Tag Archives: social security benefits

The Stark Reality of Social Security: Someone Has to Take a Pay Cut

My Comments: As a financial planner focused on retirement, I counsel people about where the money is going to come from when they’re 85 and still have bills to pay. And 85 is simply a symbolic number.

A critical source for most of us is Social Security. And it’s under attack by those we’ve elected to represent us in Congress. These words appeared some 20 months ago and since then the pressure has grown stronger.

We need to take a hard look at those we vote for and make sure we’re not shooting ourselves in the foot.

By Sean Williams Published January 22, 2017

According to the November update from the Social Security Administration, nearly 61 million people are receiving monthly Social Security benefit checks, roughly two-thirds of whom are retired workers. For these retirees, more than 60% rely on their Social Security check to account for at least half of their monthly income. In other words, without Social Security there would likely be widespread poverty among the elderly.

The stark reality of Social Security: Someone’s going to lose

Unfortunately, the program that so many seniors have come to rely on is on the decline, so to speak. Two major demographic shifts — the ongoing retirement of baby boomers and lengthening life expectancies — are expected to turn the program’s cash inflow into an outflow by the year 2020, according to the Social Security Board of Trustees 2016 report. By 2034, it’s estimated that the more than $2.8 trillion currently held in special issue bonds and certificates of indebtedness will have been completely exhausted, at which point an across-the-board cut in benefits of up to 21% may be needed to sustain the program for future generations.

The silver lining throughout Social Security’s imminent decline is that there are a bounty of possible fixes — more than a dozen, to be precise. Some of the Social Security solutions tackle the problem by boosting revenue into the program, while others examine the possibility of cutting benefits in a variety of ways. Thus far, an agreeable solution to fix Social Security has eluded lawmakers on Capitol Hill.

However, there’s a stark reality that these lawmakers, Social Security recipients, and working Americans need to understand: There is no “perfect” fix. If Social Security does have a “best solution,” it’s going to mean that someone has to take a pay cut. In order for the program to serve future generations of retirees, there’s going to have to be some give somewhere. The big question is where it’ll come from.

Should all workers take a pay cut?

One solution that offers a presumed-to-be-bonafide fix is an immediate, across-the-board payroll tax increase on all working Americans. According to the aforementioned Trustees report from 2016, the researchers estimated a 75-year actuarial deficit of 2.66%, down two basis points from the previous year. In English, this means enacting a 2.66% increase in the payroll tax should allow the program to generate enough revenue that no benefit cuts would be needed until the year 2090.

As a refresher, the payroll tax for Social Security is 12.4%, and responsibility for this tax is often split down the middle between you and your employer, 6.2% each. If you’re self-employed, you pay the entire 12.4%. In 2017, the payroll tax applies to every dollar earned between $1 and $127,200. However, wages earned above and beyond $127,200 are free and clear of the payroll tax.

Lifting the payroll tax by 2.66% would mean an aggregate tax of 15.06% on the income of self-employed individuals and a cumulative tax of 7.53% of employees and employers. Workers would have to do with less in their take-home pay, but seniors would more than likely not have to worry about a cut to their Social Security benefits.

Do the rich need to fork over more?

Another solution (and this one is by far the most popular among the public) would be to focus on wealthier Americans and have them pay a larger portion of their income into Social Security. This would be done by tinkering with the payroll tax earnings cap — the aforementioned $127,200 cap at which wages no longer become taxable by the payroll tax.

During her campaign, Hillary Clinton had suggested raising the payroll tax earnings cap to $250,000. By doing so, there would be a payroll tax moratorium on wages between $127,200 and $250,000, but any wages over $250,000 would be subject to the 12.4% tax. The reason lifting the payroll tax earnings cap is so popular is that it would only affect about one in 10 Americans. Since most working Americans are paying into Social Security with every dollar they earn, it would only make sense to most Americans to see the wealthy have to do the same. It would also wind up eliminating a good portion but not all of the budgetary shortfall in Social Security through 2090.

The downside? Other than the fact that the well-to-do would be taking home less income, they also wouldn’t see commensurate benefits from Social Security when they retire, despite paying so much extra into the system.

Do future retirees need to make do with less?

The other side of the equation is to leave the revenue aspect of Social Security alone and tinker with the benefits being paid. Most lawmakers wouldn’t dare suggest reducing the benefits of current retirees, but the idea of adjusting the payouts to future retirees is very much on the table, especially for Republican lawmakers.

