Category Archives: Social Security

Retiring Early? Here’s How to Delay Taking Social Security Anyway

My Comments: I’ve you’ve not yet signed up to receive your monthly Social Security benefit, this is worth a read. I encourage everyone to try and wait until Full Retirement Age (FRA). The outcomes are likely to be much better.

If you claim Social Security early, your checks will be permanently reduced. Consider looking for income elsewhere so that you can wait until full retirement age.

Wendy Connick \ Aug 9, 2017

Sometimes retiring early is unavoidable. If you’re struggling with chronic health issues, or if you’re laid off from your job in your early 60s and see no prospect of getting another, it just makes sense to go ahead and retire. On the other hand, claiming Social Security early can put a serious crimp in your income later on: Starting Social Security payments before full retirement age means your benefits checks will be permanently reduced. But if you can scrape together enough income from other sources, you can wait to claim Social Security until the most financially practical time for you.

Here are five ways to fill the income gap between the day you retire and the day you start collecting retirement benefits.

Buy an annuity

If you retire early, it may make sense to take a chunk of money and use it to buy an immediate fixed annuity. These annuities pay you a set amount of money every month for the rest of your life. That makes them something of a substitute for Social Security, and if you have cash to buy a substantial annuity, you may be able to delay taking Social Security for years, thereby letting your eventual benefit amount grow.

A caveat: Annuities are complex products that come with fairly restrictive terms, so do plenty of research on your options before buying one. You can start by learning some of the basics HERE.

Construct a bond ladder

Bonds are an excellent source of guaranteed income in the form of interest payments — but the drawback is that in order to get a decent return on investment these days, you need to purchase fairly long-term bonds, which means your principal will be tied up for years and years. Bond ladders help you to get around this problem. To construct a bond ladder, you buy bonds with different maturity dates so that you will regularly have bonds reaching maturity and releasing principal back to you. As you get your principal back, you use it to buy new bonds and keep the ladder going. Another perk of bond ladders is that if interest rates go up, you’ll be able to take advantage of the new rates as you continually buy new issues to replace the bonds that have matured. While interest rates are quite low even on long-term bonds, a good bond ladder can provide a substantial amount of income.

Buy dividend stocks

With their exceptionally high long-term returns, stocks are an excellent money maker. However, in order to realize the income from a stock’s increased value, you have to sell it. An alternative way to get income from stocks is to buy ones that pay regular, high dividends to their stockholders. While dividends aren’t as reliable a source of income as bond interest payments, if you invest in dividend aristocrats — companies that have paid dividends for at least 25 consecutive years — then those payments are likely to keep coming, and increasing, for many years. This strategy works well for retirees, because dividend aristocrats also tend to be large, stable companies that are unlikely to suffer from high volatility.

Get income from your house

The above strategies require a retiree to have a substantial chunk of money at their disposal. If your accounts aren’t quite so well-funded, you might not be able to generate enough income from them to get by without Social Security. In that case, your house may be the resource you need to make up your income gap. If you have more house than you require, renting out a room might be an excellent source of income — especially if you live in a college town. A somewhat more permanent option would be to get a reverse mortgage on your house, but before you pursue this option, make sure that you understand all the consequences of doing so. Finally, if all you need is a little extra cash to smooth out your cash flow, a home equity line of credit can help.

Work part-time

The side hustle is an increasingly popular way to make money at any age, and the best side hustles are the ones you actually enjoy doing. Your favorite hobby might be just the thing to bring in some extra cash; it’s clearly something you enjoy doing, since you’re doing it now without being paid for it. You may be surprised by how many people would be willing to pay you for the fruits of your labor. So if you practice any sort of craft, from sewing to building bird houses, try setting up a shop on Etsy or a similar site and peddling your wares. If you love gardening, look for a local farmers market and figure out what it would take to set up a profitable booth. And if you have years of experience in a job that can be done without leaving a computer, then you may be able to find freelance work online. There are several websites that exist solely to connect freelance workers with companies that have a short-term need for help.

A side hustle likely won’t pay the bills on its own, but combined with the other options above, it could help you stay afloat until you reach full retirement age — and finally claim those Social Security benefits.

Do Social Security Payroll Taxes Need to Increase?

My Comments: If you have not already signed up for Social Security, chances are good you will draw the short straw. If you are now getting monthly benefits, chances are you have a longer straw. Me, I have no idea.

What we do know is that sooner or later the crisis will become immediate and it will get fixed. The problem is if it gets fixed now, the pain will be far less. But that’s not how Congress works, so don’t hold your breath.

