#socialsecurity

We concluded our Summer Webinar Series in August of 2022. We had a great turnout and thank you to our clients and friends that joined us live. The educational series covered great topics such as planning for loved ones, retirement plan basics, behavioral investing, Social Security and Medicare. We hope you learned something new to help you achieve your retirement goals.

For those that were unable to attend or for those that want to re-listen to the webinars, the replays are now available at BFSG University on YouTube. We always suggest you subscribe to BFSG University on YouTube to ensure you never miss the latest educational videos and presentations, many of which are pre-recorded and not broadcast via live webinar.

Again, we hope you enjoyed our summer webinar series and we look forward to having you back for future sessions. 

With approximately 94% of American workers covered by Social Security and 65 million people currently receiving benefits, keeping Social Security healthy is a major concern.¹ Social Security isn’t in danger of going broke — it’s financed primarily through payroll taxes — but its financial health is declining, and benefits may eventually be reduced unless Congress acts.

Each year, the Trustees of the Social Security Trust Funds release a detailed report to Congress that assesses the financial health and outlook of this program. The most recent report, released on June 2, 2022, shows that the effects of the pandemic were not as significant as projected in last year’s report — a bit of good news this year.

Overall, the news is mixed for Social Security

The Social Security program consists of two programs, each with its own financial account (trust fund) that holds the payroll taxes that are collected to pay Social Security benefits. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. Other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation) is also deposited in these accounts.

Money that’s not needed in the current year to pay benefits and administrative costs is invested (by law) in special government-guaranteed Treasury bonds that earn interest. Over time, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits, and these reserves are now being drawn down. Due to the aging population and other demographic factors, contributions from workers are no longer enough to fund current benefits.

In the latest report, the Trustees estimate that Social Security will have funds to pay full retirement and survivor benefits until 2034, one year later than in last year’s report. At that point, reserves will be used up, and payroll tax revenue alone would be enough to pay only 77% of scheduled OASI benefits, declining to 72% through 2096, the end of the 75-year, long-range projection period.

The Disability Insurance Trust Fund is projected to be much healthier over the long term than last year’s report predicted. The Trustees now estimate that it will be able to pay full benefits through the end of 2096.  Last year’s report projected that it would be able to pay scheduled benefits only until 2057. Applications for disability benefits have been declining substantially since 2010, and the number of workers receiving disability benefits has been falling since 2014, a trend that continues to affect the long-term outlook.

According to the Trustees report, the combined reserves (OASDI) will be able to pay scheduled benefits until 2035, one year later than in last year’s report. After that, payroll tax revenue alone should be sufficient to pay 80% of scheduled benefits, declining to 74% by 2096. OASDI projections are hypothetical, because the OASI and DI Trust Funds are separate, and generally one program’s taxes and reserves cannot be used to fund the other program. However, this could be changed by Congress, and combining these trust funds in the report is a way to illustrate the financial outlook for Social Security as a whole.

All projections are based on current conditions and best estimates of likely future demographic, economic, and program-specific conditions, and the Trustees acknowledge that the course of the pandemic and future events may affect Social Security’s financial status.

Many options for improving the health of Social Security

The last 10 Trustees Reports have projected that the combined OASDI reserves will become depleted between 2033 and 2035. The Trustees continue to urge Congress to address the financial challenges facing these programs so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public.  Many options have been proposed, including the ones below. Combining some of these may help soften the impact of any one solution.

• Raising the current Social Security payroll tax rate (currently 12.4%). Half is paid by the employee and half by the employer (self-employed individuals pay the full 12.4%). An immediate and permanent payroll tax increase of 3.24% to 15.64% would be needed to cover the long-range revenue shortfall.
• Raising or eliminating the ceiling on wages subject to Social Security payroll taxes ($147,000 in 2022).
• Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
• Raising the early retirement age beyond the current age of 62.
• Reducing future benefits. To address the long-term revenue shortfall, scheduled benefits would have to be immediately and permanently reduced by about 20.3% for all current and future beneficiaries, or by about 24.1% if reductions were applied only to those who initially become eligible for benefits in 2022 or later.
• Changing the benefit formula that is used to calculate benefits.
• Calculating the annual cost-of-living adjustment (COLA) for benefits differently.