The most effective way to reduce benefits for a future generation of retirees without using the words “reduce benefits” would be to raise the full retirement age. Your full retirement age is determined by your birth year (you can find yours with this SSA table), and it marks the age at which the SSA determines you’re eligible to receive 100% of your monthly benefit. File for benefits before reaching your full retirement age, and you’ll take a cut in pay from your full retirement benefit. Wait until after your full retirement age and your benefit will grow beyond 100%.

Raising the full retirement age to 68, 69, or 70 would mean that all brand-new and future retirees would either have to wait longer to receive 100% of their benefit, or they’d have to accept an even bigger reduction in their monthly payout if they claim benefits before reaching their full retirement age. Raising the retirement age could encourage healthy seniors to stay in the workforce longer, thus adding to payroll tax revenue in the process. On the flip side, seniors in poor health or those who can’t get a job could be forced to file for benefits at age 62, taking a big cut in lifetime benefits in the process.

Should current retirees deal with reduced income?

It’s certainly not a popular solution, but cutting benefits for current retirees is another possible answer to fixing Social Security.

One such example was recently touted in the Social Security Reform Act of 2016, introduced by Rep. Sam Johnson (R-Texas), the chairman of the Ways and Means Social Security subcommittee. Among the many fixes offered by Johnson, one involved switching from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Chained CPI when it comes to calculating cost-of-living adjustments (COLA).

The difference between the two is that the Chained CPI factors in “substitution,” which is the perception that consumers will trade down to lesser expensive goods and services if the price of another good or service rises too much, while the CPI-W does not. Because the Chained CPI factors in substitution, it grows at a slower pace than the CPI-W. The implication being that going with a Chained CPI will result in lower COLAs for retirees.

Which solution is best is really up to interpretation, but one thing is very clear: If Social Security is going to be fixed for the generations to come, someone is going to take a pay cut.

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Social Security’s future

My Comments: Followers of my comments know that I’ve talked in the past about how to fix the projected ‘crisis’ of the Social Security system. I remember the last one, and in 1983 it was fixed. At least for the time being.

What happened then was the upper threshold of income subject to what we all think of as the FICA tax was raised. In other words, if your income was higher than the earlier threshold, you continued to contribute to the system. In addition, the percentage of that income, paid by both you and your employer was raised.

We can argue until the cows come home that all that does is create job losses, and there are those who will lose their jobs. But think back to the years since 1983 if you can, and tell me that the increase I referenced in the above paragraph caused any significant economic turmoil in these United States.

Now think about the economic turmoil that will happen if 50 million people suddenly lose 21% of their income. Talk about job losses if that much money suddenly stops flowing to grocery stores, restaurants, gas stations etc.

But given the nature of politics, the fix won’t happen until the crisis happens within the last election cycle of those we elect to Congress. It’s another reason to make sure as many people as possible are registered to vote. If you are likely to be affected in some way by the 20% drop in Social Security benefits, you need to pay attention.

Sean Williams, The Motley Fool Published 10:00 a.m. ET July 9, 2018

To be frank, Social Security is a financial foundation that millions of seniors simply couldn’t do without. According to the Social Security Administration, more than three out of every five aged beneficiaries lean on the program for at least half of their monthly income, with just over a third essentially reliant on the program for all of their income (90 percent or more).

Furthermore, the Center for Budget and Policy Priorities finds that its mere existence keeps more than 22 million people, including 15.1 million seniors, above the federal poverty line. We’d probably be contending with a genuine elderly poverty crisis right now if not for the guaranteed monthly payout associated with Social Security to eligible beneficiaries.

Big changes are underway for America’s most important social program

But therein lies the rub: This guaranteed payout is in some serious trouble. While Social Security is in absolutely no danger of going bankrupt — which means current and future generations will receive a retired worker, disability, or survivor benefit, should they qualify — it is on the brink of a major transformation.

The latest annual report from the Social Security Board of Trustees finds that America’s most important social program will begin paying out more in benefits than it collects in revenue this year. In each year thereafter, with the exception of 2019, the net cash outflow from the Social Security is expected to increase. By 2034, the $2.9 trillion in excess cash that has been built up since the reforms of 1983 were passed are expected to be completely gone.

What happens then, you ask? Again, it doesn’t mean the program is bankrupt. But it does clearly demonstrate that the existing payout schedule isn’t sustainable. Assuming no additional revenue is generated above and beyond the intermediate-cost model projections from the Trustees report, an across-the-board cut in benefits of up to 21 percent may be necessary to sustain payouts (without any further cuts) until the year 2092.

Considering how dependent today’s senior citizens are on Social Security, the thought of a 21 percent reduction to benefits is frightening. As a reminder, the average retired worker is only receiving $1,412 a month, as of May 2018. This would push the average payout down to just $1,115 a month, using 2018 dollars. For added context, the federal poverty level for an individual on a monthly basis in 2018 is approximately $1,012.