Sean Williams \ Jul 30, 2017

The longer Congress waits to act, the bigger the actuarial deficit grows.

Social Security is an absolute monolith of a program. Last year, the program generated $957 billion in revenue and wound up spending $922 billion, a vast majority of which went to the more than 25 million retired workers who currently receive a monthly check from the program.

However, this vital program, which is currently cash-flow positive, is also facing some major issues. And, according to the latest report from the Social Security Board of Trustees, major changes could be just around the corner.

Social Security’s foundation is crumbling
The heart of the problem for Social Security is this: By 2022, it’ll begin paying more in benefits than it’s generating in revenue from payroll taxes, interest income earned on its asset reserves, and taxes on Social Security benefits. The Trustees have estimated that after reaching approximately $3 trillion in 2022, Social Security’s cash reserves will be completely exhausted 12 years later. By 2034, should Congress fail to enact any new laws to generate additional revenue for Social Security, benefits will need to be cut by as much as 23%. Enacting a steep 23% benefits cut across the board would keep the program solvent for another 75 years (through 2091), but it would also be a devastating blow to the more than 60% of retired workers who currently rely on Social Security for at least half of their monthly income.

Understanding that Social Security is coming to a crossroads, the public has rightly looked to Congress to fix things. Ironically, a lack of solutions isn’t the problem. Both Democrats and Republicans have put forth Social Security fixes that would resolve the estimated $12.5 trillion budgetary shortfall and provide financial certainty into the early 2090s. Unfortunately, since Washington politics is so partisan, neither party has been willing to work with the other. Thus we have multiple solutions that work, and no lawmakers willing to vote those plans into law.

A payroll tax hike of this much would fix Social Security
Arguably the simplest fix of all would be to increase the payroll tax, which is a 12.4% tax on all earned income between $0.01 and $127,200, as of 2017. Increasing the payroll tax on all American workers would generate additional income and possibly make benefit cuts unnecessary, at least through 2091. Keep in mind that if you’re employed by someone else, your employer pays half of your Social Security tax (6.2%), leaving Americans who aren’t self-employed to pay just 6.2% of their earned income up to $127,200 into Social Security. Any earned income above $127,200 is free and clear of the payroll tax.

Just how big of an increase is needed to fix Social Security? According to the Trustees report, the actuarial deficit grew by 17 basis points from the previous year to 2.83%. In plainer terms, this means that the Trustees estimate that a 2.83% increase to the payroll tax right now would eliminate the $12.5 trillion cash shortfall between 2017 and 2091. It would also likely mean no benefit cuts for anyone. It’s worth noting that the longer Congress waits to act, the bigger the deficit gets.

What would this tax hike actually look like? Self-employed folks would see their share of Social Security payroll taxes rise from 12.4% to 15.23% on earned income up to $127,200, while the average American who’s employed by someone else would see their responsibility increase by 1.415% (half of the 2.83%) to 7.615%. Assuming the average American makes around $30,000 a year, we could be talking about handing over an extra $425 a year for Social Security payroll taxes under such a scenario.

The public has previously shown their support for gradual increases to the payroll tax to help fix Social Security, but support for tax hikes usually fizzles out beyond a 0.4% increase in average worker payroll taxes (0.8% overall), which isn’t anywhere near the projected 1.415% (2.83% overall) needed to offset demographic changes to Social Security.

A potentially easier path to more revenue
There is, however, a potentially easier way to generate more revenue that wouldn’t require a 2.83% payroll tax hike on all workers — and it’s a pathway that a majority of Americans support. Raising the maximum earnings tax cap would substantially reduce Social Security’s cash shortfall, while eliminating it would wipe out the deficit entirely.

The aforementioned $127,200 figure, which often increases annually with the Wage Index, represents the peak dollar amount that is assessed the 12.4% payroll tax. Approximately one out of every 10 workers earns more than this peak figure annually, meaning they get an exemption on a portion of their earned income, while 90% of working Americans pay into Social Security with every dollar they earn. Raising the maximum earnings cap so that it’s reinstituted on earned income above, say, $250,000 or $400,000, would require the wealthy to contribute more, and it would resolve a good chunk of the program’s cash shortfall. Eliminating the cap entirely and allowing all earned income to be taxed would be a popular and easy fix.