A comprehensive list of potential solutions can be found at here.

Sources:

1) Social Security Administration, 2022

Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Paul Horn, CFP®, CPWA®, Senior Financial Planner

Deciding when to claim Social Security benefits will have a permanent impact on the benefit you receive. Claiming before your full retirement age (66-67 based on birth year) can significantly reduce your benefit, while delaying increases it. More than ever, we are seeing more individuals not collect their Social Security until they receive their full benefits.

Some clients when they go to file, find out that they have the opportunity to get a large paycheck from Social Security by receiving what is known as a retroactive benefit. When most people hear this, they will jump on the opportunity because who doesn’t want a nice windfall like that? While receiving a large check is appealing what is not discussed is the dangers of choosing this option.

How the retroactive benefit works

The retroactive Social Security benefit allows an individual to choose to start social security six months before the day they claim benefits and by doing so they will receive a one-time check for those 6 months of benefits. The danger of this strategy is that you are going to receive a smaller paycheck for the rest of your life.  A retroactive check is only available to those that claim benefits on or after their Full Retirement Age (FRA). You can look at the chart below to see what age this is for you:

Example

Sally will be 67 and a half in August and is looking to start her Social Security. She speaks with Social Security, and they offer her the option to take the retroactive check and begin collecting as though she was 67. If she takes the benefit at 67 and gets the retroactive check, she will receive monthly benefit of $3,000. If Sally decides to start the benefits at 67.5, she will receive $3,120 a month instead. This difference is small but can add up over retirement. Below is a chart showing the total amount from Social Security she would receive from each option:

What we see from this chart (far right column) that if Sally lives past age 80, she will receive more benefits over her lifetime by not selecting the retroactive benefit. With that being said, she only will receive an additional $14,400 over her lifetime.

What is the best decision for me?

The decision of taking a retroactive check from Social Security is ultimately a personal one. If longevity is in your family, it can be beneficial to not take the retroactive option since it reduces your Social Security benefit. However, the difference is not that large in the grand scheme of things so it is up to you on how you choose to proceed.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Myths and misstatements of fact frequently circulate on the Internet, in email and on websites, and are repeated in endless loops of misinformation. One common set of such misinformation involves Social Security and its benefits. Given Social Security’s importance, concerns about its current and future state are understandable and widespread. We will spend some time debunking some common myths.

Myth: Social Security will provide most of the income you need in retirement.

Fact: It’s likely that Social Security will provide a smaller portion of retirement income than you expect.

There’s no doubt about it — Social Security is an important source of retirement income for most Americans. According to the Social Security Administration (SSA), nearly nine out of ten individuals age 65 and older receive Social Security benefits.¹

But it may be unwise to rely too heavily on Social Security, because to keep the system solvent, some changes will have to be made to it. The younger and wealthier you are, the more likely these changes will affect you. But whether retirement is years away or just around the corner, keep in mind that Social Security was never meant to be the sole source of income for retirees. As President Dwight D. Eisenhower said, “The system is not intended as a substitute for private savings, pension plans, and insurance protection. It is, rather, intended as the foundation upon which these other forms of protection can be soundly built.”

No matter what the future holds for Social Security, focus on saving as much for retirement as possible. When combined with your future Social Security benefits, your retirement savings and pension benefits can help ensure that you’ll have enough income to see you through retirement.

Myth: If you earn money after you retire, you’ll lose your Social Security benefit.

Fact: Money you earn after you retire will only affect your Social Security benefit if you’re under full retirement age.

Once you reach full retirement age, you can earn as much as you want without affecting your Social Security retirement benefit. But if you’re under full retirement age, any income that you earn may affect the amount of benefit you receive.