7 Social Security “did you know” moments to consider

My Comments: For millions of us, Social Security is a critical component and source of income as we attempt to flourish and enjoy our retirement. For those of you who decry the idea of ‘socialism’, I encourage you to attempt to finish your life without every cashing one of your monthly checks.

Yes, you might prefer to have never paid into the system, but pay in your must. Years ago, people we elected to serve in public office at the national level determined that it was in society’s best interest that the elderly not be reduced to living in the streets or under bridges.

Over time, it’s appropriate for us to re-evaluate those decisions. That’s what we’re doing now. I have confidence the aforementioned choices made by our elected leaders will be confirmed and re-affirmed. Democratic Socialism is a viable economic model for us to follow.

Sean Williams, The Motley Fool Published 7:00 a.m. ET May 5, 2018

Social Security arguably is the most important social program in this country, but you wouldn’t know that by quizzing the American public on their knowledge of the program.

Back in 2015, MassMutual Financial Group did just this and found that only 28% of the more than 1,500 respondents could pass its straightforward, 10-question, online true-false quiz with at least seven correct answers. Such poor results suggest that most seniors are likely to leave money on the table or make a non-optimal claiming decision during their golden years.

The fact of the matter is that the American public doesn’t know much about Social Security. And while there’s a laundry list of things they don’t know, the following seven facts stand out most of all.

1. Did you know that Social Security is only designed to replace 40% of your working wages?

To begin with, you may or may not be aware that Social Security is not meant to be a primary source of income for retired workers. When it was signed into law in 1935, its purpose was to provide a financial foundation for lower-income workers during retirement.

Today, the Social Security Administration (SSA) suggests that benefits be relied on to replace about 40% of working wages, with this percentage perhaps a bit higher for low-income workers and lower for well-to-do workers. By comparison, 62% of current retirees lean on Social Security to account for half of their monthly income. That’s a bit worrisome, as the average check for retired workers is only $1,410 per month.

2. Did you know that the Social Security Administration can withhold some or all of your benefits, depending on when you claim?

Claiming benefits before your full retirement age — the age where you become eligible to receive 100% of your monthly benefit, as determined by your birth year — may entitle the SSA to withhold some or all of your benefits. If you won’t reach your full retirement age in 2018, the SSA is allowed to withhold $1 in benefits for every $2 in earned income above $17,040. Meanwhile, if you’ll reach your full retirement age in 2018 but have yet to do so, the SSA can withhold $1 in benefits for every $3 in earned income above $45,360.

The good news is you’ll get every cent withheld back in the form of a higher monthly payment once you hit your full retirement age — likely between 66 and 67 years old. The bad news is it’ll prevent most folks from double dipping with working wages and Social Security income prior to hitting their full retirement age — i.e., between the ages of 62 and 66 to 67.

3. Did you know that Social Security benefits may be taxable?

Believe it or not, your Social Security benefits may be taxable at the federal and/or state level. If your adjusted gross income plus half of your Social Security income totals more than $25,000 as a single filer, half of your Social Security benefits are taxable at federal ordinary income tax rates. For couples filing jointly, this figure is $32,000. A second tier allows 85% of Social Security benefits to be taxed above $34,000 for single filers and north of $44,000 for couples filing jointly.

What’s more, 13 states tax Social Security benefits to some extent. A few, like Missouri and Rhode Island, have exceptionally high income exemptions, allowing most retired workers to escape state-level taxation. Others, like Vermont and West Virginia, mirror the federal tax schedule and can act as a double whammy for seniors.

4. Did you know that Social Security offers a mulligan?

You probably aren’t aware that there’s a do-over clause built into Social Security if you regret claiming benefits early. Beneficiaries are allowed to undo their claim within 12 months of receiving benefits if they file Form SSA-521 or a “Request for Withdrawal of Application.” The catch? First, you only have 12 months to make this choice, and second, you’ll have to repay every cent you’ve received from Social Security in order to undo your original filing.

The benefit of this mulligan is that it’ll allow your benefits to grow once again at 8% per year, until age 70. It’s as if your claim was never made. Seniors who wind up going back into the workforce shortly after they start receiving Social Security income usually benefit the most from SSA-521.

5. Did you know that your claiming decision may be about more than just you?

Deciding when to take benefits might be one of the most important decisions a senior citizen will make. However, it may be an equally important decision for their spouse.

In addition to providing retired worker benefits, Social Security provides benefits to the disabled and the survivors of deceased workers. If a high-earning spouse passes away, a lower-earning spouse may be able to claim survivor benefits based on their deceased spouse’s earnings history, assuming the survivor benefit pays more per month that the low-income worker’s own retirement benefit. If a high-earning spouse enrolls for benefits early — i.e., before his or her full retirement age — it can adversely impact the survivor benefit that the lower-income spouse receives.