So, why not simply make the wealthy pay more? After all, the well-to-do are unlikely to be as reliant on Social Security income during retirement as lower-income folks. The answer is that Social Security’s monthly payouts at full retirement age are capped at $2,687, as of 2017. Like the maximum taxable earnings cap, the maximum monthly payout at full retirement age adjusts annually, often moving similarly to the rate of inflation. Because there’s a cap on what seniors can receive each month in retirement, there’s also a cap on how much income can be taxed. In other words, it doesn’t make a lot of sense to have a self-employed individual pay 12.4% on $5 million in income if all he or she can net once retired is $2,687 a month at full retirement age. The cap does serve a purpose, after all.

The simple question is: Can lawmakers on Capitol Hill find an amicable solution to boost revenue? If history is any indicator, seniors and pre-retirees should be concerned.

2017 Social Security Trustees Report

My Comments: A critical question on the minds of everyone is “Will Social Security be there for me or my spouse?” It doesn’t matter where you are in life, short of being on life support.

Unfortunately, there is not yet the political will to impose a solution. That’s because the crisis is not yet within the last election cycle for any elected official. Few politicians have the necessary ability to think and act for anything beyond the next election.

The easiest fix is to increase the upper limit of earned income to which FICA taxes apply. But it won’t happen from either a Republican or Democrat controlled house and senate until the crisis is next door. But it will get fixed if we still have a Constitutional democracy.

Dan Caplinger \ Jul 17, 2017

Americans rely on Social Security, but its financial future has been unclear for a long time. Every year, it’s the responsibility of the Social Security Trustees to report on the health of the Social Security Trust Funds, which hold the assets that will help fund future retirement benefits for Social Security recipients. Once again, the trustees missed their statutory deadline and were three and a half months late getting the 2017 Social Security Trustees Report done. The report, which you can access by PDF here, is 269 pages long, but the most important aspects confirm most of what those who’ve followed Social Security in the past have seen for years.

1. The disability trust fund again improved, but Social Security’s trust funds overall will still run out of money in 2034.

Most of the headline numbers regarding Social Security stayed the same as they’ve been for a couple of years now. The 2017 report repeated its previous projections that the combined overall trust fund reserves will be depleted in 2034. When you look solely at the Old Age and Survivors Trust Fund, which covers the Social Security benefits that older Americans and their families receive, 2035 is still the date at which that portion of the overall program will run out of money.

The Disability Insurance Trust Fund, however, has gotten more financially healthy. The depletion date for that fund is now 2028, five years later than it was last year. The report noted that favorable experience for applications and benefit awards for disability benefits has been helpful, continuing a trend of falling applications for disability since 2010. The number of disabled workers actually getting benefits has also fallen each year since 2014, and despite expectations that this trend would reverse itself, the numbers at the end of 2016 confirmed its continued improvement. Disability is a small portion of the overall Social Security program, so even if favorable trends continue, optimism about that trust fund won’t be enough to provide a meaningful extension of time for Social Security as a whole.

2. Americans will face a benefit cut after the trust funds are depleted.

Many people mistakenly believe that once the Social Security trust funds are out of money, the program will be completely bankrupt. That’s not the case, because the program gets income from Social Security payroll taxes and other sources. What will happen, though, is that recipients will only get a fraction of their scheduled benefits.

The 2017 trustees report said that following the spending of all trust fund balances, Social Security on the whole will only get enough revenue to cover 77% of scheduled benefits. When you break that down by the type of benefit, the Old Age and Survivors Fund will receive enough income to cover 75% of payments, while the Disability Fund will be able to cover 93% of what it owes beneficiaries.

3. Here’s what it would take to fix Social Security’s financial problems.

Trustees reports typically offer some thoughts about how to close the shortfall between Social Security’s long-term financial obligations and its current financial resources. The 2017 report made a couple of suggestions about how lawmakers could immediately solve the problem, although the measures are so draconian that they would never happen in reality.

One solution would be for the government to increase the current payroll tax that goes toward Social Security. For 2017, employees pay 6.2% on the first $127,200 in wages that they earn. Employers have to match that amount with a 6.2% tax of their own. In order to cover 100% of future benefits over the next 75 years, the government would have to increase that total tax by 2.76 percentage points, bringing the overall total to 15.16%. That’s considerably larger than the 2.58 percentage point increase that the 2016 report said would be necessary.

Alternatively, lawmakers could cut benefits. But even if they acted right now to cut all benefits — including those that current Social Security recipients get — then it would take a 17% cut to get the job done. That’s up from 16% last year. If you spare current recipients but apply a reduction to future beneficiaries, the reduction would have to be even greater at 20%. That too is one percentage point higher than the corresponding figure in the 2016 report.

