Guess What? Social Security Has A Profit

You’ve probably heard that Social Security is going broke, not good news for most of those with hopes of a sane and fiscally-secure retirement. The reality is that for most households Social Security is a central source of retirement funding, especially as more employers have moved from defined benefit plans to defined contribution plans.

But, what’s usually not mentioned is that Social Security is actually doing pretty well — for the moment at least it’s doing better than much of the private sector.

Don’t believe it? The latest available figures show the Social Security system is actually generating a surplus.

According to its Board of Trustees, the Social Security system paid out $685.8 billion during 2009. Notably it cost $6.2 billion to operate the system — about 1 percent.

And what about revenue? It turns out that the system took in $807.5 billion. That money comes from contributions ($667.3 billion), interest ($118.3 billion) and taxes on benefits ($21.9 billion).

If we subtract costs from income then in 2009 the program had a $121.7 billion surplus.

For 2010 the Trustee’s report also shows there’s a surplus but not as much: The system paid out $712.5 billion but took in $781.1 billion. That’s a difference of $68.6 billion.

The Federal Deficit

If someone tells you the Social Security system contributes to the federal deficit have them look at the Social Security Act.

“By law,” says Rep. Xavier Becerra (D-CA), ranking member on the House Subcommittee on Social Security, “Social Security can only spend what it has: the contributions workers make from their paychecks, the bonds purchased with those contributions, and the interest earned on those bonds. By law, Social Security cannot contribute to the federal deficit.”

Social Security Demographics

With more retirees and relatively-fewer workers the Social Security system will have to change over time. Most likely, that means a later retirement age before full benefits kick in. As well, the income base for the Social Security tax could be expanded from just wages to dividends and interest and the tax could also be applied to income above the current maximum of $106,800. Were contributions based on all income sources Social Security benefits could actually be raised.

Unfortunately for many retirees Social Security benefits by themselves will be insufficient to maintain today’s lifestyle. The Pension Rights Center says the average individual receives $13,836 from the system each year.

While many people will be unable to materially-increase their retirement income they may be able to reduce their costs. For some, the choice will be to obtain a reverse mortgage. Here’s why:

Imagine that the Smith’s have a “forward” mortgage which now costs $2,000 a month. Of this amount, $1,500 is for mortgage principal and interest, $100 is for homeowners insurance and $400 is for property taxes.

With a reverse mortgage they may be able to pay off their current home loan. There are no required payments for a reverse mortgage saving the Smiths $1,500 per month. They would, however, have an obligation to pay their tax and insurance costs.

Is a reverse mortgage right for everyone? Surely not. But it can work for selected seniors with real estate equity and a preference to age in place. It is, at least, an interesting option to discuss with tax professionals, fee-only financial planners and reverse mortgage lenders.

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