6. Did you know Social Security isn’t going bankrupt?

Surprise! Despite a pervasive myth that Social Security is spiraling into bankruptcy, I can assure you that it’s not.

Social Security is funded three ways:

  • A 12.4% payroll tax on earned income up to $128,400, as of 2018.
  • The taxation of Social Security benefits.
  • Interest earned on almost $2.9 trillion in asset reserves.

The secret sauce here is the 12.4% payroll tax, which accounted for 87.3% of the $957.5 billion collected by the program in 2016. As long as Americans keep working and Congress leaves the funding mechanism for the program as is, there will always be money collected that can be disbursed to eligible beneficiaries.

Mind you, this doesn’t mean the current payout schedule is sustainable. Social Security’s Board of Trustees projected last year that sweeping benefit cuts of up to 23% may be needed by 2034 to sustain payouts through 2091.

7. Did you know it’s been 35 years since the program’s last overhaul?

Finally, were you aware that it’s been 35 years since Congress last enacted a sweeping overhaul to the Social Security program? Sure, it’s tweaked a few things over the years, but it hasn’t made any major adjustments in over three decades.

That’s disturbing for one big reason: Social Security is facing a $12.5 trillion cash shortfall between 2034 and 2091, and lawmakers are simply kicking the problem under the rug. Make no mistake about it, Democrats and Republicans each have a core fix for Social Security that works. Unfortunately, with politics in Washington highly partisan, no middle-ground solution has been reached.

While there’s much more to learn about Social Security, these seven facts offer a solid foundation on which to build your wealth of knowledge.

 

Filing for Social Security Benefits

My Comments: For millions of us, a predictable monthly income from Social Security has become critical for sustaining our standard of living. For many reasons, we should be increasingly worried about it. But that story is for another day.

Right now, I’m sharing with you what I hope is a simple overview if you have not yet applied for benefits. You can choose from any one of 97 months. The first one is when you turn 62 and the last one is when you turn 70. (you can wait beyond that but it’s pointless…)

Know this too: regardless of when you sign up, we’re talking about essentially the same amount of money spread over your lifetime. Starting early means you’re getting a smaller check for a longer period of time. Starting late means you’re getting a larger check for a shorter period of time.

The optimal month for most of us, is, in my opinion, the month when you reach what is known in Social Security jargon as your FULL RETIREMENT AGE or FRA. Unless you plan or expect to die before your full life expectancy, that date is your first target for signing up.

There are dozens of good reasons to sign up early. And there are dozens of good reasons to wait until your FRA. There are far fewer good reasons to extend your wait beyond your FRA. Here’s a summary of what you can expect.

by Maurie Backman / Apr 10, 2018

Age 62
Age 62 is the earliest point at which you can file for Social Security, and it’s also the most popular age for seniors to claim benefits. The advantage of filing at 62 is that you get your money sooner. The downside, however, is that you’ll face the greatest reduction in benefits by going this route.
If you’re entitled to a full monthly benefit of $1,500 at age 67, for example, then filing at 62 will knock each payment you collect down to $1,050. That said, if you’re unemployed come 62 or need the money for another reason, you’re better off taking benefits than resorting to credit card debt.

Age 63
Filing for Social Security at 63 still means taking benefits early and having them significantly reduced. Still, if you’re desperate for cash, it often pays to take that hit, which won’t be quite as bad as it would if you were to file at 62. Using our example above, a $1,500 benefit at age 67 would be whittled down to $1,125 at 63 — not ideal, but better than collecting just $1,050.

Age 64
Claiming Social Security at age 64 will also result in a sizable reduction in your full monthly benefit. But it won’t be as drastic as filing at an earlier age. In the case of a $1,500 benefit at 67, you’d only lose about 20% by filing at 64, thereby resulting in a $1,200 monthly payment.

Age 65
Once you turn 65, you’re eligible for coverage under Medicare. As such, some people get confused and assume that 65 is the age at which they’re able to collect their Social Security benefits in full. Not so. Still, if you retire at 65 once Medicare kicks in and decide to file for benefits simultaneously, you won’t face such an extreme reduction. Following the above example, a $1,500 monthly benefit at 67 would only be reduced to $1,300 at 65.