4. It only gets tougher to fix Social Security later.

The solutions above assume immediate action. If lawmakers wait, the actions required to fix Social Security get even harder.

The 2017 report looks at what would be necessary if nothing changes until 2034. It would take a payroll tax increase of almost 4 percentage points to close the funding gap at that point. Immediate benefit reductions of 23% would also get the job done. Those cuts won’t be any more palatable in the future than they are today.

5. Social Security’s date of reckoning is getting more certain.

The Social Security Trustees Report has to make assumptions about the future, and that introduces uncertainty in their projections. However, the likely range of trust fund depletion dates is getting narrower, reflecting greater visibility as the dates get closer.

Last year, the 2016 report said that it was likely that the trust funds would run out of money between 2029 and 2045, with a 95% confidence level for that range of dates. This year, the range in the 2017 report narrowed to between 2030 and 2043.

The trustees did acknowledge that under low-cost assumptions, there is a theoretical possibility that the Social Security trust funds won’t run out of money. It would take higher fertility rates, slower rises in life expectancy, lower unemployment, and favorable macroeconomic factors to get to that low-cost scenario, however, and the trustees see that scenario as extremely unlikely.

Most of those who follow Social Security will dismiss the 2017 Social Security Trustees Report as having few big changes from previous years. Yet as the impending depletion of trust fund balances approaches, lawmakers have to tackle the issue with more resolve if they want to avoid huge problems within the next 15 to 20 years.

When Should You Apply for Social Security

My Comments: Brian Stoffel has identified 3 critical elements for everyone not yet retired and receiving Social Security benefits. And they are not just about money and the role it plays in people’s lives. I could point out some flaws in his arguments, but the message is real.

Brian Stoffel | Apr 17, 2017

You can choose to take Social Security as early as age 62, and as late as age 70. When to claim your benefits is a question many retirees take a long time to consider. To make the best decision, it’s important to look at how your monthly benefits change based on when you begin receiving them.

Currently, the average retirement benefit check from the program is $1,360, and the average retirement age is the earliest option, 62. But if recipients waited, these checks could get much bigger. Here’s what it would look like for those born in 1954 and earlier:

As you can see, those aren’t small differences. On the one hand, if you wait until age 70, your monthly benefit will be a whopping 76% higher than if you claim right away. On the other hand, if you do decide to delay your benefits that long, you’ll go almost a decade with no Social Security income coming in even though it was an option.

While there are tons of different variables that affect when you should apply for Social Security benefits, the following three questions often play an outsize role.

1. How do you feel when you get up and go to work in the morning?
This may seem like an odd place to start, but hear me out. Most people worry about having enough money to retire — that is an important concern, and we’ll get to it in a bit. But there’s one big blind spot to tackle first: hedonic adaptation.

You’ve likely heard hedonic adaptation being used in the context of getting used to lifestyle improvements, as in, “Even after buying the new car to keep up with the Joneses, Mark was still miserable — that’s hedonic adaptation for you.”

But in truth, it works both ways: We can have much less materially, and not be nearly as depressed about it as we’d expect.

If you want proof, I point you toward a Merrill Lynch/Age Wave survey that came out in 2015. When respondents of different ages were asked how often they felt happy, content, relaxed, and/or anxious, here’s how they responded:

And lest you think that this was just a survey of wealthy respondents, it was “nationally representative of age, gender, ethnicity, income, and geography.”

The bottom line is that if you hate your work and you can make ends meet on Social Security plus other sources of income, you shouldn’t wait to apply for benefits.

2. Can you make ends meet?
Of course, we can’t forget entirely about money. In the survey mentioned above, 7% of retirees said retirement was less fun and more stressful than pre-retirement years. The main culprit: financial concerns.

Almost all retirees report spending less in retirement than while they were working, and these expenses continue to fall as people age. Of course, everyone has heard about rising healthcare costs — and it’s true that healthcare expenses do jump. But there’s a host of other realities that keep costs down: less money spent on transportation costs commuting to and from work, a drop in food costs as you can make your own food more often, and a house finally being paid off in full, to name a few.

In general, you’ll need to calculate how much income you’ll get from three streams:
• Social Security and/or pensions
• Withdrawals from your own retirement accounts, using the 4% rule
• Other forms of income

The “other” forms of income could come from rental properties you own or even part-time work.

