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Understanding Social Security For Investors

Jun. 15, 2022 10:51 AM ET11 Comments


  • Social Security is a government program designed to provide a guaranteed income to retirees. It's vital for investors to understand how the program works and how benefits are calculated in order to understand Social Security's place within a broader investment portfolio and retirement budget.

Pareja de mediana edad leyendo facturas de papel calculando la pensión usando computadora portátil en casa.

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What Is Social Security?

The Social Security Administration (SSA) is a U.S. government agency which administers Social Security and various other government benefits programs.

Its namesake program is old-age, survivors, and disability insurance (OASDI), which is more commonly known

This article was written by

Ian Bezek profile picture

Ian Bezek is a former hedge fund analyst at Kerrisdale Capital. He has spent the decade living in Latin America, doing the boots-on-the ground research for investors interested in markets such as Mexico, Colombia, and Chile. He also specializes in high-quality compounders and growth stocks at reasonable prices in the US and other developed markets.

Ian leads the investing group Learn more .

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (11)

John Vincent profile picture
Great Info - Thank you. Also, just a note that the the average benefit check quoted as $1537 may be somewhat misleading and give a false sense of security. The median could be much lower and for the people who need it most, lower still. The SSA quick calculator at www.ssa.gov/... can give you the range. If you input ~$6040 as your earnings for the current year (minimum possible to earn all four credits) and input earnings only for ten years (minimum possible to earn the forty credits required for eligibility) it comes up with ~$100 at age 62. At the other extreme, if you input $142,800 (maximum counted toward benefit calculation), it comes up with $1956. So, it is a wide range and the people who need it most only gets 1/20th of the maximum possible.

@John Vincent By "people who need it most" you of course mean "people who contributed the least". Of course, there are myriad reasons for not having contributed to SS over your life but the primary ones are the inability or unwillingness to work over your lifetime. While I have sympathy for the former (who were truly unable to work) I have none for the later.
@Husker Bob and John Vincent The average retirement benefit for January 2022 is $1657 not $1537 per SSA website. Many people with a "low" benefit contributed less because they only worked part time in SS covered employment and full time in a government job. Those workers also receive more than a 50% reduction in their SS benefit under the Windfall Elimination Provision. Federal employees switched to SS coverage many years ago. Many State and local employees have also switched so the number of people affected by WEP is steadily decreasing. Low income workers who do not have a government pension receive a very high benefit as a percentage of their earnings. So the people that need it the most actually get the best deal from Social Security!
Bim Ska La Bim profile picture
Thank you - really appreciate this...I'd like to step off the wheel at 62 or 63...we'll see...
darnoc111 profile picture
Thanks for the article. I have always thought that SS would end before I was able to get it. Yet I did get it and am glad it is there. But it does drain a lot of money from the current generation to the older people and hurts the young and businesses alike. It is too bad that there is not another way for the funds to grow through investment rather than giving them out as they come in, or taken into the general budget where an IOU is given for repayment. But if the funds were put into the market it would mean that government would not be able to freely spend as they do and congress would not be able to sell their positions to become wealthy as they do. I am sure that there is a way that the funds could be invested to grow them faster than what we currently get, but I doubt it ever would happen.
As for whether to take SS at 62 or 67 or 70 I would say that it really depends on your family's history and how long family members live for. I've seen many friends die before they even collected a penny. I did do a little research and found that if you retired at 62 rather than retiring at 70 that even though you got far more money at 70 that it would take the person that retired at 70 till they were over 80 before they equaled out to the person who retired at 62 in amount of money received. Which gives some food for thought. I can also see how all of this has to enter your investment thesis for the future.
As for the current benefits continuing, I think they will, but I would not surprised to see indirect cuts through reduced cost of living, or computation of benefits.
fhbecker profile picture
Since Social Security is essentially an annuity, its payout depends on when you start it and how long you live after you start it. All things being equal, it effectively transfers wealth from those that statistically die earlier to those that statistically live longest.

According to the latest CDC government statics, women live longer than men so one could say the program is sexist. Looking at race, the longest lived demographic is Asian females and shortest lived is American Indian/Alaska Native males. So one could also say the program has racist components.
Since almost everyone is required by law to participate in Social Security, one can also develop the argument that its untended consequence is to transfer wealth from male American Indians, male Alaskan Natives and Black males to Asian females, Hispanic females and Asian males....
See figure 4 in link below;
@fhbecker So then, if we allowed money to be taken from us during our working lives to fund social security we have engaged in a racist enterprise. Just when I thought I had my guild issues under control...
This is an excellent overview. I have 2 suggestions. Supplemental Security Income is not funded from the FICA payroll tax and is a welfare program. It is administered by SSA, but has nothing to do with Social Security retirement, disability, or survivor programs. The amount of misinformation/misunderstanding revealed in SA comment streams is huge so I just think this point should be crystal clear.

The second issue is the complications of when to claim if you are married, divorced, or widowed, and can be entitled to your own retirement benefit plus a second benefit as a spouse or widow should be mentioned.
@pokerpaint Additionally, the WEP and GPO provisions reduce benefits for recipients as well as their survivors. Bear in mind that this applies only to people whose employment spans both social security contributing jobs as well as exclusively pension based jobs (such as most municipalities).
@pokerpaint It would have been nice if they were mentioned, but think about how long and all the stipulations that would be required to include those. Have you seen the Social Security manuals. Hell the Bible is shorter. Give Ian credit for what he wrote. It wasn't supposed to be all encompassing.
@G-man$$ I agree. I was not suggesting he include all the different claiming strategies. It would take 2 more articles, one for married couples and one for widow(er)s.
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