Social Security Questions & Answers

By Patrick Stark, CFP®
I spent some time with my wife’s family over the holidays and had several discussions with my father-in-law on various financial topics. He told me that he began collecting Social Security early (at age 63). When I asked him why he started early he replied “because that’s when I retired.” Such a response isn’t unusual; many people lean toward collecting Social Security earlier versus later without truly understanding the pros and cons of such a decision.

Social Security is also a popular discussion topic when we meet with clients. Here are some of the more common questions that we get relating to Social Security:

When should I begin collecting Social Security?
This is the most common question by far but unfortunately the most difficult to answer. The Social Security Administration 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 is increased 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 nonworking 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.

Everyone knows that Social Security is going bankrupt. Should I even count on it?
“Going bankrupt” is a bit of an exaggeration, but Social Security does face some long term financial challenges. Without any changes to the current program, in 2033 the Social Security trust fund will be able to pay about 77 cents for each dollar of benefits. The federal government has many tools at its disposal to close this gap – lifting the payroll ceiling, increasing SS taxes, changing the cost of living adjustment – among many others. Regardless of your political leaning, Social Security is considered one of the most successful social insurance programs in history. It’s doubtful that the program will go away completely or be dramatically reduced.

But what about means testing? I heard that SS benefits may be phased out for those above a certain income level.
It’s true that this is one of the options being considered to close the projected funding shortfall. However, it’s a very unpopular option with the general public and thus not gaining much political traction.

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. For a married couple with $30K in Social Security benefits, the 85% upper threshold comes into play when there’s roughly $52K of other income.

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

What’s the maximum Social Security retirement benefit someone can receive?
The maximum benefit in 2015 depends on the age you begin collecting benefits:
Age 62: $24,300/yr
Age 66: $32,220/yr
Age 70: $42,012/yr

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 date of birth). So if your benefit at normal retirement age was $24,000/year, you would receive only $18,000/year if you begin at age 62.
• On the other hand, your benefit increases by 8% per year past your normal retirement age – up until age 70. In the above example, your benefit would increase from $24,000/yr to $31,680/yr! And that doesn’t include any cost of living increases along the way. Assuming normal longevity, the difference between $18,000/yr and $31,680/yr 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.