Social Security Benefits and You
Social Security is a sore topic for many people. The system is flawed, it’s in significant financial trouble, and the younger generations aren’t expecting to see a penny from it when they retire. While it’s true that Social Security has its problems, it still pays out benefits to tens of millions of Americans each year and will continue to pay out benefits for years to come. How the system and benefits may change in the future is anyone’s guess, but as it stands now it’s still a key source of retirement income for many.
There’s some bad news for younger generations, which include many in Generation X. Unfortunately, younger workers have a great deal to worry about. Even though their parents’ and grandparents’ benefits are safe, theirs are not. Any worker born after 1974 will reach full retirement age after the trust fund is exhausted. Unless Congress acts soon, younger workers can look forward to paying full Social Security taxes throughout their careers but only receiving 78 percent or less of the benefits that have been promised to them. In addition, they will have to repay the Social Security trust fund, an expense that will total almost $6 trillion by the time the trust fund is exhausted in 2041.
More Than Just Retirement
When most people think of Social Security it simply means a monthly retirement check. While that may make up the bulk of the benefits, Social Security covers much more. Social Security as a whole consists of:
- Old-Age Benefits
- Survivor’s Benefits
- Disability Benefits
The old-age benefits are what most people consider retirement benefits. This is the monthly check a retiree receives once they are age 62 or older. As important as this is, you also need to consider the survivor benefits, disability benefits, and Medicare. Even though Medicare is technically part of the Social Security program, that’s such a big topic it deserves its own post. So for now we’re going to focus on the other three benefits.
Normal Retirement Age (NRA)
The normal retirement age is the age at which full retirement benefits are available. The NRA doesn’t remain constant and those born between 1937 and 1960 will have different normal retirement ages. For those of us born after 1960 it’s pretty easy to remember that our NRA is a flat 67. Keep in mind that although this information currently applies, there could be changes made that affect you in the future as the government looks for ways to solve the Social Security funding problems. But for now, here is the current Social Security NRA breakdown with some examples of how much benefits are reduced by taking an early retirement at age 62.
|At Age 62|
|Year of Birth||Full (normal) Retirement Age||Months between age 62 and full retirement age||A $1000 retirement benefit would be reduced to||Benefit is reduced by||A $500 spouse's benefit would be reduced to||The spouse's benefit is reduced by|
|1937 or earlier||65||36||$800||20.00%||$375||25.00%|
|1938||65 and 2 months||38||$791||20.83%||$370||25.83%|
|1939||65 and 4 months||40||$783||21.67%||$366||26.67%|
|1940||65 and 6 months||42||$775||22.50%||$362||27.50%|
|1941||65 and 8 months||44||$766||23.33%||$358||28.33%|
|1942||65 and 10 months||46||$758||24.17%||$354||29.17%|
|1955||66 and 2 months||50||$741||25.83%||$345||30.83%|
|1956||66 and 4 months||52||$733||26.67%||$341||31.67%|
|1957||66 and 6 months||54||$725||27.50%||$337||32.50%|
|1958||66 and 8 months||56||$716||28.33%||$333||33.33%|
|1959||66 and 10 months||58||$708||29.17%||$329||34.17%|
|1960 and later||67||60||$700||30.00%||$325||35.00%|
Those who are eligible for a Social Security old-age benefit can begin receiving them at age 62, but with a reduction from what would otherwise be received at NRA. The current formula for figuring the benefit reduction is five-ninths of 1% per month for each of the first 36 months prior to normal retirement age, plus five-twelfths of 1% for each month in excess of 36 months. This reduced level of payments continues for the life of an early retiree. Benefits do not increase to 100% when the retiree reaches NRA.
Could that calculation be any more confusing? Odd fractions of a single percent for a certain number of months. It sounds like a math question that would be on the SAT. Don’t worry about calculating it yourself. If you really want to know you can use the Social Security Administration’s online benefit calculator.
Someone who does not want to start receiving benefits at their Social Security NRA but continues working can earn delayed retirement credits, which can eventually increase the worker’s benefit by up to 8% per year. Keep in mind the worker’s spouse will not see any increase in their benefits as a result. The decision to delay receiving benefits can be complicated and one must take into account many different factors such as the amount of the benefit, other sources of income, and life expectancy.
In addition to receiving benefits as a Social Security recipient the spouse of a recipient is also entitled to 50% of their primary insurance amount (PIA), subject to a family maximum, as long as the spouse is of normal retirement age. If the spouse is entitled to a larger Social Security benefit of their own, they will receive that benefit and no additional spousal benefit will be paid. Also, the family maximum does not reduce the benefit if both spouses receive their own Social Security benefits. Instead, the family maximum applies when one or more dependents receive benefits based upon the earnings record of one worker.
