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There has been a great deal of talk and speculation about the Social Security program lately — and for good reason. Social Security is projected to be insolvent relatively soon, and it does not help that government accounting practices are constantly “borrowing” from Social Security. As a result of some of the tricky math going on, we may not even have until 2037 before the system goes bust.
While Congress scrambles to try and fix the problem (which would be nice because 2037 shows up a little bit before I am likely to retire), here are 5 things for you to think about when it comes to Social Security:
1. It Was Never Meant to Replace Income
We have become extraordinarily dependent on Social Security as a society. Indeed, many people plan retirement around Social Security. However, when the program was first introduced, it was meant to be supplemental only — it was never meant to replace your income. Additions like adding disability and spousal benefits also came later, even though the original program was designed to pay benefits only to the retired worker. In light of this history, and looking to the future, it becomes especially important for you to plan your retirement without relying too much on Social Security.
2. The Self-Employed Pay Twice as Much Into the System
I love being my own boss, but being self-employed can have its challenges. One of those challenges is what is paid into the system. The self-employed pay 12.4% of their taxable incomes into the Social Security system. Others only pay 6.2%. Why? Because employers pay a matching amount for each employee. Before you quit your day job, consider the added cost of Social Security payments, and consider that lower pay in a regular job may be more about the benefits you get.
3. The Longer You Wait to Collect, the Higher Your Payment Will Be
One of the things to consider as you plan your retirement is how long to wait before you begin collecting Social Security benefits. You can begin receiving payments at age 62, but you will not be eligible for as much as you could get if you can wait until you are 70. For those closer to retirement, waiting longer can be a good thing. If you have a way of working part time, or using alternative income streams, it is possible for you to collect higher payments by waiting longer.
4. You May Not Get Cost of Living Increase
Before 1975, it took Congress to provide cost of living increases to Social Security payments. Now, Social Security is tied to the Consumer Price Index (CPI). But that does not mean that there will always be an automatic cost of living increase. If the CPI does not move higher, neither will Social Security benefits. Additionally, there is nothing to stop Congress from working some of its legislative magic and doing away with a cost of living increase each year. You will probably need to find some other way to protect yourself against inflation.
5. Social Security is About to Go Paperless
In an effort to save $300 million over five years, Social Security is about to go paperless. Paper checks will be abolished by March 1, 2013. You will need to set up a direct deposit for Social Security payments, or use the government’s Direct Express Debit MasterCard. The switch begins next year, on March 1, 2011.