This one is for the history buffs and policy aficionados. Social Security, which many commonly understand as a retirement benefit for millions of Americans, is a complex structure that works similarly to a traditional Trust fund. This article dives into the history and inner workings of Social Security. We will unpack how it operates as a Trust fund and why it's important for anyone thinking about the legacy they'll one day leave behind.
Social Security: A Quick History Lesson
"We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, 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."
- President Roosevelt upon signing Social Security Act
The Social Security Act was signed into law by President Franklin D. Roosevelt on August 14, 1935, as part of the New Deal. This was in response to the economic devastation of the Great Depression, which left many elderly Americans in dire financial status.
Social Security was designed to provide a safety net for the elderly, . The primary objective of Social Security is to provide security to Americans over the age of 65 in the form of a retirement benefits system. As a result, the dependency on welfare and family support should be reduced. Social Security still remains one of the nation's most critical social service programs today. families with dependent children, and disabled individuals by offering a continuous source of income
How Social Security Works
According to the Center on Budget and Policy Priorities, Social Security is essentially a "pay-as-you-go" system that operates much like a Trust fund.
(A Trust Fund is a legal entity that holds assets for the benefit of another. You can learn more about how traditional Trust Funds work through our Learn article here.)
The Social Security fund is financed through employers and individuals through dedicated payroll taxes at the current rate of 6.2 percent on earnings, up to a defined limit. This fund, in turn, is used to pay benefits to current retirees, survivors, and disabled workers.
The Social Security program comprises two separate trust funds: the Old-Age and Survivors Insurance (OASI) Fund and the Disability Insurance (DI) Trust Fund. The OASI fund provides retirement and survivor benefits, while the DI fund pays benefits to workers who are disabled and their families.
The revenues collected from payroll taxes are not saved in a conventional sense but are used to pay current benefits. Social Security contributions, combined with funds from general tax revenue, are invested in U.S. Treasury securities. The interest and returns on these investments ensure that the Trust fund assets continue to grow and help offset demographic shifts as the population ages.
At the end of 2023, the Trust fund contained nearly 2.8 trillion U.S. dollars. To say that is an eye-watering number is an understatement.
Social Security as a Trust Fund
Next, let's compare the Social Security Trust to traditional trust funds used in individual estate planning. Here are the key roles defined:
The Trustor: The American taxpayers, who contribute part of their earnings to fund Social Security.
The Trustees: Comprising six members, including the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human Services, the Commissioner of Social Security, and two public trustees. These officials are responsible for managing the Social Security Trust Funds.
The Beneficiaries: Individuals who receive Social Security benefits, including retirees, disabled workers, and families of deceased workers.
Much like private trusts, the Social Security Trust Fund is designed to manage assets (in this case, payroll taxes) on behalf of Beneficiaries. However, unlike private Trusts, which typically aim to minimize taxes and preserve wealth for future generations, the Social Security Trust Fund is intended to be a dynamic fund, with money flowing in and out to support current Beneficiaries.
Estate Planning and Social Security
Social Security is a critical component of retirement planning and, by extension, estate planning. The benefits an individual or family may receive has a direct impact on estate planning decisions and can be a determining factor in someone's future financial landscape.
Understanding the role of Social Security in retirement begins with how benefits are calculated. Earnings over time are used to calculate an individual's "average indexed monthly earnings," an important number when determining monthly benefits. Maximizing these earnings means understanding the role of taxation, spousal benefits, and timing for optimal financial rewards.
Estate planning makes these considerations even more nuanced. Social Security benefits, which are essentially a form of deferred income, factor into an estate’s overall financial strategy. Decisions regarding when and how to claim benefits can directly affect the tax efficiency and distribution of assets upon death. Options such as “File and Suspend,” benefits for divorced spouses, and survivor benefits are all tools used to secure benefits for loved ones.
The Future of Social Security and Implications for Estate Planning
The Social Security program is not without its challenges, and looking to the future, potential changes loom. We discuss extensively in our guide, "The Retirement Crisis in America: How to Plan in the Face of Uncertainty," how retirement planning for Americans has drastically changed over the decades. Namely, the onus has shifted largely from the government and employers to the individual.
If you have a stake in estate planning, which we encourage of everyone, be sure to consider these implications of the changing legal and financial landscape:
1. Trust Fund Solvency: The Social Security Trust Funds face long-term financial challenges due to an aging population, lower birth rates, and longer life expectancies. The Trustees of the funds report annually on the health of Social Security, projecting when the Trust funds may be exhausted if no changes are made to the program. According to the 2023 Trustees Report, Social Security will be depleted within 15 years if there are no interventions. The Social Security Administration points out that the Fund was almost depleted in 1982. Congress reacted with emergency legislation that allowed SSA to borrow from other Federal funds, which was repaid within 4 years.
2. Government Policies: Various policy proposals are on the table to address the impending "Retirement Crisis," from increasing taxes and raising the retirement age to altering benefit formulas. What this means for individuals planning their estates is that they need to remain vigilant and adaptable, as these measures can have direct or indirect implications for estate planning.
3. Personal Preparation: Preparing for future changes might include incorporating flexibility into estate planning strategies, particularly with regard to income and asset distribution. Additionally, supplementing Social Security benefits with other retirement vehicles can provide a buffer against any potential cuts or alterations to the program.
Control What You Can: Estate Planning for Future Protection
This guide merely scratches the surface of the intermingled relationship between Social Security and estate planning. While Social Security was a cornerstone of retirement security in the past, its status in the future is unclear. This highlights how the context of the larger, national economy should always play a major role in your personal planning. Integrating Social Security into comprehensive estate plans is necessary, but because the circumstances are changing, it is critical to stay on top of government policies that may impact your strategy.
As always, it is recommended to work with financial and estate planning professionals and consult with them regarding your unique circumstances and develop the strategies that stand the best chances of achieving your desired objectives. While it can be easy to glaze over numbers and financial jargon, doing your due diligence is necessary if you hope to secure a legacy and are concerned about the welfare of future generations.
Don't leave your legacy to chance or allow changing policies to dictate the security of your loved ones' future. Now is the time to take control of your estate planning - Trust & Will offers a straightforward and trusted solution tailored to your unique needs. From comprehensive Wills to Trust-based estate plans, our platform ensures that you're prepared for whatever the future holds. That includes the evolving landscape of Social Security. Secure your legacy and ensure peace of mind for you and your family. Take our free quiz to see where you should get started, or compare our different estate planning and settlement options today!
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