Have you ever stopped to wonder what are the downsides of Social Security?
A lot of Americans end up using Social Security once they reach retirement age, and a lot are already thinking about how they can access it. However, it also comes with some downsides that not a lot of retirees are aware of. The program was instated back in 1935 and is an exclusive United States program that works on a pay-as-you-go basis.
The idea behind it is that retirees would be able to access extra funds during their retirement through this program, as well as disabled and unemployed workers until they find their footing again. In addition, the program is also set up to pay a lump-sum benefit to those who are in need of financial aid for funeral costs. Over the years, the program has been used more and more, with the current benefit retired people get being $1,400 a month, disabled workers getting $1,100, and widows with children getting even over $2,600.
While this benefit program is a good idea and works really well on paper, as with other benefit programs, there are advantages and disadvantages that come with them. From not everyone being able to access the program but still paying for it while working to other bumps in the road that change your eligibility, we have gathered all the lesser-known downsides that people shy away from talking about!
Let us know if you knew about these downsides or if any of them are new to you!
#1 Big downside: not everyone can access it
One downside of the way in which the current Social Security system is working is that people must earn credits in order to be able to qualify for the benefits in the first place. To be able to access the benefits and be entitled to receive them, you need to earn a minimum of 40 credits during the time you were employed. If you think this is a disadvantage to you, the solution the Social Security Administration suggests is to keep on working more so that you can get the credits you need to qualify.
For example, under the 2018 rules, you could earn the maximum number of credits per year (which is 4) only if you earned at least $5,280 over the course of the year. By their rules, you would need to have worked at that wage for 10 years in order to qualify. Adding to the fact that the rules and thresholds are changing, the number of years you have to work may be different.
#2 Time-related downside: It is not fully funded
Unfortunately, the Social Security program is funded by taxes and by the people who are working. While this sounds like a good way to fund the program, the estimates are not looking good. By 2028, statistics show that the number of people who will be claiming and relying on Social Security benefits will be greater than the number of people paying into the program. There are even estimates that this will happen even earlier than 2028.
While a good part of the national debt of U.S. citizens is towards the Social Security program as they use Treasury securities, to be able to redeem those securities there is a need for funds to exist. This may mean that in the long run, we will be seeing higher tax rates, an increased federal deficit, and other financial consequences that as citizens we will all be feeling.
It may not seem like a big downside, but it may happen that despite paying towards the program all your working years, you will not even up beneficiating from it due to lack of funds.
#3 Big downside: any changes are permanent
This is one of the biggest downsides that there are. You can start claiming Social Security benefits at age 62, which is under the full retirement age. And while this may end up being a good move for your situation, this also means that the benefits you will receive will be at a 25% reduction when compared with the ones you would have gotten had you applied to take them out at full retirement age.
The bad side of this reduction is not that it applies for those years, but rather that it is permanent. Once you have applied for early benefits and started receiving them, you will only receive the reduced amount. You will never get back to the full sum nor receive any part of the money retroactively. So if your health is in good shape, we recommend you try to wait until full retirement age so you don’t receive less than you have paid into the program.
#4 You may end up getting them when you cannot enjoy or use the income
Health is something all of us are dealing with, and the harsh truth is that as we age, the number of health problems we will face will keep increasing. And while a lot of people are aware of this as a fact, not many think that it will happen to them. The downside of life is that no matter what, your health will catch up with you, and when you pair it with Social Security benefits, you may end up disappointed.
If you are planning to delay getting the benefits until you are 70 so that you can maximize them and get more money at one time, it may end up delaying other plans that you would have or enjoying other retirement perks. It may be better to take the benefits once you reach full retirement age, so you can travel and do any activities you have been planning to do before health gets in the way, even if they are lower.
Life is unpredictable, and while we plan for certain things, everything can go down the drain easily. Before you consider waiting, think about the downsides of it as well and make a decision after having all the facts.
#5 High-income earners get more perks, a downside for low-income people
Unfortunately, there are more downsides for people who have not had a high income during their working years than for those who did. This is because Social Security benefits are calculated based on the average income you have reported over your time in the workforce. What’s more, after you have reached the 40 credits needed to qualify, the additional ones you may earn have no weight when it comes to calculating how much you will get in benefits.
The equation to calculate the benefits is pretty complicated, but the easiest way to try to predict your benefit from your monthly average wages is 90% of the first $896 you earn; 32% of the amount between $897 and $5,399; and then add them all with 15% of anything above $5,399. The sad reality is that the majority of Americans will not get to the 15% calculation because they do not earn enough for that.
Yet, the calculation means that if you had an average of $4,000 a month, your benefit would be less than $1,800. If you had less, you can imagine how easily that number would keep dropping. The more you were paid while working, the higher the benefit you will receive. Likewise, if you had an average income, your benefit will end up being smaller than expected.
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#6 Age downside: the program’s retirement age keeps changing
When the program started in 1935, life expectancy was way different, as was the retirement age. As times have changed, so has life expectancy, as people live longer now than almost a century ago. The full retirement age for those born between 1943 and 1954 is 66, while for those born in 1937 or earlier, it is 65. For anyone who was born on or after 1960, the full retirement age is 67 years old.
The downside of this is that this retirement age keeps changing, and those who were born in the 1980s or even later may face a required age of 68 to be able to even make the first “standard” claim for the full benefits. This is three years later than other generations, and with how things are going, it seems like the retirement age will keep being pushed further and further.
#7 Extra downside: You may not end up breaking even
One of the biggest downsides that have been seen by people over the years and that you may have been aware of before If you choose to wait to claim Social Security at 70 instead of 62, it will take you more than 10 years to make up for the amount of money you wouldn’t have received in those 8 years you held off. And when looking at the average American lifespan, you would need to live longer than most people in order to break even and receive all your benefits.
It may just be in your best interest, if you can, to take them out once you reach full retirement age and enjoy your full benefits, despite the lower sum if you do not wait.
Interested in more stuff about Social Security? Check out this article: 10 Worst States to Live on Social Security Check Alone.