Social Security Program Solvency

Since its signing into law by President Franklin Roosevelt on August 14, 1935, the Social Security Administration has helped millions maintain a monthly benefit to support their families.  Initially established as a program to keep families out of poverty, the benefits from social security have taken a more substantive role in the finances of families.

With fewer corporations providing workers a pension plan for lifetime benefits, social security benefits have taken the role as a primary income item for most families.  Failing to save for retirement is a terrible and tragic mistake.  Longevity has improved for Americans due to the improvement of medicines, treatments, and advancements of surgeries.  If we are going to live longer, shouldn’t we consider it may take more assets to support our lifestyle?  

The original law included benefits for individuals aged 65 and older that participated in paying their share of the premiums for the benefits through their employment.  Your employer pays half of the obligation.  The initial purpose of the law was to address the period after a person finished working (i.e., retirement).

Over the decades, the Social Security Act has been amended for other purposes.  It does make sense that the loss of a family member who is responsible for a substantial portion of the financial support would need their income replaced.  Of course, life insurance is a simple manner of replacing lost income for the family, but many companies do not provide life insurance to their employees.  To solve the problem, and to keep families from facing poverty, the Social Security Administration was authorized to assist families with survivor benefits.  To qualify, the surviving spouse must be the caregiver for a disabled child or a child under the age of 16.  Some other qualifications are required as well.

The logic behind this process of granting survivor benefits is that the deceased participant would not be receiving the benefits they may have been entitled to now or in the future.  Payments do not last forever, and the child will eventually lose the monthly payments due to age unless disabled.

If a person became disabled before reaching their Full Retirement Age (defined as either age 66 or 67 depending on your year of birth), she may qualify for disability benefits from the program.  Additional qualifications are expected before granting the benefits.

These amendments and granting of benefits for other reasons than retirement have caused concern that the Social Security Program will become incapable of funding benefits at their current levels by 2032.  Today, there are two people paying into the trust fund for benefits for every beneficiary.  This is unsustainable.  

Congress should review the current funding and obligations of the program to make reasonable changes.  For one, the amount contributed could be changed by 1% and would extend the funding for the program for many years.  The program could increase the age for full retirement benefits to 68 which would save the plan’s longevity for many years.

Lastly, it would be a start to allow a privatized portion of the social security premium contributed by each worker.  Start with a smaller percentage such as 15% and allow the individual to direct the investment strategy to meet their personalized needs.

No matter what the approach to resolve the problem with funding, something should be done soon.  There is no concern for current beneficiaries being affected.  However, individuals ages 25 – 40 may see a far different benefit program when they are retirement age.

It is important to be proactive when planning for retirement.  Think about your goals for the future and seek out a Certified Financial Planner™ professional to create a plan for achieving them.  The future is predictable if you work toward the goals you wish to accomplish.  Warren Buffett offers us some good advice about saving for the future when he said, “If you spend money on things you don’t need, soon you’ll have to sell the things you do need.”

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Lifetime Decisions on Social Security Benefits

Perhaps one of the “Top 10” retirement questions we receive is when to elect social security benefits. The question is one that is complicated to answer due to the fact that many unknown variables exist within this question. Just a few considerations are: 1) How long will I live? 2) How can I maximize my benefits? 3) What is the best strategy to gain the most household benefits? 

Let’s tackle the first question since it is preeminent to the prediction of mortality. The answer to the question of “How long will I live?” requires greater analysis than a simple number presented as the target date. What age were your parents and grandparents at their deaths? Do you have any comorbidities or systemic health issues? What are your current cash flow needs? Are you married? Widowed? Do you have a dependent child that has been diagnosed special needs? All of these factors, and many more, give rise to a greater amount of analysis to properly estimate your date of filing for benefits.

According to the U.S. Centers for Disease Control, in a study published in 2019, men enjoy a life expectancy, at birth, of 75.1 years and women 80.5 years. Of course, these are averages and many of us will live to 100 years of age and beyond. Curiously, the projected ages for men and women declined in the past year by approximately 0.9 to 1.2 years. Was this due to the effects of the pandemic or is this a normal fluctuation of the population cycle? 

The most important election many of us will make that has a lifetime impact is the election to receive social security benefits. Much confusion exists around the timing of this election. We highly recommend that each client examine their needs, lifestyle and circumstances when determining the filing date for benefits. For example, if your lifetime savings is not projected to meet your cash flow needs due to the lower returns from the current market cycle, you may wish to analyze the lifetime loss of SSA benefits by electing earlier than your Full Retirement Age (FRA). It is not ideal to make lifetime decisions based on short-term needs. For an individual who is age 62 and would reach FRA at age 67, if benefits are elected at any time from age 62 to 66 years and 364 days (provided it is not leap year), his or her benefits will be reduced permanently by 30%. Depending on your lifetime earnings report, this may be a significant loss of benefit.