The bottom line is that you should try living for six months on this income to ensure that it’s suitable.

3. Have you coordinated with your spouse?
Finally, we have to deal with the sobering reality that one partner often lives longer than another. In that situation, Social Security has a simple rule: The surviving spouse gets to either keep his or her current benefit, or assume the benefit of the deceased — whichever is larger.

It’s important to remember that, statistically speaking, wives will live longer than their husbands. And if husbands were the higher earners, they may want to consider waiting as long as possible to claim their benefit, as it maximizes what their wives will receive after they pass away.

In this respect, there are a dizzying number of variables to consider, and I suggest doing further reading to figure out which will be best for you and your partner.

In the end, if you can answer these three questions accurately, you’ve got a good grasp on the factors affecting when to claim Social Security benefits.

Social Security “Facts” Or Myths

My Comments: It’s clear from the questions I get that people starting the transition to ‘retirement’ are easily confused by Social Security. They know it’s there; they’ve been paying into it for years. But there are enough variables to paralyze you if you let them.

Todd Campbell \ Jun 26, 2017

There’s a lot of misinformation out there about Social Security that could lead people to believe things about this valuable program that simply aren’t true. Can you spot fact from fiction? Here are seven statements about the program that don’t pass muster.

1. Members of Congress don’t pay into Social Security

This isn’t true anymore. Beginning in 1984, all the members of Congress (and the president and vice president too) pay into the Social Security system. Prior to 1984, most federal government workers were covered by an entirely different program, called the Civil Service Retirement System (CSRS). Therefore, the only federal employees who aren’t paying into Social Security are those who were employed prior to 1984 and who didn’t switch to Social Security from CSRS.

2. Life expectancy was less than 65 when Social Security was enacted

Yes, higher infant mortality rates meant life expectancy from birth was less than 65, but the majority of people who reached adulthood and were working and paying into the system lived to 65 and beyond. In fact, those who made it to age 65 could expect to live an additional 13 years.

3. Social Security numbers include a code indicating a person’s race

Nope. That’s not true. At one point, though, the numbers did show what region of the country a person lived in at the time they filed for their number. Today, however, the numbers are random.

4. The government has raided the trust fund

The federal government does not take money from Social Security to pay general operating expenses. Payroll tax revenue has gone into Social Security’s trust fund ever since the fund was created in 1939, and this trust fund is separate from the country’s general funds.

However, the trust fund does invest in government-backed securities, including special obligation notes, that pay interest. So, in this way, it does provide funding for the federal government, but it does so no differently than an individual who buys U.S. Treasury bonds as an investment.

5. I can’t collect on my ex’s Social Security

Your ex might not want this to be true, but former spouses can collect on their ex-spouse’s Social Security record, as long as certain conditions are met. And it won’t reduce an ex-spouse’s payment.

In order for this to happen, a marriage has to have lasted at least 10 years, and the individual has to be unmarried. An ex-spouse can collect up to 50% of the former spouse’s full retirement benefit; however, that amount can’t exceed what the person would otherwise receive based on their own work record. If their own payment would be bigger, then that’s the payment they’d receive.

6. Social Security is broke

No, it’s not broke, but there are financial question marks that need to be addressed.

Social Security is financed by payroll taxes on current workers, and the number of retiring baby boomers means there are more recipients and fewer workers paying taxes. As a result, payroll tax revenue hasn’t covered the program’s expenses since 2010, and that’s forcing Social Security to tap its trust fund to make up the difference.

If Congress doesn’t make some changes beforehand, Social Security’s trustees estimate that the trust fund will no longer be able to close the funding gap beginning in 2034. At that point, Social Security payments will have to be reduced by 25% across the board to match whatever money comes in from payroll taxes.

7. Social Security guarantees financial security in retirement

Not necessarily. Social Security is designed to replace about 40% of pre-retirement income, and increasingly, people are entering retirement with bigger mortgages and more student loan debt, and that’s straining their budgets. Financial security in retirement is also under pressure because fewer employers are offering pensions, and workers are failing to save enough money in retirement accounts to pick up the slack. About half of baby boomers have less than $100,000 in retirement accounts. That’s unlikely to be enough to guarantee a worry-free retirement — especially since the average retired worker is only collecting $16,320 in Social Security income this year.

Is Social Security Going Broke?

My Comments: In 1983, when Social Security was on the verge of going broke, Congress made some changes to keep it alive and well. It’s again on the verge of going broke and there are ways to fix it.