Age 66
Age 66 is a significant one from a Social Security standpoint because it’s when workers born between 1943 and 1954 reach full retirement age and are thereby eligible to collect their monthly benefits without a reduction. Your full retirement age is a function of your year of birth, as follows:

Year of Birth       Full Retirement Age
1943-1954                  66
1955                            66 and 2 months
1956                            66 and 4 months
1957                            66 and 6 months
1958                            66 and 8 months
1959                            66 and 10 months
1960                            67
Data source: Social Security Administration.

Therefore, if you were born after 1954 but before 1960, your full retirement age is 66 and a certain number of months. If you were born in 1960 or later and have a full retirement age of 67, filing for Social Security at 66 will reduce your benefits by about 6.67%. That means a full monthly benefit of $1,500 would go down to just $1,400 if you were to take them a year earlier.

Age 67
If you were born in 1960 or later, this is perhaps the age you’ve been waiting for, since it’s when you get to take your monthly benefits in full. In our example, age 67 is when you’d get that $1,500 we keep talking about. That said, you don’t have to file for Social Security at full retirement age. You can hold off and grow your benefits for a higher monthly payout.

Age 68
Though 68 is hardly a common age for taking Social Security, it’s a strategic one nonetheless. That’s because for each year you delay your benefits past full retirement age up until age 70, you get an 8% boost in payments, which, in our ongoing example, would take a full monthly benefit of $1,500 at 67 up to $1,620 at 68. That increase then remains in effect for the rest of your life. Of course, not everyone wants or can afford to hold off on benefits all the way until 70, but waiting until 68 is a decent compromise — you get a modest boost without having to wait too long.

Age 69
Age 69 is a good time to take your benefits if you don’t need them sooner. Doing so will boost our aforementioned $1,500 benefit to $1,740, thus guaranteeing a higher payout for as long as you collect Social Security.

Age 70
The credits you accrue for delaying benefits past full retirement age stop accumulating once you reach 70. Therefore, it’s considered the latest age to file for Social Security. Granted, you don’t have to sign up for benefits at that time, but there’s really no financial incentive not to. If you’re dealing with a full retirement age of 67, filing at 70 means boosting your benefits by 24%, which would turn a $1,500 monthly payment into $1,860 — for life.
Which of the above ages is the right one for you to take benefits? It depends on a host of circumstances, from your savings level to your employment status to the state of your health. The key is to understand the pros and cons of filing at various ages so you land on the one that works best for you.

Finding the Best Social Security Claiming Strategy – 3 Questions

My Comments: As you’ve heard me say many times, Social Security benefits have become an absolutely critical piece of the retirement income puzzle for most of us. If it’s not there to pay critical monthly bills, it’s there to allow us freedom of movement as we transition from the retirement go-go years to the slow-go years and ultimately the no-go years. What follows here are good insights for you.

Sean Williams | Nov 27, 2017

Here’s how you can get the most out of Social Security.

Many Americans will lean on Social Security pretty heavily during retirement. Data from the Social Security Administration finds that more than three out of five seniors currently rely on their benefits for at least half of their monthly income. Separately, a study from the Urban Institute estimates that an average-earning male ($47,800 in 2015 dollars) will net about $304,000 in lifetime benefits from Social Security if he turns 65 in 2020. That’s about $82,000 more in lifetime benefits than Medicare will provide for this same individual.

Yet in spite of the clear importance placed on Social Security income during retirement, deciding when is the best time to file for benefits is perhaps the greatest mystery for most workers.

Your retirement benefit from Social Security, assuming you’ve earned the prerequisite 40 lifetime work credits, is derived from four factors — three of which you can control. It’s based on your earnings history, length of work history, claiming age, and your birth year. This latter factor is what determines your full retirement age, or the age at which you’re entitled to receive 100% of your retirement benefit.

In its simplest form, if you sign up before your full retirement age, you’ll accept a permanent reduction in your payout of up to 30%, depending on your claiming age and birth year. Similarly, waiting until after your full retirement age to enroll could boost your payout by up to 32%, depending on your claiming age and birth year. You can begin receiving retired worker benefits at age 62, or any point thereafter, but be aware that your benefits grow by approximately 8% for each year you hold off on enrolling.

This is the dilemma that retired workers commonly face: Take the money now and accept a permanent reduction to your monthly payout, or wait and allow your benefit to grow.

Answering these questions will maximize your claiming strategy

The easiest way to figure out what the best Social Security claiming strategy will be for you is to answer the following three questions.

1. Am I in good health?

The first thing you’ll want to do is assess your long-term health outlook to the best of your ability. Admittedly, trying to guess our own expiration date is nothing any of us can do with accuracy. We can, however, factor in our own medical history, and that of our immediate family, to determine whether or not we’re in poor, good, or excellent health. Your overall health and longevity outlook will help determine whether claiming early, late, or somewhere in the middle makes sense.

