Everything You Need to Know About Social Security

Like if it will still be around when you retire, for one.

From the onset of your very first job, you probably noticed that your take-home pay didn’t quite add up to your full hourly wages or annual salary. Although there are several deductions on your pay stub — for federal and state taxes, as well as Medicare — no doubt you’ve noticed that a big chunk of your pay goes to Social Security.

You may have a foggy idea of how Social Security might benefit you once you retire, but, like many of us, you may not know exactly how it all works, if it will still be around, and how you can make the most of it. We break it down.

What Exactly is Social Security?

Established in 1935, Social Security was set up to help the U.S. recover from the Great Depression. The program acted as a government insurance system to help the elderly, disabled, and veterans cover their living expenses.

All U.S. workers pay into the Social Security system through payroll taxes. You pay 6.2 percent of your earnings up to $127,200 (as of 2017) into Social Security, a number your employer is obligated to match. For those who are self-employed, the full 12.4 percent paid into Social Security falls squarely on you.

Currently, Social Security pays out benefits to more than 62 million Americans, the vast majority of which is paid to about 41 million retirees.

Anyone 62 years old or older who has worked for at least 10 years is eligible to receive Social Security retirement benefits. Years worked don’t have to be consecutive and therefore can be fulfilled even through seasonal employment.

How Can I Make the Most of Social Security?

Although you become eligible to receive Social Security retirement benefits starting at age 62, this age is considered early retirement, and your benefits will be reduced if you begin receiving payouts then. In fact, withdrawing benefits at this time could result in as much as a 30 percent reduction in your Social Security benefits.

On the other hand, if you wait until age 70 to start collecting Social Security (also called delayed retirement), it could increase the amount you receive by 32 percent, compared to the amount you’d receive at age 66.

Confused yet? There’s more. Although many experts advise that you wait as long as possible to start collecting Social Security benefits in order to collect the largest possible amount, others argue in favor of the cumulative benefits of Social Security. For example, if you choose to receive your Social Security retirement early (at age 62), you will receive a smaller amount, but you may receive benefits for longer.

Another thing to keep in mind: Social Security retirement benefits are not meant to completely replace your income. The amount of Social Security you receive in retirement depends on how much you earned in your lifetime and how old you were when you started collecting Social Security. That being said, the average Social Security benefit ranges from $1,300 to $2,600 per month.

So clearly, relying on Social Security alone isn’t enough to fund anyone’s dream retirement — savings and investing in retirement funds outside of Social Security is a must. Try to consider Social Security retirement benefits as icing on the cake and aim to cover your retirement goals yourself. (You can generate a more exact number using this calculator.)

Will Social Security Be Around When I Retire?

Here’s the hard-to-swallow truth: Social Security is a pay-as-you-go model, which means that the money you are paying in now is being used for current beneficiaries, instead of being saved for you. While Social Security recorded a $35 billion surplus last year, the program is projected to run through its full reserves by 2034.

This doesn’t mean that nothing will be left for the next generation, but it does mean that Social Security may not be running at full steam. Millennials may only receive about 75 percent of their benefits once they reach retirement age unless the government decides to raise the payroll tax, raise the earnings ceiling, or change the benefits formula.

In any case, the best plan is to ensure that you aren’t relying on Social Security, so start investing in more reliable retirement and savings accounts now.