But were not yet close enough to the edge of the cliff for there to be the necessary political will to fix it.

You have to remember, things only get done within the context of ONE ELECTION CYCLE. Absent that pressure, the can gets kicked down the road. The remedy won’t likely appear until 2030. If then.

Social Security is expected to run out of money by 2034. Here’s the problem. by Matthew Frankel \ Mar 26, 2017

You may have heard certain things about Social Security’s financial condition — maybe that the system is “broke” or that it won’t be able to pay benefits for much longer. Fortunately, statements like these are a bit of an exaggeration. Social Security’s trust fund has plenty of money in it for the time being, but this isn’t expected to last beyond 2034. Here’s the truth about the current state of Social Security’s finances and why it is projected to run out of money in about 17 years.

The current and projected financial state of Social Security

According to the 2016 Social Security Trustees Report, the most recent available, the Social Security trust fund had roughly $2.8 trillion in reserves at the end of 2015. What’s more, Social Security has run at a surplus since 1982 and is projected to do so through 2019. In other words, for the next three years, Social Security’s income from taxes and investment revenue will exceed the cost of the benefits it pays out.

Unfortunately, that’s where the good news ends. In the year 2020, Social Security is projected to start running annual deficits, which are expected to grow quickly and continue for the foreseeable future. In order to pay benefits, reserve assets from the trust fund will need to be redeemed. As a result, the Social Security trust fund is expected to be completely depleted by 2034. After this point, the incoming tax revenue will only be enough to cover about three-fourths of promised benefits.

To be perfectly clear, the reason Social Security is expected to start running annual deficits and eventually run out of money isn’t because of fiscal mismanagement or anything of that nature. Rather, it’s a simple cash flow problem.

Reason 1: Baby boomers are retiring

It all starts with the post-World War 2 “baby boom.” During the time period from the end of the war until about 1964, babies were being born at some of the highest rates in modern history. To illustrate this, here are the total fertility rates, defined as the number of babies born per woman throughout her lifetime, based on the birth rate of that year, throughout our recent history.

As you can see, there was a huge uptick in the number of babies being born in the post-war decades. Since then, the total fertility rate has held steady at around two children per woman.
The baby boomer generation is generally defined to be Americans born between 1946 and 1964. Therefore, this group represents Americans ages 53 to 71 today. In other words, this is the group that is starting to retire now, and will continue to reach retirement age over the next decade and a half.

Reason 2: Modern medicine has resulted in longer life expectancies

The other contributing factor to Social Security’s expected financial woes is that modern medicine has resulted in Americans living longer lives and therefore collecting Social Security benefits for a greater number of years.

According to the Social Security Administration’s (SSA) life tables, a man who was born in 1900 lived for about 13 years after reaching the age of 65. However, a man born in 1960 (a member of the baby boomers I discussed earlier) is expected to live roughly 18 years after reaching 65 years of age. And the life expectancy improvement is nearly as dramatic for females as well. In other words, the current group of retirees is expected to collect Social Security benefits for almost five years longer than the group of retirees 60 years prior.

And this trend is expected to continue going forward. As you can see in the chart below, the average person born in 2000 will live over two decades after reaching the age of 65.


More money flowing out than coming in

As a result of this combination of baby boomers retiring and senior citizens living longer lives, there will be far fewer workers paying Social Security tax for each beneficiary receiving retirement benefits. Image source: 2016 Social Security Trustees Report.

As you can see, from 1980 until almost 2010, the ratio stayed steady at 3.2-3.4 workers paying into Social Security per beneficiary. As of 2016, this ratio has already dropped well below 3-to-1, and is expected to decline rapidly over the next few decades, reaching a level of just 2.2 workers per beneficiary by 2035.

What can be done?

The good news is that there is still time to fix the problem, and there are two main ways it can be done.

• Decrease benefits, which could come in the form of an across-the-board cut, or increase the full retirement age, cut benefits to wealthy retirees, or several other ways.
• Raise Social Security taxes. The current tax rate is 6.2% for employers and employees, assessed on up to $127,200 of earned income. So, a tax increase could either be a higher tax rate or a raising or elimination of the taxable wage cap.

There’s no way to predict the eventual reform package that will be passed, but history tells us that something will be done. It’s just a matter of how long it will take Congress to act and what the eventual solution will look like.

Image sources: Social Security Administration.

