What Social Security Isn’t
There is a great deal of misunderstanding about the purpose of Social Security. It starts with the name. The full name of the government program that hold the taxes we pay is the Old Age, Survivors and Disability Insurance or OASDI. I’m going to use that term for the rest of this tip, to drive home the point.
OASDI is an insurance plan. This insurance plan has three goals. First as originally designed, to make sure that the elderly are not destitute. Second, for survivors if they lose the family breadwinner, that they’ll have some kind of income. And third, to provide income in the case of a permanent disability.
What the OASDI is NOT is a savings plan. And that’s pretty clear in terms of how it works. An unmarried woman decides to wait until she is 70 to collect her OASDI benefits, but passes away at 69. The total payout from the OASDI fund will be exactly nothing. A man pays into the OASDI fund for 10 years, and then at age 30 is permanently disabled and collects monthly payments for another 50 years. Insurance, not savings.
Also, unique to the OASDI program is that there is an annual cost of living adjustment (COLA) based on the inflation rate. There are very few investment or insurance products that will guarantee to keep up with inflation.
Why am I making this point? Because most people misuse the OASDI program. They think of it as a savings plan, and so want to tap into it as soon as possible. 57% of plan participants take their benefits early. But they are missing the primary point. The OASDI program is not meant to pay your bills when you’re 64. It’s designed to pay your bills when you’re 84 or 104. Many people say that want to collect early to make sure they get some money, in case they die young. But that’s not the purpose of this insurance plan. In almost all cases, if people can wait until the maximum age (70) they should do so, to maximize the insurance payout and particularly the COLA benefit in their old age. Some people can’t. They become disabled or are unable to work for some reason. And that’s why the program allows for payments when disabled, or for early retirement.
I hesitate to make this tip too long, but I have to address one other point. Many people are under the false impression that the OASDI program is going to run out of money. I’ll tell you flat out that won’t happen. Could there be a modest scaling back of benefits for the wealthy? Yes, if Congress can‘t get their act together. But the average person will be unaffected. There is no benefit to the country to have millions of elderly Americans becoming a burden on society.
The odds are that you are going to live to a ripe old age. And because of that, stop thinking of the OASDI as a savings plan to be tapped early. Use it appropriately, to make sure you have enough money in your twilight years.