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Financial Planning: The Future of Social Security

The Social Security program officially began in the US in 1935, after President Franklin D. Roosevelt signed the Social Security Act. Beginning in 1937, workers were required to pay a payroll tax of two percent to contribute to the program. Initially, the benefits given in Social Security only covered the person who was working. The Act was amended in 1939 to cover the spouse and family of the working person and to cover the family in case of the death of the worker. Over time, the amount in payroll taxes increased to 12.4 percent.

Concerns about the future of Social Security benefits began to arise in the 1970s. There was an indication that there would not be enough funding to pay all the benefits by 1979. To make up for this, the amount of payroll taxes was increased. In 1996, there was concern that the fund would be depleted by 2029, as the number of people retiring was greater than the number of people in the work force.

Social Security benefits will only provide about 40 percent of the retirement needs of most people. Some retirees will have to make adjustments to their standard of living if they do not have other sources of income. Because many companies are reducing or completely eliminating pensions there is corner that the people of the baby boomer generation may not have enough income to support themselves once they retire. It is for this reason that it is wise to consider other retirement savings options such as 401k plans and IRAs if they are not already being contributed to.

401k plans are retirement savings plans sponsored by a person’s employer. Some employers offer a match, meaning they will contribute up to a certain amount to the account when the employee contributes. For example, an employer may match up to five percent of a person’s salary. If an employee earns $50,000 and contributes at least $2,500 to their 401k in a year, the employer will also contribute $2,500. The employee is free to contribute more than five percent if they wish, though there is an annual limit on the total they can contribute. There are usually limits and restrictions on a 401k plan. The employee may not withdraw the money without penalty before the age of 59 ½ in most cases.

Other retirement savings options include IRAs, or individual retirement agreements. An IRA can take many forms, from a savings account to a mutual fund. The most a person can contribute to an IRA each year is $5,000, or $6,000 if they are over age 50. There are two types of IRA, a traditional IRA and a Roth IRA. Contributions to traditional IRA are tax-deductible, but the retiree will need to pay taxes when they withdraw the money. A person pays taxes on contributions to a Roth IRA, but does not pay tax on withdrawals or on the earnings.

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