Chapter 1

What Social Security Is and Why You Need It

IN THIS CHAPTER

Knowing what Social Security means for you

Looking at the value of Social Security

Considering where your contributions go

Getting all you can out of Social Security

Contacting the Social Security Administration

Social Security is the foundation of long-term financial support for almost every American. If you're like most people, you'll depend on Social Security to help you survive in your later years (if not sooner). In fact, its protections are becoming even more important as an answer to growing insecurity in old age.

Look around you. If you're in the workforce, you know that good jobs are hard to come by. If you're an older worker who loses a job, you may also know it can take a long time to get a new one. Have you been able to set aside money for the future? Saving is essential, but many Americans save little, if anything. Maybe you contribute to a 401(k) at work, if your employer offers one, but who knows how much your investments will be worth next week or next month, let alone many years in the future?

Some of the people who read this book will live to be 100. Maybe you're one of them. Many people will make it into their 80s and even their 90s. Those years cost money. In a future of risks and unknowns, Social Security is one thing you can count on. Your benefit is guaranteed by law and protected against inflation. But that doesn't mean that it takes care of itself or that you should be a passive participant in Social Security. You have decisions to make, and you can make them better if you have some working knowledge of the benefits you've earned. You may also have actions to perform, such as informing the Social Security Administration (SSA) about things that can affect your benefits.

This chapter provides an overview of Social Security and a broad-brush description of benefits. Here, I explain why Social Security was created and why those reasons are highly relevant to Americans today.

Understanding What Social Security Means for You

So, what is this U.S. institution that - sooner or later - plays a role in virtually all our lives?

You can think of Social Security as a set of protections against things that threaten your ability to survive financially - things like getting older and retiring, or having a serious accident or illness that leaves you unable to work. When such things happen, family members who depend on you may not be able to pay for the basic necessities of life.

That's why Social Security offers a range of benefits. These protections can provide crucial financial security for workers, their immediate family members, and even divorced spouses. For example, Social Security benefits may go to

• People who retire and their dependents, typically spouses, but potentially children and grandchildren
• People who are disabled and the immediate family members who depend on them
• Spouses, children, and even the parents of breadwinners who die

Social Security's guaranteed monthly payments, set by legal formulas, stand out in a world of vanishing pensions, risky financial markets, rising healthcare costs, and increasing longevity. Although the program faces a potential financial shortfall in the future, its most fundamental features enjoy broad public support.

In the following sections, I look at specific groups of people who benefit from Social Security.

Benefits for retirees

More than 51 million retirees and their spouses get retirement benefits every month. These benefits help millions of people stand on their own two feet instead of relying on their kids or charity or scrambling every month to pay the bills. Social Security provides at least half the income for 40 percent of those 65 and older. But even for people who don't rely so heavily on Social Security, it provides a solid floor of income in later life.

Although Social Security benefits are generally modest, they help keep 15.4 million seniors above the poverty line, including many hardworking, middle-class Americans who otherwise would have little to fall back on.

Social Security isn't intended to be your sole source of income. Instead, it gives you a foundation to build on with personal savings and other income.

If you're already retired (and not rich), you understand the role these payments play in your monthly budget. If you're still in the workforce but thinking about that next phase of life, here are a few things to reflect on:

• Social Security is reliable. Its payments don't rise and fall with the markets on Wall Street or depend on how your company is faring or how well you selected investments. Social Security income lasts a lifetime.
• Social Security is accessible. Almost all workers are covered. To put this in perspective, about half of workers are covered by an employer retirement plan, and many of these workers do not even participate.
• Social Security is protected against inflation, a crucial safeguard. Rising prices can slash the value of fixed income over time, driving down your standard of living in retirement.
• Social Security is especially important for older women. Women tend to live longer than men do, and they have less income to draw on in old age. Elderly widows are exceptionally vulnerable to poverty.
• Social Security gives a boost to the least affluent. That's because the benefit is progressive. Poorer individuals get back a larger share of earnings than their higher-paid peers. Social Security benefits replace about 37 percent of the earnings of an average worker.

THE ROOTS OF SOCIAL SECURITY

You may think of Social Security as part of life in the United States, but it wasn't always this way. Social Security was a foreign idea - literally. Americans by and large never expected their national government to rescue them in hard times. This was a country shaped by pioneer culture, a society that expected people to pull themselves up by their own bootstraps. Back on the farm, extended families took care of their own and struggled together. But as more Americans migrated to cities for work, traditional supports of family and close-knit communities began to unravel.

The Great Depression of the 1930s transformed attitudes. Unemployment rocketed to 25 percent. People's life savings vanished in a tsunami of bank failures. More than half of older Americans were poor. In desperation, people turned to Washington for help, and Washington looked overseas for ideas. President Franklin D. Roosevelt and his advisors, including Labor Secretary Frances Perkins, considered an idea known as social insurance, which had gained popularity in Europe. The idea was that governments can adapt insurance principles to protect their populations from economic risks. Unlike private insurance arrangements, which are supposed to protect individuals, social insurance programs are supposed to help all of society.

In 1889, German Chancellor Otto von Bismarck pioneered the idea with a system of old-age insurance that required contributions from workers and employers. By the time of the Great Depression, dozens of nations had launched some sort of social insurance effort. U.S. leaders, eager to ease the economic pain engulfing the nation, took a more serious look at social insurance from Europe. Others viewed social insurance as radical and un-American.

After a lengthy debate, Congress passed the Social Security Act, and President Roosevelt signed it into law on August 14, 1935. The law provided unemployment insurance as well as help for seniors and needy children. Title II of the act, "Federal Old-Age Benefits," created the retirement benefits that many people now see as the essence of Social Security.

"We can never insure 100 percent of the population against 100 percent of the hazards and vicissitudes of life," Roosevelt said at the bill signing, "but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age."

Benefits for children

Social Security pays more benefits to children than any other government program. Some 3.8 million children qualify for their own benefits, as dependents of workers who have retired, died, or become disabled. More than 6 million children live in households where someone gets Social Security.

The program's definition of eligible children may include stepchildren and, in some cases, grandchildren and step-grandchildren. Typically, children who qualify may be covered until age 18 - or 19, if they haven't yet graduated from high school and aren't married.

Benefits for survivors

The death of a family breadwinner hits everyone under the same roof. That's why Social Security provides benefits for dependent survivors. Not to overwhelm you with statistics, but this is a significant program with 5.8 million beneficiaries, including children, widows, and widowers. These dependents qualify for benefits if the deceased worker or retiree met certain basic requirements of Social Security. In Chapter 2, I cover the rules, including technicalities that affect widows and widowers.

Benefits for the disabled and...