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Today I decided to find out my estimated social security benefits at http://www.ssa.gov/retire2/AnypiaApplet.html.  When you see the number in future value dollars I have to admit it feels pretty comforting.  Social Security does a fantastic job at making you feel…well…secure.

Note:  I currently make a middle class salary, 27 years old, and said I wanted to retire at 62 (which likely won’t be an option for social security by the time I am that age.)

Then I used the choose to save calculator to figure out how much I’d have to save to make 70% of my wage at 62.  For this calculation I assumed 3% inflation, 5% wage growth, 9% investment returns, and 5% investment returns after retirement.  Including my social security benefits I’d have to invest 24% of my income every year.  With that savings rate demand I’d plan on making some passive income on the side in your golden years as most of us aren’t dedicated to saving that much money. 

However, by accident the first time I used the calculator I accidentally put $0 for my social security income.  The required savings rate with no social security was 32%.  So what the calculator is telling me is the government is taking 13% of my income (well 6.5% from me and 6.5% from the company which could have been mine) when it would only take 8% in order to provide the same income at 62.  Now some of you may argue that the social security is risk free when I may have a hard time providing a 10% return.  My concern is with the government’s ability to borrow from the social security pool of money and not enough population to support the baby boomer’s there is significant risk in the system.

Why does social security require a base of people like a pyramid scheme when a simple calculator tells me for less of my income I can provide the income for myself by myself?

I wasn’t a big advocate of the private fund positions, but I honestly can’t support the social security plan anymore either.  Social Security appears to be inefficient with way too much potential for corruption. 

Play The Social Security Game

Since I can’t control if this country has an alternative system to social security or not there is some things you can do to help maximize your returns.

1. Check Your Earnings – Request a copy of your Personal Earnings and Benefit Estimate Statement (PEBES) annually from the Social Security Administration at www.ssa.gov Report any errors on your earnings immediately as you already paid your fee on those earnings you want to make sure you get your full benefit.
2. Be Weary of Earnings Limits While Under 70 – If you make too much money after you retire your social security income will be reduced.  If this happens look to reduce some of those earnings through special payment rules which include: payments for work performed before retirement, vacation or sick pay, severance pay, and royalties.  It may even be helpful to plan these special payments to pad your first few years of retirement.
3. Don’t Lose To The Suspended File - Every year 1.5% of earnings reports end up in the suspended file.  Common causes for this is name changes, agricultural work, names not matching social security card, and add or remove a title from their name.  If you’ve done any of these things report them to the Social Security Office immediately and create a plan to avoid these things in the future.

No matter what you do social security is an important part of your retirement plan and over arching investment strategy including your views of the program’s future.

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