Lastly, the best strategy for your household is to determine the ages of each spouse and then review the earnings reports for each by obtaining them on . If the higher earned benefit spouse were to delay benefits until reaching age 70, instead of claiming at age 67, a 24% increase in monthly benefits would be availed to the surviving spouse upon the death of the higher earner. The bonus earned by the higher-earning spouse is material in the fact that many spouses may live to be 90 years of age or more which allows significant time for the collection of the bonus payments. Upon the death of the higher benefit spouse, the survivor would “step in the shoes” of the deceased and receive their benefit (while forgoing the survivor’s original earned benefit).

It is critical that you make the best decision for your family. A proper analysis of the hundreds of options of benefit elections is necessary to give you confidence in this lifetime decision. If you wish to plan appropriately for your SSA benefits, contact a CERTIFIED FINANCIAL PLANNERTM professional to assist you in this important lifetime decision.

Today is another 24-hour period for you to find gratitude and happiness. Spread your smiles to those around you and you will reap what you sow. I have a saying that may be appropriate – “If smiles were contagious, would you start a pandemic?” See you on the walking trail!

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Social Security Funding Challenges

Social Security benefits are considered sacred territory by elected officials due to the large number of voting beneficiaries. This important “third rail” of untouchable programs started with a mission and purpose that was admirable. However, the projection of beneficiaries compared to those taxpayers funding the program has been dealt a significant blow lately.

To provide working families a larger paycheck, the president has recently ordered that all employer withholding for FICA and Medicare contributions from employees be deferred until January 1, 2021. Can you imagine the furor this caused? Although the intent is beneficial for those working, it is not an elimination of the tax from the pay but merely a deferral. This means that you, the employee, will be required to pay the deferral back to the system at some point. 

The IRS has not issued guidance on this process for repayment but the deferral will begin September 1, 2020 and continue through December 31, 2020. Let’s look at an example of the additional funds an employee will retain through this deferral period. Assume the weekly salary is $500. An employee’s share of SSA benefits withheld, notwithstanding the Medicare portion of 1.45%, is 6.2% of the gross salary or $31.00 ($500 x 6.2%). As of the date this article was authored, seventeen weeks remain in 2020. This provides the employee with an additional $527 of cash flow for her living needs.

How will this seventeen-week deferral impact the reserves for Social Security benefit payments? The SSA Board of Trustees analyzes the economic projections of the program when issuing their report to the public. Below is a graph reflecting the solvency of the program through 2035 under current funding projections.

Old-Age & Survivors Insurance & Disability Insurance Combined Trust Funds Reserves

By reducing the contributions of working individuals to the program for the short period, officials estimate the solvency would be impaired much sooner. Change creates confusion and chaos soon ensues. This is the current state of the changes to the Social Security Program funding for the remainder of 2020.

What does it mean “the program will be insolvent” in 2035? The SSA Board of Trustees has projected the program can continue to fund existing beneficiaries from current income received by the fund. However, the level of funding will only allow beneficiaries to receive approximately 79% of scheduled benefits. What will this mean for future beneficiaries? An obvious answer I inform younger clients is that the program will be available for them but we are not certain of the benefit structure.

One caveat I would offer is that current beneficiaries will not be impacted by this short-term change. However, future changes of a more sustainable nature should be addressed to continue the functions of the current program. The funding source (employed citizens below the retirement age for program benefits) is shrinking in comparison to the beneficiaries receiving benefits.

It is critical that one does not solely rely on SSA benefits for your retirement income. By becoming self-sufficient for your needs, you will be confident and enjoy your retirement years much more. If you are concerned how the changes to the Social Security Program will impact your retirement decisions, seek out a Certified Financial Planner® professional that specializes in retirement planning. It never hurts to get a complimentary second opinion. See you on the golf course!

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Working After Electing SSA Benefits

Many Social Security benefits recipients continue to work, if not full-time, at least part-time. Confusion surrounds the taxability of their SSA benefits when it is time to file their income tax returns. The worst-case scenario is the call you receive from your CPA and she informs you that “you owe a few thousand dollars due to your SSA benefits”.

How can you prevent such a conversation? It is simple but you must proactively plan for the elimination or mitigation of the applicable taxes. For example, let’s assume you have elected to receive your SSA benefits at age 62. You continue to earn a portion of your annual salary working part-time. How much can you earn and not be taxed on your SSA benefits? If you are taxed, how much of your SSA benefits is taxed? And by which taxing agency?

