How Social Security Works - YouTube

This is my biweekly paycheck and this is my gross pay.

It's blocked out because, well, privacy and here are all the taxes I'm

paying. There's the federal income tax.

And because I live in Manhattan, but work for a company that's based in New

Jersey, I pay New Jersey state income tax, New York state income tax and

New York City income tax.

Yeah, I know.

There's also a Medicare tax.

And then right here is something called the Social Security tax.

It's six point two percent of my pay stub, which is then matched by my

employer. The money that I'm paying into the system now is supposed to

come back to me later in retirement.

But for a while now, experts and politicians alike have been warning that

the chances of that actually happening aren't looking so good if, in fact,

he continues to withhold his plan to withhold the tax on Social Security.

Social Security will be bankrupt in by 2023 with no way to make up for it.

Social Security faces a big mismatch between the revenues that's scheduled

to take in and the benefits that it's scheduled to pay out currently in in

twenty twenty. We're paying more in benefits than we're receiving in

revenue. A Quinnipiac poll shows that less than half of Americans actually

think that Social Security will be able to pay them a benefit when they

retire. More and more young clients are asking whether or not Social

Security is going to be there for them.

And we don't know the answer to that question.

Since 2010, Social Security's cash flow has been negative, which is just a

fancy way of saying that the agency isn't collecting enough money through

taxes to cover what it's paying out.

But all wasn't lost.

There was still this huge trust fund behind Social Security, so they

started tapping the interest on that fund.

But here's the thing. Starting in 2021, they'll have to dip into the trust

fund itself to cover those benefit payments.

And even that pool of cash has an expiration date.

Trustees of the fund expect that by 2035, it won't be enough to cover full

benefit payments.

And thanks to covid-19, that date may come years sooner than expected,

which has some retirees seriously worried about their future.

I don't know what I would do if I didn't have it or if it's that I really

don't know. I could live off the small pension.

I would drain my savings and investments.

Within a couple of years, but experts speaking to CNBC think that lawmakers

will not under any circumstances, let the system go bust, which begs the

question, what went so brutally wrong for the 85 year old program and will

it actually be there when you're ready to retire?

U.s. President Franklin D.

Roosevelt signed the Social Security Act into law halfway through the

Great Depression, this Social Security measure gives at least some

protection to 30 millions of our citizens who will reap direct benefits

through unemployment compensation, through old age pension and through

increased services for the protection of children and the prevention of

ill health. Social Security was originally intended to just do three

things provide benefits for retired, unemployed and disadvantaged

Americans over the next 40 years.

The program ballooned in 1939.

Amendments added child, spouse and survivor benefits.

But the real changes began in the 1950s.

Benefit amounts substantially increased coverage under the program became

close to universal, and a new disability insurance benefit was offered.

In 1965 was the year that Social Security got into the business of health

insurance. Medicare and Medicaid provided a vital lifeline to health

insurance coverage for the country's older and low income adults and in

the 1970s were expanded even further to include a much larger group of

people like individuals of all ages with disabilities.

The last major changes came in 1983, when benefits and taxes were adjusted

to help generate surpluses in the program and to build up Social

Security's substantial trust fund.

That's the same fund that's now at risk.

Now, will all these changes to the system were under way?

The nine digit Social Security number was fast becoming the single most

important identification number in the country.

It was originally meant only to log a worker's earnings over their

lifetime in order to calculate their retirement benefits.

But it kept being adopted by more and more government agencies and private

sector companies as the identification number of choice.

The IRS started using it for taxes in 1962, the military in 1969 and later

everything from driver's licenses to credit reporting agencies.

Your landlord, utility companies and cell phone providers started using it

to. So for better or worse, these nine digits have essentially become our

national I.D. by default, and now the number is assigned when you're born

and it tracks you till you die.

The first monthly Social Security check was cashed in 1940 for a grand

total of about 23 dollars.

Fast forward to 2020.

And the average retired worker gets around 1500 dollars a month from

Social Security. Nearly nine out of 10 people aged 65 and older receive

Social Security benefits.

And Gallup research shows that some 57 percent of retirees say it's a

major source of income in their retirement, eclipsing by far the second

and third sources such as four one KS IRAs and other work sponsored

pension plans. So do I depend on Social Security?

So without a doubt, C.C.

Domínguez has been retired for 10 years and she tells CNBC that she

doesn't know what she'd do if the payments stopped.

As the economy changes, prices going up and they continue to go up.

The money that I had was not stretching in the same way it used to.

And we're talking about gasoline, food, utilities, just the basics that we

have to support ourselves with.

Social Security and a fixed income that matched that increase has been

working several part time jobs to make up for the difference between what

Social Security pays her and how much her bills cost her every month.

So how exactly are those monthly benefits calculated?

Well, they're based on your income, the year you were born and the age you

decide to start taking money out, wondering how the math works.

