What does our SSA deduction buy?

Among other deductions from our paycheck, Social Security takes a portion of our income and contributes it to a government retirement benefit program. We see this deduction each and every time we peek at our paystubs, but what does this contribution buy?

The amount an employee contributes into Social Security is only a portion of what gets paid into the system. For 2012, employees pay a total of 4.2% of their earnings into Social Security. Employers contribute an additional 6.2% on top of that amount for a total of 10.4%.

As much as we might like to see that money accumulate into an account set aside just for us, contributions into Social Security are used to pay current retiree benefits. We add money into the system with the expectation that when we retire, we’ll receive a lifelong stream of income guaranteed by the government. How much income an individual receives depends on several variables:

-         How much you earn.

-         How long you contribute to the program.

-         What age you intend to retire.

The greater these figures are for each category, the more money you’ll receive in retirement. For example, let’s assume an individual born in 1950 that started working in 1968 is earning $50,000 this year. He earned a consistent stream of income throughout his working life that increased at a rate of 2% per year. If that person were to retire this year at age 62, his monthly income would be $1,012 per month. Waiting until age 66 to retire would yield him a monthly benefit of $1,413 per month. If he waited until age 70 to retire, he would receive $1,962 per month.

You can perform your own calculations more specific to your situation by going to the Social Security Administration website.

What do you see as some of the major challenges facing Social Security going into the future?