Let’s tackle the nagging question of “how much can I earn?” per tax year and not pay tax on my benefits. The IRS established the base amount of household income, defined as adjusted gross income plus nontaxable interest and one-half of your SSA benefits, a taxpayer can receive to determine the applicable taxable portion of SSA benefits. The limit for a single filer is $34,000. 

Assume you receive $12,000 of W-2 income from your employer, SSA benefits of $25,000, taxable interest and dividends of $5,000 and nontaxable interest income of $5,000. Your household income for purposes of determining the taxability of SSA benefits, as a single person, would be $34,500 [$12,000 + $5,000 + $5,000 + $12,500 ($25,000/2)]. In our example, since your combined household income exceeds the limit by only $500, you would be taxed on 85% of your SSA benefits. 

This doesn’t seem “fair” to many beneficiaries as they wrestle with the concept that they were “taxed” on their paychecks to contribute to the SSA benefits program. However, the theory is that your contributions have earned income that is currently being paid to you in the form of your benefits and, therefore, a portion would be taxable.

The maximum amount of your SSA benefits taxed by the IRS is 85%. Good news, right? Even better news is that the State of Oklahoma does not tax your SSA benefits at all! Now that I have placed a smile on your face, lets clear up a big SSA benefits misconception.

Many rumors abound that individuals can “earn” all the money they want and not withhold FICA and Medicare contributions from their earnings after reaching age 70. This is perhaps a little misconstrued by most people. To clarify, you may earn as much “earned” income as you desire, while drawing your SSA benefits, after age 70 and not be subject to the requirements to return a portion of the SSA benefits for earning above the allowed income limits set by the SSA. 

If you elect to take your benefits at age 62 and continue to work, you may earn $17,640 in 2019 and not repay any benefits. However, for every $2.00 you earn over the limit, SSA deducts $1.00 from your benefits.

If you elect to take your benefits at FRA (full retirement age) and continue to work, you may earn $46,920 in 2019 and not repay any benefits. The SSA will deduct $1.00 in benefits for every $3.00 you earn above the limit.

Don’t play games with your retirement income. Seek professional assistance from a CPA or Certified Financial Planner practitioner. Live your life with confidence and control your future tax liability. 

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How to Qualify for SSA Benefits

One of the largest and most impactful U.S. Government Programs for citizens is the Social Security Administration. Benefits administered by this agency affect most Americans. Let’s look at the various means to realizing these important benefits.

First, there are several ways to qualify for Social Security Benefits:

  1. You can qualify on your own work history.
  2. You may be eligible based on someone else’s work history.
  3. You may be eligible before reaching age 62.

To qualify on your own work history, you generally must have worked (and paid in to the

SSA system) for a period of 40 quarters (3-month periods of employment). Your employer withholds 7.65% of your earnings and remits them to the IRS for allocation to the SSA. (Stay with me; this can get a little confusing.) Your employer is required to match your contribution with 7.65% for a total payment to the SSA of 15.3%. 

The component of the withholding that pertains to your Social Security Benefit is limited in 2019 to the first $132,900 of earned income. The remaining 1.45% of the withholding is designated for the Medicare System which will provide hospitalization, health and prescription benefits, if you elect, when you retire.

To earn one (1) credit, which is applied towards your total of forty (40) credits needed to qualify for benefits, you must earn $1,360 in a three-month period to earn one credit. A maximum of four (4) quarters may be earned in a calendar year.

Another means of qualifying for benefits is being married to an individual who paid in SSA benefits during their work history. Assume your spouse worked in a position that provided greater salary than you. During their work history, she earned far more than you. You both are the same age and elect to file for SSA benefits at full retirement age of 66 years.

In our example above, assume your spouse’s benefits are the maximum allowed under the SSA payout formula, $2,861. Your benefits are calculated at $1,000 per month. At first glance, you may not realize that you have an election to make under the SSA regulations. If you have been married to your spouse for ten (10) years or more, you may receive benefits based on their earnings history. To simplify this option, you may be entitled up to one-half (½) of the benefits credited to your spouse or your actual benefits, whichever is higher. In our example, you would have earned $1,000 per month but will be allowed to receive $1,430 per month! This provides your household a 43% increase in your earned benefits.

Lastly, you may receive benefits prior to reaching age 62. This may occur if your spouse predeceased you and your age is 60 (or age 50, if disabled). To mitigate the loss of your spouse’s income, your children may qualify for benefits, too. The children must be younger than 18 years of age or between 18 and 19 years of age while continuing to attend secondary school as a full-time student or age 18 or older and disabled (provided the child was disabled before age 22).

The programs administered by the SSA are complicated to understand for most people. It is critical that you make informed decisions that will provide the greatest impact for your family. Seek out the assistance of a CFP practitioner or a CPA who specializes in these benefits. What you don’t know, can hurt you.

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