Social Security Fundamentals

My Comments: Forget for a minute that without changes from Congress, Social Security as we know it today will collapse. We’re probably 15 years away from that happening which means no one now in Congress gives a damn. In the meantime, many of you are starting to explore when and how to sign up for a monthly check. This will hopefully help you.

By Rachel L. Sheedy, Editor for Kiplinger | Updated for 2017

For many Americans, Social Security benefits are the bedrock of retirement income. Maximizing that stream of income is critical to funding your retirement dreams.

The rules for claiming benefits can be complex, and recent changes to Social Security rules created a lot of confusion. But this guide will help you wade through the details. By educating yourself about Social Security, you can ensure that you claim the maximum amount to which you are entitled. Here are ten essentials you need to know.

It’s an Age Thing
Your age when you collect Social Security has a big impact on the amount of money you ultimately get from the program. The key age to know is your full retirement age. For people born between 1943 and 1954, full retirement age is 66. It gradually climbs toward 67 if your birthday falls between 1955 and 1959. For those born in 1960 or later, full retirement age is 67. You can collect Social Security as soon as you turn 62, but taking benefits before full retirement age results in a permanent reduction — as much as 25.83% of your benefit if your full retirement age is 66.

Age also comes into play with kids: Minor children of Social Security beneficiaries can be eligible for a benefit. Children up to age 18, or up to age 19 if they are full-time students who haven’t graduated from high school, and disabled children older than 18 may be able to receive up to half of a parent’s Social Security benefit.

How Benefits Are Factored
To be eligible for Social Security benefits, you must earn at least 40 “credits.” You can earn up to four credits a year, so it takes ten years of work to qualify for Social Security. In 2016, you must earn $1,300 to get one Social Security work credit and $5,200 to get the maximum four credits for the year.

Your benefit is based on the 35 years in which you earned the most money. If you have fewer than 35 years of earnings, each year with no earnings will be factored in at zero. You can increase your benefit by replacing those zero years, say, by working longer, even if it’s just part-time. But don’t worry — no low-earning year will replace a higher-earning year. The benefit isn’t based on 35 consecutive years of work, but the highest-earning 35 years. So if you decide to phase into retirement by going part-time, you won’t affect your benefit at all if you have 35 years of higher earnings. But if you make more money, your benefit will be adjusted upward, even if you are still working while taking your benefit.

There is a maximum benefit amount you can receive, though it depends on the age you retire. For someone at full retirement age in 2016, the maximum monthly benefit is $2,687. You can estimate your own benefit by using Social Security’s online Retirement Estimator.

COLA Isn’t Just a Soft Drink
One of the most attractive features of Social Security benefits is that every year the government adjusts the benefit for inflation. Known as a cost-of-living adjustment, or COLA, this inflation protection can help you keep up with rising living expenses during retirement. The COLA, which is automatic, is quite valuable; buying inflation protection on a private annuity can cost a pretty penny.

Because the COLA is calculated based on changes in a federal consumer price index, the size of the COLA depends largely on broad inflation levels determined by the government. For example, in 2009, beneficiaries received a generous COLA of 5.8%. But retirees learned a hard lesson in 2010 and 2011, when prices stagnated as a result of the recession. There was no COLA in either of those years. For 2012, the COLA came back at 3.6%, but dropped to less than 2% in the next few years. Bad news came again last year: Prices were flat, and thus there was no COLA for 2016. But, on the bright side, there will be a 0.3% COLA for 2017.

The Extra Benefit of Being a Spouse
Marriage brings couples an advantage when it comes to Social Security. Namely, one spouse can take what’s called a spousal benefit, worth up to 50% of the other spouse’s benefit. Put simply, if your benefit is worth $2,000 but your spouse’s is only worth $500, your spouse can switch to a spousal benefit worth $1,000 — bringing in $500 more in income per month.

The calculation changes, however, if benefits are claimed before full retirement age. If you claim your spousal benefit before your full retirement age, you won’t get the full 50%. If you take your own benefit early and then later switch to a spousal benefit, your spousal benefit will still be reduced.
Note that you cannot apply for a spousal benefit until your spouse has applied for his or her own benefit.

Income for Survivors
If your spouse dies before you, you can take a so-called survivor benefit. If you are at full retirement age, that benefit is worth 100% of what your spouse was receiving at the time of his or her death (or 100% of what your spouse would have been eligible to receive if he or she hadn’t yet taken benefits). A widow or widower can start taking a survivor benefit at age 60, but the benefit will be reduced because it’s taken before full retirement age.

