Introduction
Social Security has been a staple of the American financial system since its debut in 1935. Now that ninety years have passed, it’s easy to see how helpful it has been for the elderly and disabled as a source of funding if they outlive their savings or aren’t able to work. However, there are many problems that Social Security faces as an aging benefit without any proper reforms since 1983.
Rules for Getting Benefits
There are two main ways to begin receiving benefits:
- Being 62 or older
- Having a disability or blindness
If you satisfy either of these initial criteria, you are then required to have enough work credits. For 2025, you get one Social Security and Medicare credit every time you earn $1,810 for a maximum of four credits attainable. Therefore, once you earn $7,240, you will get the max credits in 2025.
The requirements for retirement versus disability (other than blindness) differ in slight ways. To be eligible for social security based on retirement you need to have earned an average of one credit for each calendar year between age 21 and 62, up to a max of 40. Therefore, if you are 52 and start your first job you can still reach 40 credits by 62 so long as you get the full four credits each year for those ten years.
This differs from getting benefits from disability because you must work long enough and recently enough to be considered eligible. Depending on your age, you need to have earned enough credits in the last 10 years to be eligible. Below is the list of credits needed.
24 and Younger
May qualify with six work credits in a three-year period ending when disability starts
24 to 31
May qualify if you worked half the time between 21 and when disability starts
31 and Older
Need to have 20 or more credits, depending on your age, in the 10 years prior to becoming disabled
To further illustrate the credits needed for 24 to 31, if you start disability when you turn 29, you will need 16 credits. This is because you would have been able to work for 8 years (29 years old – 21 years old = 8 years) with a total amount of eligible credits of 32 (8 years * 4 credits per year = 32) which you then divide by half (32 / 2 = 16).
These rules get more complicated for surviving spouses, dependents, or even divorcees. If you would like to get more in depth in those categories, you can go to this website from the Social Security Administration.
How is Social Security Funded?
The current tax rate is 6.2% for employees and 6.2% for employers, for a total tax of 12.4%. Social Security funds are collected by the Social Security Administration where the funds are then put into two different federal trust funds: Federal Old-Age and Survivors Insurance (OASI) Trust Fund and the Federal Disability Insurance (DI) Trust Fund.
How Much Can You Get?
Social Security rewards recipients the longer they go without taking the benefit. The math behind the benefits can get complicated and differs between receiving retirement benefits and receiving disability. The main two considerations for taking retirement benefits are:
- Age that you start taking social security
- The amount of money you make in your highest 35 years of earnings
You can begin to take retirement social security starting at age 62 with the full retirement age of 67. At 70, you can get the max retirement benefits. Every year, Social Security and Supplement Security Income (SSI) get a cost-of-living adjustment (COLA). For example, in 2026, the increase will be 2.8%.
For a retirement benefits calculator, you can click here to go to the Social Security Quick Calculator.
Will Social Security Still be Around?
Many people today now question whether social security is one giant pyramid scheme. If you look at how it works, you might think the same thing. Everyone working puts their money into a big pool and then people who are retired take a specified amount of money out every month in the expectation that the amount of funds going in will supersede the amount that is getting taken out. This logic made sense in the 1930’s when there are enough workers to support the smaller number of retirees. However, with Baby Boomers starting to reach the peak of retirement and not enough workers entering the workforce to meet the growing aging population, there is no longer enough money flowing in versus going out. When there are more expenses than revenue, that is when the trust fund will be insolvent, which is what people are referring to when they say that Social Security won’t be able to survive.
To further illustrate the point, in 1950 there were 41.9 workers per recipient. In 2013, there are now only 2.8 workers per recipient. Assuming the workers are making $60,000 per year, they will be generating $20,832 in social security revenue ($60,000 x 0.124 = $7,440. $7,440 x 2.8 = $20,832). The average yearly social security payout is $23,160. When you multiply this discrepancy by the millions of people on social security, the gap begins to widen significantly between revenue and expenses. Keep in mind that if your annual income is between $25,000 to $34,000 if you are single, then 50% of the benefits are taxable. If you are single with an income above $34,000, then up to 85% of the benefits are taxable.
The current estimate for how much longer Social Security will last, according to the Committee for a Responsible Government, is late 2032. According to the current rules for Social Security, about 80% of benefits will still get paid out. Therefore, retirees will still be getting a check every month, but the check payout will be reduced.
Possible Solutions
An important rule in business is to never bring up a problem unless you have a solution. With Social Security, there isn’t one single correct solution to resolve the funding and payout problems. The possible remedies are:
- Raise the retirement age – This won’t fix the short-term timeline of when social security will run out. In the long term, however, this could be a part of the solution, though the generation getting told they need to work for even longer will not be happy.
- Increase taxes – This could be a solution to raise new revenues but will disproportionally affect lower earners with social security only getting taxed on the first $176,100 that you make in 2025.
- Increase the max taxable income – Increasing the max amount that can get taxed to above $176,100.
- Reduce benefits – This would reduce the cost of Social Security, but seniors who rely on social security and are incapable of working in their retirement could suffer from the lack of benefits and could potentially be forced into dire circumstances.
This list is by no means exhaustive. There are several ideas that vary in their overall effectiveness for how it could prolong the trust funds. With each idea, there are severe political consequences. There is no bipartisan-friendly way to prolong the trust funds which is likely the reason that politicians seem to avoid the problem that Social Security has become.
Conclusion
Social Security is a flower in full bloom within the financial industry. While it is quite appealing for the aging population right now, its beauty may be short-lived under the current rules. If you would like more information on Social Security, or need help with other financial matters, Volpe Consulting would be happy to assist!
If there’s a pain point within your operation that you’d like to discuss, we’re here. We’d appreciate the opportunity to look into it with you and hopefully provide some insight as to how you can move forward. For more information, or to just put a few faces to the name,