The Senior Citizens’ Freedom to Work Act of 2000 eliminated the retirement earnings test for people who have attained Social Security’s normal retirement age. Excess earned income by Social Security beneficiaries who are under Social Security’s NRA results in a partial or full loss of benefits, depending on the age of the person, the amount of their benefit, and the amount of earned income. For the sake of this test earned income generally includes wages and salary. Investment income is not included in this definition.
For people attaining NRA after 2010, the annual exempt amount in 2010 is $14,160. For people attaining NRA in 2010, the annual exempt amount is $37,680. This higher exempt amount applies only to earnings made in months prior to the month of NRA attainment. $1 in benefits is withheld for every $2 of earnings in excess of the lower exempt amount. $1 in benefits is withheld for every $3 of earnings in excess of the higher exempt amount. Earnings in or after the month you reach NRA do not count toward the retirement test.
Taxation of Benefits
As if it wasn’t bad enough that Social Security benefits are rather small, many people are surprised to find that some or all of their Social Security benefits may be taxed. Whether or not your benefits are taxed are a result of two things:
- The total amount of Social Security benefits received, and
- The amount of the recipient’s other income
The higher the amount of Social Security benefits received during the tax year and the higher the income from other sources (even including tax-exempt income), the more likely it is that your benefits will have to include a portion of Social Security benefits as taxable income. The portion is defined by a set of calculations that, in essence, determines how much of the taxpayer’s income is in excess of certain thresholds. Because tax-exempt income is one factor in this calculation it may have an ironic effect of pushing some of the benefits over the thresholds to a point where they are subject to taxation.
If a taxpayer’s modified adjusted gross income (MAGI) for the tax year plus one-half of Social Security benefits received (let’s call this provisional income) during the tax year exceed the base amount, then according to the general rule the lesser of the following two amounts must be included in gross income:
- one-half of the Social Security benefits received during the year, or
- one-half of the amount by which the provisional income exceeds the base amount
The base amount is determined by the recipient’s filing status. Notwithstanding the preceding general rule, if a taxpayer’s provisional income exceeds certain levels, more than one-half of their Social Security benefits must be included in gross income.
Are you confused yet? Don’t worry, it is kind of complicated. This is a situation where it certainly makes sense to get professional tax advice. But if you have plenty of time before collecting Social Security, don’t fret about it. Just realize that there are tax considerations when you reach that point.
Indexing for Inflation
Social Security benefits are indexed annually to the cost of living. This is one bright spot the current system. The idea is that your Social Security benefits will increase alongside everything else. The bad news is that not all things increase in price at the same rate. Your benefits may generally increase according to some things, but it may fall well short of covering for the price increases in other areas. So, it’s good that benefits will generally increase over time, but don’t be fooled in thinking that the increases will easily cover everything as you age through retirement.
What You Need to Know
Fortunately (or unfortunately, depending on how you look at it), Social Security is largely out of our hands. During your working years you simply have to work and pay into the system. Little can be done in terms of increasing your benefit other than make more money so that you pay more into the system or work longer. Where the real decisions come into play are those years leading up to retirement. You’re then faced with choices such as deciding if you want to receive your benefits early, wait until NRA, or keep working longer and building up a larger benefit. In addition, you then need to begin thinking about your other income and how taxes will affect your benefits.
Whether or not Social Security will be around for the younger generation is debatable, but the best thing you can do is to plan for retirement as if it won’t be. This means putting money into your 401(k), opening an IRA, and saving what you can for retirement so that you will have something to live off of in the event Social Security is nowhere to be found. In reality, there will probably always be some sort of benefit to protect our retired individuals, but the amount you receive will almost certainly not provide you with the retirement that you want.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.
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My questions - Generation X is still required to pay into Social Security, and if the program will be exhausted by 2041, they will receive none of what they paid into the program. Why are they still required to pay into the program? Whose bill are they paying? Are they really required to make payment and to expect no return?
I don't know whether you are tracking this article.
Legally you are required. Social Security is a tax according to the Supreme Court technically no different from your income tax.
Today we are paying benefits to people who may have started work in 1940. At that time, and into the mid-70s, people didn't pay the full cost of benefits. Congress was giving away benefits at nearly 1/10th the actual cost - it was effective in getting reelected.
What Social Security will tell you is that you will get a return, and for some that will be a very good return (provided that it is paid). For most of us, it is a negative return though.
Social Security will be around to the extent that there is public support for it. The demographics of support are changing. 2012 was the first year in which a majority of voting aged Americans expect to retire after the Trust Fund is going. The Trust Fund is the cushion with which the system pays full benefits.
