, author of “SOCIAL SECURITY: Will It Be There For You?”   has devoted much of his adult life to promoting economic education. He taught economics for 30 years before retiring from Eastern Illinois University in 1998 to become a full-time writer. “Understanding Inflation and Unemployment,” Smith’s first book, became an alternate selection of Fortune Book Club when it was published in 1976. “Understanding Economics,” (Random House; 1986), was used in more than 600 schools in 48 states. In recent years, Smith has focused his research and writing on government finance and Social Security.