People with chronic health conditions and/or those with immediate family members who haven’t reached the average U.S. life expectancy of 78.8 years, according to the Centers for Disease Control and Prevention, are often best served claiming benefits earlier. While waiting would boost your monthly payout, claiming early and immediately receiving a payout will usually maximize what you’ll receive over your lifetime.

Conversely, waiting until ages 68 to 70 and boosting your payout well above your full retirement age benefit can be worthwhile for seniors in excellent health who’ve had parents or grandparents live into their 80s, 90s, or even 100s. Waiting can produce a significantly higher lifetime payout by ages 85 and up.

If you’re in good, but not great, health, then claiming around your full retirement age might be a wise decision. Again, it’s something of a crap shoot, but the smartest thing to do is take the information we have about our health and apply it as best as possible to our claiming decision.

2. Will this claiming decision affect anyone other than me?

The second question you’ll want to answer to ensure you’re making the best Social Security claiming decision possible is: How will this claiming decision affect those around me?

For instance, if you’re an unmarried elderly individual with no dependents, then your claiming decision really is your own to make. What you do should affect you alone.

On the other hand, if you’re married, your claiming decision could have implications on your spouse. As an example, if you’re the higher-earning spouse and file for benefits before reaching full retirement age, and you wind up passing away before your lower-earning spouse, the maximum survivor benefit that your lower-earning spouse may be eligible for will be reduced.

Elderly couples should also work on coordinating claiming strategies to maximize what they receive while they’re alive. Higher-earning spouses often benefit by waiting until their full retirement age or later to sign up for Social Security. Letting this larger benefit appreciate makes sense given that it’ll have the biggest positive impact on the couples’ household income later in life. Meanwhile, couples can sometimes gain by having the lower-income spouse claim early in order to generate some income for the household while the larger benefit grows.

Long story short, understand how your claiming decision will affect those around you.

3. How reliant will I be on Social Security income?

Perhaps the most important question you’ll want to ask yourself is this: How reliant will you be on Social Security? Generally speaking, the more reliant you’ll be, the greater incentive you’ll have to wait before signing up.

One of the bigger mistakes made by enrollees is filing for benefits early if you have little or nothing saved for retirement. If your nest egg is practically nonexistent, then you’re probably going to lean very heavily on Social Security during your golden years. If this is the case, the last thing you’d want to do is file for benefits early and permanently reduce your monthly payout. Instead, you should be working during your 60s, assuming you’re in good enough health to do so, and allowing your wages to cover your living expenses. This way your Social Security payout can keep growing, thus allowing you to maximize your monthly payout.

How reliant should you be on Social Security? I believe the ultimate goal should be to have no reliance on Social Security income whatsoever. In other words, your ability to save and invest for the future allows your Social Security payout to be nothing more than icing on the cake. But for the average American, it’s designed to replace about 40% of working wages. As long as you have a primary source of income, and Social Security isn’t it, you’re doing something right and should be in decent shape during retirement.

If you take your health, your marital/dependent situation, and your expected reliance on Social Security income, into question when making your claiming decision, you’re liable to find the best claiming strategy for you.

10 Social Security Terms To Know And Understand

My Comments: Happy Thanksgiving everyone!

For those of you still not signed up and receiving monthly benefits, here’s some useful things to know.

For those of you who attended my Social Security workshops, you’ll recall the acronyms that appear on every page. There’s even a couple more here for you to learn.

Maurie Backman – The Motley Fool – Nov. 10, 2017

Social Security serves as a key source of income for countless retirees and disabled individuals.

It’s also an extremely complex program loaded with rules and terminology. If you’re attempting to learn about Social Security (which is something you should do, regardless of how old you happen to be), here are a few key terms you’ll need to understand.

1. OASDI

OASDI stands for old age, survivors, and disability insurance, and in the context of your paycheck, it’s the tax used to fund the Social Security program. The current OASDI tax rate is 12.4%. If you work for an outside company, you’ll lose half that amount of your earnings up to a certain income limit, while your employer will pay the remaining 6.2%. If you’re self-employed, however, you’ll pay the full 12.4% up front.

2. SSI

SSI stands for supplemental security income, and it’s different from OASDI in that it’s a program funded by general tax revenues, not Social Security taxes. SSI is designed to help those who are over 65, blind, or disabled with limited financial resources keep up with their basic needs.

3. FICA Tax

FICA stands for the Federal Insurance Contributions Act. It’s the tax that’s withheld from your salary or self-employment income that funds both Social Security and Medicare. For the current year, FICA tax equals 15.3% of earned income up to $127,200 (12.4% for Social Security and 2.9% for Medicare), but those making above $127,200 will continue to pay 2.9% FICA tax on income exceeding that threshold. In 2018, the earnings cap will rise to $128,700.

