Social Security Defined
Social Security is a social insurance program administered by the United States federal government to pay benefits to qualified individuals. Social Security retirement benefits are paid monthly, providing income for the life of the retiree. These benefits are calculated based on credits earned per a worker’s wages and can be increased or reduced depending upon the age at which benefits begin. Generally, the longer an individual waits to elect benefits, the greater the monthly benefit will be.
Social Security benefits are automatically adjusted each January through a cost of living adjustment (COLA) to keep pace with inflation. Dependent upon a recipient’s total income, as much as 85 percent of Social Security benefits may be taxable.
Is Social Security Sustainable?
One of the most common topics of discussion regarding Social Security is the program’s solvency. In 2018, for the first time since 1982, Social Security will not have a surplus of tax revenue versus benefit payments. As of 2018, the estimated depletion date of the Social Security Trust Fund is the year 2034, based on estimates of future benefit distributions and future inflows. If benefits are to continue in full for current retirees, Congress will need to consider options such as adjusting future benefit amounts, changing the Full Retirement Age and Earliest Filing Age, or increasing Social Security taxes. As Social Security evolves, your SYM team will be ready to help you plan accordingly.
Benefit eligibility generally requires a worker to accumulate 40 credits. Credits are obtained through the payment of FICA taxes with a maximum of four quarters (credits) per year. Sufficient earnings for 10 years or more will qualify a worker for retirement benefits. Once 40 credits are obtained and a worker becomes eligible to start receiving Social Security benefits, the benefit amount is calculated based on an average of the worker’s highest 35 years of indexed earnings.
In addition, spouses of workers (divorced or still married), workers who have become disabled, workers disabled before a certain age, survivors of deceased workers, and children of deceased workers will often be eligible for benefits. The timing and amount of benefits available to individuals who qualify based on another person’s Social Security record will vary based on individual circumstances. Some examples are listed below:
If an individual has a spouse eligible to receive benefits, he or she may elect payment of benefits on the spouse record as early as age 62. To be eligible for payment under a spousal record, the wage-earning spouse must file for benefits first. A spousal benefit cannot be paid until the primary worker’s benefit has begun.
Even if an individual is divorced, he or she can still receive benefits on the ex-spouse’s record. To be eligible for divorced spousal benefits one must meet the following criteria:
- The marriage must have lasted for 10 years or longer
- The individual is unmarried (ex-spouse can be re-married)
The benefit paid to an ex-spouse will be the maximum of 50% of the primary worker’s full retirement age benefit. This amount will be reduced if taken before full retirement age and will also be reduced by any benefit the ex-spouse is entitled to receive from their own Social Security record. If an individual remarries, he or she generally cannot collect benefits on the former spouse’s record unless the remarriage ends by death, divorce, or annulment.
Finally, a divorced individual will be eligible to elect spousal benefits upon reaching age 62 if the primary worker has also already filed for benefits. One exception allows the ex-spouse to receive benefits at or after age 62 regardless of whether the former spouse has started benefits as long as the marriage ended two or more years prior.
A widower age 60 or older may receive benefits on a deceased spouse’s record. Additionally, a surviving divorced spouse may also receive benefits under certain circumstances. Many other individuals may be eligible under the survivor rule including widow/widowers caring for deceased’s children, unmarried children under a certain age, certain individuals who have a disability or are caring for an individual with a disability, stepchildren, grandchildren, adopted children, and parents who were financially dependent on the deceased for at least half of their support.
With such a complex system and various scenarios in which one can be eligible to receive benefits, it is recommended as best practice to contact both the Social Security Administration and your financial advisor for advice.
The simple step of setting up a My Social Security account online can help to avoid a great deal of future hassle. Though any individual can find out his or her benefit amount by calling in to the Social Security phone line, wait times are typically long. By setting up an online Social Security profile, you have instant access to a great deal of information including statements, earnings amounts, earnings years, and approximate benefit amounts. To set up a profile go to https://www.ssa.gov/myaccount/.
When it comes time to apply for benefits, there are three ways to do so:
- Apply online at https://secure.ssa.gov/iClaim/rib
- Call the Social Security Administration phone line at 1-800-772-1213
- Make an appointment with your local Social Security office
Things to consider when electing for Social Security benefits
Are you still working or considering working?
If an individual is still working and has not yet reached full retirement age, deferring is often the best option, since Social Security benefits are reduced after age 62 based on a tiered system of income levels. Those “held back” dollars are paid to individuals who start Social Security at a later date as an increase in benefit. However, an early claimer will continue to receive the permanently-reduced retirement benefit amount, even after the held back dollars are paid back.
Continuing to work also impacts your highest 35 years of earnings; additional high-income years can replace low earnings years resulting in higher average earnings, thus increasing the benefit.
Is it best to take benefits early at age 62, at full retirement age, or defer until 70?
Filing for retiree benefits earlier than an individual’s Full Retirement Age results in a permanently reduced benefit, while waiting until after Full Retirement Age grants a permanently increased benefit. As a general rule of thumb, deferring one’s benefit allows for a high guaranteed return without volatility. The individual’s cash flow, goals, assets, risk tolerance, and income must all be reviewed to properly analyze the best strategy for taking Social Security benefits. Other important factors to consider are family health history, life expectancy, and affluence since the affluent tend to have greater access to a higher level of healthcare which often results in longer life expectancies. Your SYM advisor is well equipped to analyze these factors and guide you to a decision right for you.