Well, here's a case study.

The median salary is about fifty two thousand dollars will round down to

make things easy. If you have a traditional job making fifty thousand

dollars, you pay six point two percent of your salary or thirty one

hundred dollars a year in Social Security taxes.

That number is then matched by your employer.

Those numbers are straightforward.

Figuring out how much you'll get back when you're ready to cash out is a

different story. Let's say you'll turn 62 in twenty twenty and your

average lifetime salary was fifty thousand dollars adjusted for inflation.

To determine your benefits, Social Security takes your top 35 earning

years adjusted for inflation, adds them all together.

Then divide that number by four hundred and twenty the number of months

and thirty five years that gives you four thousand one hundred and sixty

six dollars. Still with me, that number is your average indexed monthly

earnings or Iame.

Simply put, it's your monthly pay for the last 35 years.

But there's still some math to get through.

Your benefits are determined by Ben points in an equation almost like a

tax bracket, but it's used to give you money instead.

The less money you've made, the higher a percentage of your salary you'll

get back. This is designed to help low wage retirees.

So let's run your monthly average from before.

Through that Bend Point equation, you get 90 percent of your first nine

hundred and sixty dollars and thirty two percent of everything you made

between five thousand seven hundred and eighty five and nine hundred and

sixty dollars and fifty thousand.

We won't have to worry about that third bend.

So now we have our number.

You can expect a monthly Social Security check of one thousand eight

hundred ninety dollars if you wait until your full retirement age.

But there are two big factors that will affect how much you take home

every month, one of them being cost of living adjustments or colas, which

we've assumed will be a two point six percent pay bump.

Social Security gives retirees every year to keep up with rising prices.

And secondly, if you wait a few years to claim your benefits, you could

add hundreds of dollars to your monthly benefit.

Check your first eligible to begin receiving your Social Security benefits

at age 62.

But you won't get the full benefit amount until the full retirement age of

66 years and eight months.

Back to our hypothetical case.

If you wait until 70 to collect benefits, your monthly check jumps to

almost three thousand dollars.

That's over a thousand dollars more than you would have gotten at your

full retirement age every month for the rest of your life.

One trillion dollars in benefits will be paid out to about 65 million

people in 2020.

So where does all that cash come from?

Social Security is financed through a dedicated payroll tax.

Like we said earlier, every working American pays six point two percent of

their wages to the government on everything they earn, up to one hundred

and thirty seven thousand seven hundred dollars.

Employers match that amount.

Or if you're self-employed, you pay twelve point four percent into the

Social Security Trust Fund.

All of Social Security's payroll taxes and other sources of income are

deposited into this fund, and all the benefits and administrative expenses

are paid out of this fund.

I think of Social Security like a pay as you go type program, benefits

being paid out today mainly come from payroll taxes collected from today's

workers. Now, for over 30 years, Social Security was flush with cash.

It took in more in payroll taxes and other income than it was paying out

in benefits and expenses.

And the fund didn't just sit there by law, income to the trust fund must be

invested on a daily basis.

So they did just that.

Income to the fund is invested in interest bearing Treasury securities,

earning an average interest rate of two and a half percent in 2020.

Every dollar of the trust fund is invested in the United States Treasury

securities, their special securities only designated for the Social

Security trust fund, and that actually gives them advantages over regular

Treasury securities.

U.S. Treasury securities are considered the safest kind of asset to back

any claim that you have.

And so at the moment, they're held in an extremely safe, although new, low

yielding kind of investment.

As of the end of 2019, the trust fund was up to almost two point nine

trillion dollars.

At the moment, the trust fund is very near its all time peak.

In terms of dollars, it's not it's not near a peak in terms of how many

years of benefit payments can we afford to spend out of the trust fund.

But nonetheless, it's in a very high level at the moment.

But here's the thing.

Since 2010, the payroll tax hasn't been enough to cover benefit payments

for the massive baby boomer generation that started to retire in 2016.

The deficit of 75 billion dollars was covered by the interest earned on

the trust fund in 2019.

Interest covered almost eighty one billion dollars of benefit payments.

But starting in twenty twenty one, living off the interest won't be enough

because people are living longer and millions of baby boomers are

retiring. Social Security will have to start to draw down from the trust

fund itself to help pay for benefits.

And even that fund won't last forever.

Experts predict the reserves could run out by 2035, at which point Social

Security would only be able to pay about 79 percent of promised benefits.

And all the while, any chance at earning any sort of return on surplus

money coming into the fund is virtually lost.

The reality is today, every dollar that goes into Social Security

immediately goes out the door to current retirees.

It never has a chance to earn a positive rate of return over time.

And that has really negative consequences if you look over decades of not

being able to invest the money that is set aside.

When you look at pension programs, about two thirds of the assets in there

are actually investment returns.

And so you're stripping that opportunity away from workers.

The world wide pandemic has complicated things even further.

