Social Security: FAQ with a Client

By Patrick Stark, CFP®

Looking for something fun to read this summer? Each year, about this time, the Social Security Administration (SSA) releases its annual report on the long-term financial health of Social Security. Although you need a degree in actuarial science to comprehend the mind-numbing 261 pages of tables and graphs, the always helpful SSA issues a press release to summarize the highlights of the report. The resulting media response can lead people to believe that the Social Security program is going bankrupt. Here are a few common questions regarding the financial stability of Social Security, along with some general questions and guidelines.

Is Social Security really going bankrupt?

No, but it does face some long-term funding challenges.

What does that mean?  

The Social Security Trust Funds are projected to become depleted in 2034. It’s anticipated that the revenue from Social Security taxes will cover about 77% of the benefits payable at that time. So even if no changes were made to increase funding, individuals would still receive 77% of their benefit.

What are the Social Security Trust Funds?

It’s the surplus of money that was built up over the years when more people paid into the system than received benefits. It’s projected that beginning in 2022, benefit payments will exceed the revenue generated from Social Security taxes. That would eventually lead to the depletion of the Trust Funds in 2034.

What can be done to address the funding shortfall?

Several options are being discussed. Raising the full retirement age, reducing the cost-of-living adjustment, reducing benefits, and increasing Social Security taxes are a few of the alternatives being debated.

Politicians can’t seem to agree on anything these days. What are the chances that this is going to be fixed before 2034?

No one really knows. Although the potential solutions tend to run along party lines, Social Security debates aren’t as polarizing as the other issues currently facing Congress. Both sides of the aisle recognize the importance of protecting Social Security.

When should I begin collecting Social Security?

This is the most common question that we get, but unfortunately it’s also the most difficult to answer. The SSA has 2,728 rules related to claiming benefits. It’s a mind-boggling collection of byzantine regulations with a level of complexity rivaling our tax code. It’s so complicated that you need sophisticated professional software – in conjunction with knowledge of the arcane rules – to fully understand and analyze the various options available. We can help!

But aren’t there any general guidelines?

Social Security allows you to begin collecting a reduced benefit as early as age 62, which becomes a fairly simple decision if Social Security is your sole or primary source of income. But assuming normal longevity, it’s generally best to delay retirement benefits until age 70 because your benefit increases the longer you wait. However, claiming strategies get very complicated when there’s a couple involved – especially if there’s a large age difference. So it’s tricky to come up with general guidelines that apply to everyone in all situations.

My spouse doesn’t have a work history. Is he/she still eligible for Social Security?

Yes. A non-working spouse is entitled to 50% of the working spouse’s benefit OR his/her own benefit, whichever is greater.

What happens when my spouse dies? Do I get his/her Social Security in addition to mine?

No, in most situations you’ll get the greater of the two benefits. However, widow/widower benefits get extremely complicated if the survivor is under normal retirement age or if the deceased person began benefits early. This is one area where the modeling software is essential.

Are Social Security benefits taxable?

It depends on your other income. If you have very little income besides Social Security, none of your SS benefits will be taxable. As your income increases, the amount of your SS benefit subject to taxation also increases. The formula to determine how much of your SS is taxable is complex, but no more than 85% of your benefit can be taxed – regardless of your income level.

This applies only to federal taxation; the state of California does not tax Social Security benefits.

What’s the maximum Social Security retirement benefit someone can receive?

The maximum benefit in 2017 depends on the age you begin collecting benefits:

Age 62: $2,153/month

Age 66: $2,687/month

Age 70: $3,538/month

What’s the average retirement benefit?

The average retirement benefit is $1,360/month

Wow, that’s a lot less than the maximum. Why such a big difference?

There are two reasons. First, most people claim benefits before their full retirement age, which reduces their payment. Second, benefits are based on your highest 35 years of earnings up to a certain maximum level. Many people don’t have 35 years of earnings and/or have earned less than the maximum level.

As soon as I turn 62 I’m going to claim my benefits. Why should I leave money on the table?

It’s certainly your prerogative to claim benefits as early as age 62 (and in some rare situations it’s the appropriate strategy), but consider the following:

  • If you begin early, your benefit is permanently reduced. If you begin at age 62, you get only 75% of the amount that you would have received at normal retirement age (66 to 67 depending on your date of birth). So if your benefit at normal retirement age was $2,000/month, you would receive only $1,500/month if you begin at age 62.
  • On the other hand, your benefit increases by 8% per year past your normal retirement age until age 70. In the above example, your benefit would increase from $2,000/month to $2,640/month! And, that doesn’t include any cost of living increases along the way. Assuming normal longevity, the difference between $1,500/month and $2,640/month is significant.
  • Think of what happens when you die. As mentioned earlier, your spouse takes over the larger of the two benefits. Delaying benefits until age 70 is one way to provide for a younger spouse who may outlive the other by many years.
  • Few people are fortunate enough to have large pensions that cover their living expenses in retirement; most of us need to live off a certain amount of assets. Social Security provides a form of longevity insurance that increases with inflation every year.

I need some help getting to sleep tonight. Where can I find a copy of the SSA Annual Report?

You can find it here: https://www.ssa.gov/oact/tr/2017/tr2017.pdf. Sweet dreams!