• If you’re under full retirement age, $1 in benefits will be withheld for every $2 you earn above a certain annual limit. For 2022, that limit is $19,560.
• In the year you reach full retirement age, $1 in benefits will be withheld for every $3 you earn above a certain annual limit until the month you reach full retirement age. If you reach full retirement age in 2022, that limit is $51,960.

Even if your monthly benefit is reduced in the short term due to your earnings, you’ll receive a higher monthly benefit later. That’s because the SSA recalculates your benefit when you reach full retirement age and omits the months in which your benefit was reduced.

What is Your Full Retirement Age?

*If you were born on January 1 of any year, refer to the previous year to determine your full retirement age.

Myth: Social Security is only a retirement program.

Fact: Social Security also offers disability and survivor benefits.

With all the focus on retirement benefits, it’s easy to overlook the fact that Social Security also offers protection against long-term disability. And when you receive retirement or disability benefits, your family members may be eligible to receive benefits, too.

Another valuable source of support for your family is Social Security survivor insurance. If you were to die, certain members of your family, including your spouse, children, and dependent parents, may be eligible for monthly survivor benefits that can help replace lost income.

For specific information about the benefits, you and your family members may receive, visit the Social Security Administration website at ssa.gov, or call 800-772-1213 if you have questions.

Myth: Social Security benefits are not taxable.

Fact: You may have to pay taxes on your Social Security benefits if you have other income.

If the only income you had during the year was Social Security income, then your benefit generally isn’t taxable. But if you earned income during the year (either from a job or from self-employment) or had substantial investment income, then you might have to pay federal income tax on a portion of your benefit. Up to 85% of your benefit may be taxable, depending on your tax filing status (e.g., single, married filing jointly) and the total amount of income you have.

For more information on this subject, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

Myth: Social Security is going bankrupt soon.

Fact: Social Security is facing significant financial challenges but is not going bankrupt.

Social Security is largely a pay-as-you-go system with today’s workers (and employers) paying for today’s retirees through the collection of payroll (FICA) taxes. These taxes and other income are deposited in Social Security trust funds and benefits are paid from them.

According to the SSA, due to demographic factors, Social Security is already paying out more money than it takes in. However, by drawing on the Old-Age and Survivors Insurance (OASI) Trust Fund, the SSA estimates that Social Security should be able to pay 100% of scheduled benefits until fund reserves are depleted in 2033. Once the trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 76% of scheduled benefits. So, at that time, if no changes are made, beneficiaries may receive a benefit that is about 24% less than expected.²

That’s not good news, but Congress still has time to make changes to strengthen the program and address projected shortfalls. Until then, consider various income scenarios when planning for retirement.

Sources:

1) Social Security Administration, Social Security Basic Facts, 2021

2) 2021 OASDI Trustees Report

Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Is 62 your lucky number? If you’re eligible, that’s the earliest age you can start receiving Social Security retirement benefits.

Although collecting early retirement benefits makes sense for some people, there’s a major drawback to consider: If you start collecting benefits early, your monthly retirement benefit will be permanently reduced. So, before you put down the tools of your trade, there are some factors you’ll need to weigh before deciding whether to start collecting benefits early.

How much will your retirement benefit be?

Your Social Security retirement benefit is based on the number of years you’ve been working and the amount you’ve earned. Your benefit is calculated using a formula that takes into account your 35 highest earnings years. If you earned little or nothing in several of those years (if you left the workforce to raise a family, for instance), it may be advantageous to work as long as possible, because you’ll have the opportunity to replace a year of lower earnings with a higher one, potentially resulting in a higher retirement benefit.

If you begin collecting retirement benefits at age 62, each monthly benefit check will be 25% to 30% less than it would be at full retirement age. The exact amount of the reduction will depend on the year you were born. Conversely, you can get a higher payout by delaying retirement past your full retirement age — the government increases your payout every month that you delay retirement, up to age 70.

However, even though your monthly benefit will be 25% to 30% less if you begin collecting retirement benefits at age 62, your total lifetime Social Security benefits might be the same or higher than if you had waited until full retirement age to start collecting benefits. That’s because the longer you wait to claim Social Security, the shorter the time period over which you will receive benefit payments.