Massive unemployment, a recession, reduced earnings and lower interest

rates, thanks to the Fed could all speed up the erosion of the fund.

Data from the Wharton School at the University of Pennsylvania estimates

the funds could run out as early as twenty thirty two.

And the Bipartisan Policy Center, a D.C.

think tank, says the reserves could be depleted by twenty twenty eight.

This doesn't mean that Social Security will run out of money completely,

but it does mean that they'd only be able to pay out a portion of the

promised benefits.

The Social Security Administration declined to participate in this video.

Now, what does this mean for you?

And many policy experts agree the federal lawmakers are going to intervene

to solve the shortfall before the agency has to resort to cutting benefits

once its plan is called the Social Security twenty one hundred act, which

includes some tax increases while avoiding benefit cuts.

And that's just one of many options that Congress has at its disposal.

You can either raise taxes or you can reduce benefits.

And then there's little things along sides that you can do.

You could increase the payroll tax rate.

You could also increase the wage base that those payroll taxes are applied

to. So rather than subjecting the only earnings below a certain taxable

maximum are subject to the payroll tax, you could subject earnings to a

higher cap or even all earnings to the payroll tax rate.

Could you just do a flat reduction in benefits?

You could also increase the retirement age.

President elect Joe Biden wants to expand the program, meaning bigger

benefit checks to the Americans who need it most.

His plan to make that happen, higher taxes on the wealthy.

He wants to apply that Social Security tax to earnings over 400000

dollars. It is worth noting that this is a bit of a reversal for Biden,

who has advocated for possible benefit cuts in the past.

There's another option that involves no policy changes at all.

Adopting how the fund invests its money.

Yes, there's more risk, but the rate of return on Treasury securities

can't compete with the kind of returns you'll see from money invested in

the stock market. And 20 20 so far, even amid a worldwide pandemic, the

S&P 500 is still higher today than it was on January 1st if we invested in

equities. Now, clearly, the Social Security trust fund would be exposed to

the risk that stock market prices could decline.

But on the other hand, they would also enjoy the extra income that occurs

because of dividends from stock investments and because of capital

appreciation. The shares that are held by the trust fund, but those ups

and downs are very minor relative to the overwhelming need for revenues

for Social Security.

But the problem with this kind of change in investment strategy, some say

it's too late to make a difference if we had changed the investment

portfolio back when President Clinton proposed it in the late 1990s.

Well, it would have made a considerable difference.

Now, we would have had a much larger trust fund, but we didn't do that.

And so if we start now, when the trust fund is expected to be used up over

the next 10 to 15 years, it will not make much difference if none of these

things happen, an outcome that analysts tell CNBC is highly unlikely.

Then the Social Security Administration says all beneficiaries would get 79

percent of scheduled benefits.

Universal Social Security has been debated for as long as Social Security

has existed. The Heritage Foundation, a conservative think tank, put

together its own universal benefit plan, one that they argue will flatten

out benefits, providing more for people who are below the poverty line.

One of the biggest components that we are recommending is shifting towards

a universal benefit program.

And so instead of providing the largest benefits to the people who already

had the greatest incomes throughout their working careers and the lowest

benefits to those who have the least incomes, it would just be one flat

benefit for everybody, regardless of how much you made throughout your

working career. And the benefit of this is that it would actually lift

about the bottom third of people, would get a higher Social Security

benefits. And then over time, those who are middle and upper income would

gradually shift their benefits down.

But of course, it would be very gradual over time, so that many decades in

the future, you get to this point where you have the same benefit for

everybody. And another benefit of that program, as I said, is lifting more

people, the lower income earners, up.

But it also can make the program smaller and total size and scope one big

benefit to this kind of plan.

It would actually involve a Social Security tax cut.

We estimate that you could reduce the twelve point four percent tax down to

10 percent. The median person who makes about sixty thousand dollars per

year, they could have an extra more than four thousand dollars per month

that we're talking about here.

And I think it's about an extra nine hundred dollars for somebody who's

making almost twenty thousand dollars a year.

So this is a lot more money that goes into those workers paychecks.

However, it is important to keep in mind that while this would put extra

cash in your pocket today, the onus would be on the individual to actually

invest that money wisely.

This plan, of course, also assumes that Social Security will still be

there when you retire.

But one financial planner that we spoke to says that his millennial clients

just aren't holding their breath for a hypothetical like this.

Instead, they're trying to plan ahead for a world in which there is no

Social Security coming to them in retirement.

Millennials are a generation that faced more uncertainty than any other

generation before them.

So it's no wonder they're asking whether or not Social Security will be

there for them. And while we don't have an answer as to how things will

look 40 or 50 plus years down the line, we can plan around that level of

uncertainty by showing them a number of scenarios as to whether or not

there will be Social Security, maybe a 50 percent reduction in Social

Security or if the system will remain as is.