If you remarry before age 60, you cannot get a survivor benefit. But if you remarry after age 60, you may be eligible to receive a survivor benefit based on your former spouse’s earnings record. Eligible children can also receive a survivor benefit, worth up to 75% of the deceased’s benefit.

Divorce a Spouse, Not the Benefit

What if you were married, but your spouse is now an ex-spouse? Just because you’re divorced doesn’t mean you’ve lost the ability to get a benefit based on your former spouse’s earnings record. You can still qualify to receive a benefit based on his or her record if you were married at least ten years, you are 62 or older, and single.

Like a regular spousal benefit, you can get up to 50% of an ex-spouse’s benefit — less if you claim before full retirement age. And the beauty of it is that your ex never needs to know because you apply for the benefit directly through the Social Security Administration. Taking a benefit on your ex’s record has no effect on his or her benefit or the benefit of your ex’s new spouse. And unlike a regular spousal benefit, if your ex qualifies for benefits but has yet to apply, you can still take a benefit on the ex’s record if you have been divorced for at least two years.

Note: Ex-spouses can also take a survivor benefit if their ex has died first, and like any survivor benefit, it will be worth 100% of what the ex-spouse received. If you remarry after age 60, you will still be eligible for the survivor benefit.

It Can Pay to Delay
Once you hit full retirement age, you can choose to wait to take your benefit. There’s a big bonus to delaying your claim — your benefit will grow by 8% a year up until age 70. Any cost-of-living adjustments will be included, too, so you don’t forgo those by waiting.

While a spousal benefit doesn’t include delayed retirement credits, the survivor benefit does. By waiting to take his benefit, a high-earning husband, for example, can ensure that his low-earning wife will receive a much higher benefit in the event he dies before her. That extra income of up to 32% could make a big difference for a widow whose household is down to one Social Security benefit.

In some cases, a spouse who is delaying his benefit but still wants to bring some Social Security income into the household can restrict his application to a spousal benefit only. To use this strategy, the spouse restricting his or her application must be at full retirement age and he or she must have been born on January 1, 1954, or earlier. So the lower-earning spouse, say the wife, applies for benefits on her own record. The husband then applies for a spousal benefit only, and he receives half of his wife’s benefit while his own benefit continues to grow. When he’s 70, he can switch to his own, higher benefit. Exes at full retirement age who were born on January 1, 1954, or earlier can use the same strategy — they can apply to restrict their application to a spousal benefit and let their own benefit grow.

Take a Do-Over
There aren’t many times in life you can take a mulligan. But Social Security offers you the chance for a do-over. Say you claimed your benefit, but now wish you had waited to take it. Within the first 12 months of claiming benefits, you can “withdraw the application.” You will need to pay back all the benefits you received, including any spousal benefits based on your record. But you can later restart your benefit at a higher amount.

Early claimers have another opportunity for a do-over: They can choose to suspend their benefit at full retirement age. Say you took your benefit at age 62. Once you turn full retirement age, you can suspend your benefit. You don’t have to pay back what you have received, and your benefit will earn delayed retirement credits of 8% a year. Wait to restart your benefit at age 70, and your monthly payment will get up to a 32% boost — which could erase much of the reduction from claiming early.

Uncle Sam Wants His Take
Most people know that you pay tax into the Social Security Trust Fund, but did you know that you may also have to pay tax on your Social Security benefits once you start receiving them? Benefits lost their tax-free status in 1984, and the income thresholds for triggering tax on benefits haven’t been increased since then.

As a result, it doesn’t take a lot of income for your benefits to be pinched by Uncle Sam. For example, a married couple with a combined income of more than $32,000 may have to pay income tax on up to 50% of their benefits. Higher earners may have to pay income tax on up to 85% of their benefits.

Passing the Earnings Test
Bringing in too much money can cost you if you take Social Security benefits early while you are still working. With what is commonly known as the earnings test, you will forfeit $1 in benefits for every $2 you make over the earnings limit, which in 2016 is $16,920. Once you are past full retirement age, the earnings test disappears and you can make as much money as you want with no impact on benefits.

But the good news is that any benefits forfeited because earnings exceed the limits are not lost forever. At full retirement age, the Social Security Administration will refigure your benefits going forward to take into account benefits lost to the test. For example, if you claim benefits at 62 and over the next four years lose one full year of benefits to the earnings test, at a full retirement age of 66 your benefits will be recomputed — and increased — as if you had taken benefits three years early, instead of four. That basically means the lifetime reduction in benefits would be 20% rather than 25%.