The following chart shows how much an estimated $1,000 monthly benefit at full retirement age would be worth if you started taking a reduced benefit at age 62.

Source: Social Security Administration

If you want to estimate the amount of Social Security benefits you will be eligible to receive in the future under current law (based on your earnings record) you can use the Social Security Administration (SSA) Retirement Estimator. It’s available at the SSA website at ssa.gov. You can also sign up for a my Social Security account to view your online Social Security Statement at the SSA website. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor, and disability benefits.

Have you thought about your longevity?

Is it better to take reduced benefits at age 62 or full benefits later? The answer depends, in part, on how long you live. If you live longer than your “break-even age,” the overall value of your retirement benefits taken at full retirement age will begin to outweigh the value of reduced benefits taken at age 62.

You’ll generally reach your break-even age about 12 years from your full retirement age. For example, if your full retirement age is 66, you should reach your break-even age at 78. If you live past this age, you’ll end up with higher total lifetime benefits by waiting until full retirement age to start collecting. However, unless you’re able to invest your benefits rather than use them for living expenses, your break-even age is probably not the most important part of the equation. For many people, what really counts is how much they’ll receive each month, rather than how much they’ll accumulate over many years.

Of course, no one can predict exactly how long they’ll live. But by taking into account your current health, diet, exercise level, access to quality medical care, and family health history, you might be able to make a reasonable assumption.

How much income will you need?

Another important piece of the puzzle is to look at how much retirement income you’ll need, based partly on an estimate of your retirement expenses. If there is a large gap between your projected expenses and your anticipated income, waiting a few years to retire and start collecting Social Security benefits may improve your financial outlook.

If you continue to work and wait until your full retirement age to start collecting benefits, your Social Security monthly benefit will be larger. What’s more, the longer you stay in the workforce, the greater the amount of money you will earn and have available to put into your overall retirement savings. Another plus is that Social Security annual cost-of-living increases are calculated using your initial year’s benefits as a base — the higher the base, the greater your annual increase.

Will your spouse be affected?

When to begin receiving Social Security is more complicated when you’re married. The age at which you begin receiving benefits may significantly affect the amount of lifetime income you and your spouse receive, as well as the benefit the surviving spouse would be entitled to, so you’ll need to consider how your decision will affect your joint retirement planning.

Do you plan on working after age 62?

Another key factor in your decision is whether or not you plan to continue working after you start collecting early Social Security benefits. That’s because income you earn before full retirement age may reduce your Social Security retirement benefit. Specifically, if you are under full retirement age for the entire year, $1 in benefits will be withheld for every $2 you earn over the annual earnings limit ($19,560 in 2022).

In the year you reach full retirement age, different rules apply; $1 in benefits will be withheld for every $3 you earn over the annual earnings limit ($51,960 in 2022).

If your monthly benefit is reduced in the short term due to your earnings, you’ll receive a higher monthly benefit later. That’s because the SSA recalculates your benefit when you reach full retirement age and omits the months in which your benefit was reduced.

Other considerations

In addition to the factors discussed here, other financial considerations may influence whether you start collecting Social Security benefits at age 62. How do other sources of retirement income factor in? Have you considered how your income taxes will be affected?

What about personal considerations? Do you plan on traveling, volunteering, going back to school, starting your own business, pursuing hobbies, or moving to a new location? Do you have grandchildren or elderly parents whom you want to help take care of? Every person’s situation is different.

Even if you start collecting Social Security benefits at age 62, keep in mind that you still won’t be eligible for Medicare until you reach age 65. So, unless you’re eligible for retiree health benefits through your former employer or your spouse’s health plan at work, you may need to pay for a private health policy until Medicare kicks in.

For more information

Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at ssa.gov, or call (800) 772-1213 to speak with a representative. Learn more here about common myths and what to consider before taking social security.

Taking social security is an important decision and we are here to help guide you through this process. The general rule is that you want to wait if there is longevity and you can afford to, but of course, it is best to contact us to review your individual circumstances.

Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.