09 Sep Happy 80th Birthday Social Security!
By Richard W. Jackson, CFP®, CRPC, Principal
Schlindwein Associates, LLC
Having enough resources to maintain one’s lifestyle throughout retirement is a major concern for most retirees. Social Security income can play a vital role in enjoying a comfortable retirement. With this in mind, the following provides a brief history of the program, answers to common questions, and details of a few claiming strategies that will help you make the most of this important benefit.
On August 14, 1935 President Roosevelt signed the Social Security Act into law as the country labored to climb out of the great depression. The Act’s purpose was to provide financial welfare for the aged as those individuals reached retirement years.
“We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.” – Franklin D. Roosevelt, 1935
Current State of the Program
At the time of Social Security’s inception there were approximately 40 workers for every retiree receiving benefits. Given the Baby Boomer generation’s sheer size that number is now approximately 3 workers per beneficiary and is expected to fall to 2 workers per beneficiary in 2035. It is estimated that reserves held in the Trust fund will be able to pay full benefits until 2033. If there are no changes, projected tax income will cover 72% of promised benefits from 2033 to 2087.
While there clearly are issues to be addressed to ensure the longevity of the program, benefits for the vast majority Americans are not at risk. Proposed fixes include increasing the tax rate, raising the earnings maximum subject to Social Security tax, increasing the retirement age, decreasing future retirement benefits, and reducing cost of living adjustments. Social Security benefits are a key component of retirement income making up 30% to 100% of a retiree’s income, so strengthening the program is vital.
Social Security is funded through the Federal Insurance Contributions Act or FICA. FICA taxes are withheld on workers’ wages up to $118,500 (2015) at 6.2%. Employers and employees must pay this tax.
Before earning benefits you must earn 40 credits or have about 10 years in the workforce. In 2015 one credit is earned for every $1,220 of earnings, up to a maximum of four credits per year. Credits determine eligibility not the benefit amount. Actual benefit amount is determined by the average indexed monthly earnings for the highest 35 years which is applied to a formula yielding a Primary Insurance Amount. This figure is the benefit paid at Full Retirement Age.
Full Retirement Age (FRA)
The age when a person first becomes eligible for full unreduced retirement benefits. It is based on bith year.
- 1943 – 1954 FRA is 66
- 1954 – 1960 FRA is between 66 and 67
- 1960 or later FRA is 67
Innovative Strategies for Couples
File and Suspend (excellent for maximizing cumulative lifetime income)
- At FRA the higher earning spouse files for and suspends their benefits
- The lower earning spouse now may receive 50% of their spouses benefit assuming they too have reached FRA
- While receiving spousal benefits both spouses let their respective benefits grow at 8% per year to age 70
- At age 70 they each begin receiving benefits on their own records
Restricted Application (good when income is needed before FRA)
- The lower earning spouse files for early benefits at age 62
- At FRA the higher earner files for spousal benefits (50%)
- While receiving spousal benefits the higher earning spouse’s benefit grows by 8% year until age 70
- At age 70, the higher earning spouse switches to their own benefit
Age, life expectancy, employment status, income needs, and marital status are factors that may affect Social Security claiming decisions. Everyone’s situation is different and there is no one size fits all answer. Overlooking or underestimating the true value of a smart Social Security strategy can cost hundreds of thousands of dollars over one’s lifetime. You have spent a good portion of your life paying into the Social Security system. We can help you make informed and smart decisions so you can make the most of the Social Security benefits you have earned.