By John Spoto
Several of surveys conducted over the last few years show that a growing number of Americans are losing faith that they will receive their full Social Security benefits.
Predictably, younger adults expect to receive no benefits at all when they retire. Although opinions differ regarding the urgency of the situation, most financial and policy experts agree there is good reason for concern about Social Security's financial health.
The Social Security Act was signed into law in 1935 under President Franklin D. Roosevelt. It established two national social-insurance programs -- old-age retirement benefits for workers in private industry and unemployment benefits for those who had lost their jobs. In large part, these programs were a response to the devastating effects of the Great Depression, which had decimated the lifetime savings and job opportunities for many older workers.
The scope of this program was broadened in subsequent years through amendments including those adding benefits for disabled workers, dependents of retired and deceased workers, and cost-of-living adjustments tied to the Consumer Price Index to offset the effects of inflation.
Social Security was designed to be a pay-as-you-go system, where the money raised from payroll taxes on workers is paid out to beneficiaries. Social Security benefits are funded primarily by the 12.4 percent (shared evenly by employer and employee) tax on our earnings from work.
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A portion of the payroll tax is used to pay current benefits, and the balance is invested in the Social Security Trust Fund, which consists of government bonds earning interest to help pay future benefits.
In prior years, there were many more working people contributing to the system than retirees collecting benefits, generating large cash-flow surpluses for Social Security. However, as our population has aged, there are far fewer workers for every retiree. People are also living longer. This presents major challenges to the system.
Next week we'll discuss the implications of the changing demographics to the Social Security system.
John Spoto is founder of Sentry Financial Planning in Andover and Peabody. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com.