4. Social Security credits

In order to collect Social Security benefits, you must earn enough credits during your working years. In 2017, you’ll receive one credit for every $1,300 in earnings, up to a maximum of four credits per year. For 2018, the value of a single credit will rise to $1,320 of earnings. Those born in 1929 or later need 40 credits to qualify for benefits in retirement.

5. AIME

AIME stands for average indexed monthly earnings, and it’s used to calculate your personal Social Security benefit. The amount you receive from Social Security is based on your highest 35 years of earnings. To arrive at your AIME, your past earnings are adjusted for inflation so that they don’t lose value.

6. Full retirement age

Your full retirement age, or FRA, is the age at which you’re eligible to collect your Social Security benefits in full. FRA is based on your year of birth, and for today’s older workers, it’s 66, 67, or 66 and a number of months. Though you’re allowed to claim benefits prior to reaching FRA (the earliest age is 62), doing so will cause you to collect a reduced benefit amount — permanently.

7. Delayed retirement credits

Though waiting until full retirement age will ensure that you collect your benefits in full, if you hold off on filing for Social Security past FRA, you’ll rack up delayed retirement credits that will boost your benefits. Specifically, for each year you wait, you’ll get an 8% increase in your payments. Delayed retirement credits stop accruing at age 70, so that’s typically considered the latest age to file for Social Security (even though you can technically wait even longer than that).

8. Trust Fund

The Social Security Trust Fund was established in the early 1980s to cover any future shortfalls the program might face. If Social Security has a year in which it collects more taxes than it needs to use, that money is placed in the Trust Fund and invested in special Treasury bonds. Once Social Security’s incoming tax revenue fails to cover its scheduled benefits, the Trust Fund will be tapped to make up the difference. Come 2034, however, the Trust Fund is expected to run out of money, at which time future recipients might face a reduction in benefits.

9. COLA

No, we’re not talking about a soft drink. In the context of Social Security, it stands for cost-of-living adjustment, and it’s designed to help beneficiaries retain their purchasing power in the face of inflation. Back in the day, those who collected Social Security received the same benefit amount year after year. But beginning in 1975, beneficiaries have been eligible for automatic COLAs based heavily on fluctuations in the Consumer Price Index. COLAs are not guaranteed, however. If consumer prices don’t climb in a given year, benefits can remain stagnant. Such was the case as recently as 2016.

10. Survivors benefits

Survivors benefits are designed to provide income for your beneficiaries once you pass. Those benefits are based on your earnings records and the age at which you first file for Social Security. Surviving spouses, children, and even parents of deceased workers are eligible for survivors benefits.
Clearly, there’s a lot to learn about Social Security, but familiarizing yourself with these key terms will help you better understand how the program works. It also pays to read up on ways to maximize your benefits so that you end up getting the best possible payout you’re entitled to.

A Majority of Working Americans Are Completely Wrong About Social Security

My Comments: The first monthly Social Security income benefit ever paid was to Ida May Fuller on January 30, 1940. Today, some 77 years later, it is a critical income source for millions of Americans.

This article by Sean Williams confirms the role Social Security plays in the lives of millions of Americans, and I’m one of them. If not already, you too will become a recipient of benefits from this 82 year old program.

I’m creating an internet course called Successful Retirement Secrets. It will have three major topic areas, one of them about Social Security.

The course will be a comprehensive and sophisticated outline for someone to follow as they slowly move through life toward retirement. I expect to have it ready to go before year end.

Sean Williams | Dec 10, 2016

In terms of retirement income, no program is more vital to seniors’ financial well-being than Social Security. For more than 75 years, Social Security income has been providing a financial floor for countless seniors, with the Center on Budget and Policy Priorities estimating that elderly poverty rates in America are just 8.5% because of Social Security income, as opposed to 40.5% without it.

Data from the Social Security Administration backs up this reliance on benefits. According to the SSA, 61% of all beneficiaries are counting on their Social Security benefits to supply at least half of their monthly income. This figure was particularly high (71%) for unmarried elderly individuals. Even pre-retirees, which believe they’ll be less reliant on Social Security than the current generation of beneficiaries, would likely struggle to make ends meet without Social Security income.

While on one end Social Security has been a financial blessing for many retired workers, their spouses, and their families, it’s also a major cause for concern. Projections from the Social Security Board of Trustees suggest that the program could begin paying out more in benefits than it’s bringing in via payroll taxes, interest, and through the taxation of benefits by 2020, ultimately culminating in the program exhausting its more than $2.8 trillion in spare cash by the year 2034.

