How Social Security works and what you need to know about its future

NEW YORK (AP) — Tens of millions of older Americans will see a big boost to their benefits in January when a new cost-of-living adjustment (or COLA) is added to Social Security payments.

The 8.7% increase is intended to help them cope with higher prices for food, fuel and other goods and services. The average recipient will see an increase of more than $140 per month, according to government estimates.

You can read more about the cost of living adjustment here.

But what does this increase mean for the fund that helps pay Social Security benefits? And what should the younger generations keep in mind? Here are some as to some Qs.


When you work, part of your taxes funds Social Security. The government uses taxpayers’ money to pay benefits to people who have already retired, people with disabilities, survivors of deceased workers and dependents of beneficiaries.

While the money is used to pay people currently receiving benefits, any unused money goes to the Social Security trust fund. When you retire, social security contributions from working people, along with money from the fund, will pay monthly benefits to you and your family.

To determine the Social Security benefits you will receive, the government calculates a percentage of your highest earnings during your best 35 years of earnings and takes into account when you choose to start collecting benefits. This year, the maximum benefit allowed for someone who retired at full retirement age, which is 66 or 67 depending on the year you were born, is $3,345 per month.


The Social Security Act was signed by President Franklin Delano Roosevelt in August 1935. Taxes were first collected in January 1937 and the first lump sum payments were made that month. Regular monthly benefits began in January 1940.

The Social Security Act of 1935 was originally called the Economic Security Act, but the title was changed during the consideration of the bill by Congress.


Future problems with the fund have long been predicted, largely due to changing demographics. As birth rates decline, fewer people become workers, leading to fewer payroll tax payments. Meanwhile, more baby boomers are retiring and collecting Social Security.

According to the latest report from Social Security and Medicare administrators, released in June, the fund will no longer be able to pay full benefits from 2035.

When the Social Security trust fund runs out, the government will still be able to pay 80% of scheduled benefits for the indefinite future, the report said, while Medicare may pay closer to 90% of scheduled benefits. This means that if nothing changes, future generations can expect to see a general 20% reduction in payments, with a 10% reduction in Medicare coverage.


Kathleen Romig, director of Social Security and disability policy at the Center on Budget and Policy Priorities, a nonpartisan but generally left-leaning think tank, said the COLA increase “just isn’t a game-changer. for social security”.

“It’s not something that should alarm anyone,” she said. “A year or two of inflation will not change the long-term situation.”

Romig noted that the expected date when Social Security will no longer be able to pay full benefits has historically fluctuated between 2033 and 2035 from year to year, due to a variety of factors.

William Arnone, CEO of the National Social Insurance Academy, warns that “the two economic enemies of the trust fund are high inflation and low employment, which means not only high unemployment but also low wages”.

“When they hit together, it’s a double whammy,” he said.

In this context, a high cost-of-living adjustment can be “bad for the trust fund, but good for the beneficiaries”.


Ben Storey, senior product manager with Bank of America’s retirement research and insights team, said many people in their 20s and 30s have a misplaced lack of confidence in their future. social Security.

“What I hear from a lot of the younger generation is that they really feel like it just won’t be there,” he said. “They see the headlines without reading the whole story. Even if (the government does not make) any changes, they will still receive about 75% of these benefits.

Still, Storey said it’s prudent for young people to contribute to retirement and traditional savings vehicles, such as 401(k), IRAs and Roth IRAs.

“Social Security will only be one piece of the puzzle,” he said.

Storey acknowledged that the same inflation behind the cost-of-living adjustment for Social Security makes saving more difficult for people in this age bracket, who also frequently face student loans, debts and savings for an emergency fund or down payment on a home.


Republicans and Democrats have offered a variety of policy fixes.

Romig, of the Center on Budget and Policy Priorities, said the last time legislation was passed to address the future of Social Security was in 1983.

“It was bipartisan, and it was a compromise,” she said. “Benefit cuts and tax increases.”

Each solution, according to Romig, involves “paying more or getting less,” or a combination. “You can’t wish to get out of this. »

“Legislators have many policy options that would reduce or eliminate long-term Social Security funding shortfalls,” the fund’s trustees wrote in the latest June report. “Acting as soon as possible will allow a wider range of solutions to be considered and allow more time to phase in changes so that the public has enough time to prepare.”

That said, Romig wants young people to better understand the system, including the fact that Social Security isn’t going anywhere.

“Almost everyone is affected by Social Security,” she said. “Either they contribute to it, or they receive benefits, or they will one day.”

“I think young people have an extraordinarily strong stake in the system,” she added.


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