I hope you had a great weekend! Today is National Talk Like Shakespeare Day. This day brings back fun memories for me since I had a friend in college who felt like he needed to talk like Shakespeare every day. He was a unique fellow.
LRPC’s Monday Morning Minute for this week, “10 Most Common Social Security Questions” (presented below) comes to you courtesy of Investopedia. As an independent, objective Registered Investment Advisory (RIA) firm, Lawton Retirement Plan Consultants, LLC (LRPC) has access to research from many sources. Be assured that I will share enlightening, useful information with you each week.
Regardless of your age, you should try to become more familiar with one of the largest benefits you will receive in your lifetime. And yes, Social Security will be around long enough so that you can collect. Worry about other things, not whether you will receive your Social Security benefit.
Have a wonderful week!
10 Most Common Social Security Questions
The Social Security program was established in 1935 to provide retirement income to certain workers. It was later expanded to cover most of the U.S. workforce. Like many large, complex federal programs, it doesn’t get much love: Retirees, politicians and political and financial websites complain about it and point out all of its flaws. But it remains America’s pension plan, and the financial lifeline that many people use to stay afloat in their old age.
Regardless of how old you are, however, you should know some of the facts about Social Security. Here are answers for 10 of the more common questions people ask.
1. When am I eligible to receive benefits?
Based on when you were born, retirement benefits may begin as early as age 65 and as late as age 67.
If you were born prior to 1938, your full eligibility date, aka your full or “normal” retirement age, is age 65.
- People born in between 1938 and 1942 are eligible on a graduating scale that increases by two months per year.
- Persons born between 1943 and 1954 are eligible for full benefits at age 66.
Those born between 1955 and 1960 are eligible based on a graduating scale that increases by two months per year.
- If you were born after 1960, your full eligibility date is age 67.
The earliest full retirement age – that is, the age at which you can receive your full benefits – is 65. You can opt to start receiving benefits as early as age 62, but they will be partial benefits: You receive smaller payments, only 75% of your benefits to be exact, for the rest of your life. If you wait until full retirement age, you get the full 100% of what’s coming to you.
Conversely, you don’t necessarily have to take Social Security benefits at your full retirement age. Instead, you can delay receiving them, and grow them by 8% per year up to age 70 – a nice bonus for those who don’t need the funds right away. After that, you can continue to delay, but the size of the benefit payments will no longer increase.
2. How is eligibility determined?
Eligibility for Social Security is based on credits earned during your working years. As of 2017, for every $1,300 you make, you earn a credit, and you need to earn four a year (that is, have an annual earned income of $5,200). If you were born in 1929 or later you need 40 credits – or 10 years of full-time work – to receive full Social Security benefits at retirement. Once you have these minimum credits, your benefit is based on your highest 35 years of averaged earnings. If you only worked 20, you would have 15 years of zero income.
There are special provisions that can change the formula if you had certain public service jobs. For citizens who have government-sponsored pensions, like teachers, firefighters, police officers or other public employees, there is a high probability that your Social Security benefits are reduced or even eliminated.
3. How much do I pay into the program?
As of 2017, workers pay 6.2% of their wages toward Social Security. Employers also contribute a payroll tax of 6.2% of each employee’s salary. Unfortunately, those who are self-employed have to pay both portions, bringing their payment up to 12.4% of their earned income.
4. How much will I get?
Your Social Security benefits are based on your lifetime earnings. The formula’s a tad complicated, but basically, the payout amount is calculated by averaging the earnings from your 35 best income-generating years, as noted above. The average monthly Social Security payment for retired workers as of July 2017 was $1,368. There was a 3% cost of living (COLA) increase for 2017.
5. Can I receive Social Security if I still work?
Yes, you can be employed and receive Social Security benefits. If you’re older than your full retirement age, you can work as much as you would like and receive full benefits. If you’re below full retirement age but eligible for some amount of benefits, Social Security will reduce your payments based on a calculation.
Basically, if you’re opting to receive Social Security prior to your full retirement age, you are permitted to earn up to $16,920 for 2017; for every $2 in earnings over this limit, $1 is withheld from the benefits. In the year you reach your retirement age, you may earn up to $44,880 before the system deducts $1 for every $3 in earnings over the limit. This continues until the month you actually become fully eligible.