Will someone explain to me when a person is vested and required to pay into a system for retirement and when retired the money the employee contributed is taken out first and if you die in those 3 yrs (which they will deplete what the employee has paid in ) the matching amout will never be paid to beneficiaries. So why would I be excited if they match more than me if no one can really benefit if I die? What is very upsetting is they make you contribute but if I had put my money somewhere else, my beneficiaries would get mine and the match. This should be outlawed. I think this deal is them planning on you dying the first three years so they won't have to ever pay out the money. In other words, it is not mixed until your money runs out and tough if you die, as no one is going to get the rest of the so-called match.
I am almost 64. It also makes me furious our ss is not secure and the fund should never have been tapped into. The taxes we all pay are very high and not fair those before us get a full % and those now continue to get less and less. Rent for seniors needs to be adjusted as well. The limit is too low for those of us who cannot afford rent that keeps rising at an owner's whim just because they can get it. I do not want to impose on my children who already will have it harder than my generation. Sometimes, I just want to sit down and cry over what has happened. I look at Fannie and Freddie, those who made horrible decisions and the federal government bails out these but not all the hard-working people like myself who have paid into the system since 18 yrs old, did not take welfare and who now will pay the price for bad management by the government. This is unacceptable. We must vote in a president who knows business and how to manage a budget and stop welfare. The poor and needy I do support but not freeloaders. Get an oversight committee and go after those who can work but choose to milk the system. Do it now.
If you're in your 20's and 30's, you better start saving for retirement right now because social security benefits aren't going to be enough. If you're lucky enough to have a job where your employer matches retirement benefits, do it and be grateful you have it while it lasts.
Your second sentence says it all..."social security is flawed" it was flawed from the beginning and just like you said I'm not expecting a dime from it. No sense in relying on something that most likely won't be there.
I am 55 and my husband is 65. He's on social security and a pension. Can he claim my benefits even though I'm not at retirement age yet? I ask this as my benefits are much higher than his even though I'm younger because I paid into it longer. Social Social Security says NO because I'm not retired yet, although other people are saying yes I can. HELP!
Don't forget that for each year you work past, normal retirment age, you benefits will be increased by 8%.
Thus, IMHO - "Normal Retirement Age" really does not mean anything. Prior to NRA causes a decrease and later than NRA to 70 causes an increase in benefits.
Thus, retiring any time prior to 70 years of age decreases the maximum benefit you could qualify for.
Interesting. I'm 52 and I did not realize my normal retirement age is about 66 1/2. I guess I assumed it was about 69 or so. Maybe I'll just retire earlier than I thought...if the market recovers.
This is the most complete post on social security I have ever read..hands down...my takeaway is that SS is very insecure and you're a fool to think this ALONE will take care of retirement needs. Great job!
Privatization is the only reform which is neither regressive or redistributive.
Reducing benefits is highly regressive. Reducing benefits for those above a certain income level (and not for those at lower incomes) is redistributive. Raising the retirement age is highly regressive
While SS was intended a a SUPPLEMENTAL retirement income source for the minority, it has become the PRIMARY income source for the majority. In 1945 there were 16 contributors to one beneficiary, in 2005 there were 3.25 contributors to one beneficiary. According to a SSA study, 65% of retirees use SS for 50% of their income. The answer? Plan for your own future using all the retirement plans available to you along with a good saving ethic.
1) Great information that is accurate - I work for SS and this looks just like the information we publish. If you got from SSA website - good thinking, why not go to the source.
2) All people that want to invest there own SS tax payments, if you are allowed to do this - were does the government get the funds to pay all the people currently already getting SS benefits?
I'm in my 30's and not planning on a dime from SS. If I get any, then that's great but it would only be a bonus and not the defining part of my retirement.
Unfortunately, I've been paying into the system for 16 years now and the fact that I won't get back what I paid in is what's fundamentally wrong, aside from the fact that many of my parents generation were led to believe that SS would fund their retirement completely.
This social security will not be around forever so everyone must be saving for their own retirement.
I get so mad when I think about the money that gets taken out of my checks each payday, knowing that I'm paying into a system that will be bankrupt by the time I get to use it. I'm fine with the money going to provide for today's seniors, but I sure as heck expect that when it's my turn, that the system will still provide.
That said, everyone should be saving for their own retirement. It's too important to trust to the government. Social security won't be around when you finally need it.
Social Security has been mismanaged for years. It is such a shame the funds were not invested as a real pension fund would be. Can you imagine how much better off the fund would be if even 50% were invested in an S&P 500 index fund since this programs inception? Now the trust fund is a box of IOU’s.
Blackrock has a really cool social security site that lets you calculate different options (one spouse working to one age, the other working to another age...varying income/inflation) you should check it out!
It then prints out a nice color report
Honestly, at this point it just all looks really bad. Many people who are of the retiring age now just can't retire because they haven't saved up enough yet and it seems like the money just won't last until our generation.