A majority of working Americans have this all wrong

If you’re among the many retirees reliant on Social Security, the idea of the program “exhausting its spare cash” probably sounds terrifying. The TransAmerica Center for Retirement Studies, which regularly surveys Americans to get a feel for their retirement preparedness and knowledge, found earlier this year that 77% of workers are concerned that Social Security will not be there for them when they retire. Yet the truly terrifying fact here isn’t that Social Security’s spare cash is expected to be depleted in less than two decades; it’s that a majority of working Americans are just plain wrong about Social Security.

One of the near-surefire guarantees of Social Security is that it will be there when baby boomers, Generation X, millennials, and Generation Z retire. In other words, Social Security won’t be going bankrupt anytime soon, if ever.

The reason Social Security will be able to provide benefits to America’s retired workforce, the disabled, and survivors of deceased workers lies with the payroll tax. Even if the more than $2.8 trillion current in spare cash is depleted as the Trustees report has predicted, payroll tax revenue — a 12.4% tax that’s often split down the middle between you and your employer, or which is paid in full by the self-employed — will continue to be levied and collected on America’s workforce. As long as Americans keep working, the program will continue to generate revenue.

Social Security can, in theory, continue forever as a budget-neutral program that pays out benefits based on what is collected via payroll tax revenue and the taxation of benefits. Interest income earned from its spare cash is the only component of the program set to essentially disappear once that excess cash has been exhausted.

Two steps for working Americans to take now

The true worry for working Americans should be that their future Social Security benefit may be reduced from its current trajectory. The Board of Trustees estimates that when the spare cash is depleted, across-the-board benefit cuts of 21% may be needed to sustain the program through 2090. This would put three in five retirees who count on Social Security for a majority of their monthly income in a very precarious position.

This estimate serves as a wake-up call for working Americans to both (1) have a working budget and retirement budget ready, and (2) have alternative channels of income for retirement.

1. Have a working and retirement budget

Budgeting is critical for a variety of reasons but none more important than that it helps you understand your cash flow. If you don’t have a firm grasp of where your money is being spent once it’s deposited into your account by your employer, then your chances of maximizing your saving habits or minimizing your discretionary spending is low.

Creating a budget can be done entirely online these days with the use of free software, and the biggest challenge is no more involved than adding and subtracting and sticking to your plan. Some of the most helpful hints for budgeting with the goal of saving as much as you reasonably can for retirement include:

• Getting everyone in your household involved, since it’ll encourage you and those around you to stick to the household budget.
• Meeting up with like-minded individuals once or twice monthly to share your ideas and progress.
• Using separate accounts for different spending categories, such as food and entertainment.
• Most importantly, analyzing your data monthly to assess your progress.

Having a retirement budget is just as critical as the budget working Americans use to save money. Retirement probably means giving up a consistent working wage for good, and for many Americans that can mean a sudden drop in monthly income. If you’re nearing retirement and haven’t thought about a retirement budget, you could be in for a shocking surprise when your income drops 10%, 20%, or even more once you retire, especially if you’re still working with your old budget from when you were working.

Furthermore, not having a retirement budget in place could lead to you depleting your nest egg faster than expected or pulling out more than you need from your retirement accounts each year and paying more in taxes as a result.

2. Have alternative channels of income

Working Americans also need to ensure that they have alternative channels of income beyond just Social Security when they retire. If you have other forms of income, then a 21% cut to Social Security benefits may not be crippling to your financial well-being.

Arguably the most popular retirement income channel is the employer-sponsored 401(k). According to StatisticBrain.com, 52.5 million Americans have a 401(k), with the value of assets held by 401(k)s totaling about $4.5 trillion. A 401(k) is a tax-deferred retirement plan, meaning the money is taken out pre-tax and can lower your current-year tax liability. However, you’ll owe federal tax once you begin making withdrawals during retirement. A 401(k) can be particularly attractive if your employer offers to match a percentage of your contribution, which is essentially free money.

For those of you who work for an employer that doesn’t offer a 401(k), either a traditional IRA or Roth IRA is always available. The popularity of the Roth IRA has grown particularly quickly in recent years since eligible distributions are completely tax-free. Unlike a traditional IRA or 401(k), which provide that aforementioned up-front tax benefit and deferred taxation until retirement, a Roth IRA is funded with after-tax dollars — and since you’ve already paid your taxes on those dollars, any subsequent gains on that money is free and clear of taxation as long as you make a qualified withdrawal.

Long story short, there are ample ways for working Americans to save money and diversify their income stream during retirement. Social Security will be there for you when you retire, but that doesn’t mean you should rely on it to be your primary or sole source of income.