6. How does Social Security work for my spouse?
If your spouse has worked long enough to qualify for Social Security, you both qualify for full benefits. If your spouse did not work or earned only a small amount and therefore qualifies for a benefit that is less than half of yours, your spouse’s payment will be increased to a rate equal to half of your benefit amount.
What happens if a spouse dies? If the surviving spouse has reached his or her full retirement age, the spouse is entitled to 100% of the deceased worker’s basic benefit amount. Prorated amounts are paid to surviving spouses who have not yet reached retirement age. If the surviving spouse was receiving Social Security benefits and the deceased’s benefits were greater, the survivor will receive the higher benefit amount.
And what if you are divorced? If you are currently remarried, you’re not entitled to any of your ex-spouse’s benefits. If you’re not, you may be entitled to a part of his or her benefit if you were married for at least 10 years and have been divorced for at least two years.
Your benefit is as much as half of your ex-spouse’s full retirement amount if you start taking benefits at full retirement age. However, this only applies if you’ve no benefits of your own or aren’t eligible for full benefits — but would qualify for a higher amount of benefits based on your ex-spouse’s work record.
7. Do I have to pay taxes on Social Security income?
That depends. If you file a federal tax return as a single adult and your income is higher than $25,000, you have to pay taxes. If you’re married, filing jointly, and your combined income is higher than $32,000, you’re on the hook, too. But you will never have to pay taxes on more than 85% of your Social Security income, regardless of how much you make.
8. How do I apply for benefits?
You can do it online. You’ll need your original birth certificate, a copy of your W-2 forms for last year and possibly other documentation. You can also apply by phone or in person at a Social Security Administration (SSA) office.
9. How does Social Security actually work?
Many people believe that the money taken from their paychecks goes into a something like a personal bank account and remains there earning interest until the they retire and begin to take it back. It doesn’t quite work like that.
Social Security is a “pay-as-you-go” system. Money paid in by current taxpayers is spent to pay benefits to current retirees. Contributions beyond the amount needed to fund the Social Security system are deposited in a government account called the Social Security Trust Fund, to be used when current taxed income does not cover all the system’s obligations. There are actually two trust funds: the Disability Insurance (DI) Trust Fund and the Old-Age and Survivors Insurance (OASI) Trust Fund.
Tax income is deposited on a daily basis, and is either exchanged for a government IOU or invested in government-issued Treasury bonds. In both cases, the cash goes into the general fund of the U.S. Treasury and is indistinguishable from other cash in the general fund.
Politicians spend the cash, relying on future generations of taxpayers to make good on the IOUs, and to repay the principal underlying the Treasury bonds. As the number of retirees increases and the number of workers declines, repayment of the IOUs and bond principal will be necessary in order to meet the payments owed to Social Security beneficiaries, including retirees, those on disability and the children and survivors of beneficiaries.
According to the Social Security Administration’s “Summary of the 2015 Annual Reports,” the combined trust fund, including Social Security Old-Age and Survivors Insurance (OASI), is expected to be depleted in 2034.
10. Is Social Security in trouble?
As the ratio of current workers to current retirees drops, fewer people will be paying into the system as a larger number makes withdrawals. In addition, people are living much longer than when the program first began in the 1930s, and this stretches out the payments that millions of Americans will be receiving.
Furthermore, Social Security was designed as an income supplement; it was not intended to replace 100% of a worker’s salary. Unfortunately, a large percentage of senior citizens now rely on Social Security for all, or a majority, of their retirement income.
According to the Social Security Administration, large adjustment policy changes will be needed to ensure that the system is sustainable on a long-term basis. Legislators have already increased the eligibility date for receipt of full benefits from age 65 to age 67 for citizens born in 1960 or later.
Additional increases in the age of eligibility, reductions in benefits, or both, are likely to be necessary in order to get the program back on solid footing. Raising taxes to fund the system is another likely course of action.
The general consensus is that the U.S. government will not let the Social Security program fail, though. Because current retirees make up such an enormously active voting block, and current workers hope to retire someday, politicians feel that changing the system will hurt their chances for re-election, or otherwise stunt their careers. Former Speaker of the House Tip O’Neill referred to Social Security as the “third rail of politics. Touch it and you die!”
Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.
Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly $475 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or firstname.lastname@example.org or visit the firm’s website at http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.