Social Security Retirement, to Be or Not to Be?

Categories: Plan, Retire

Social Security Retirement Benefit, or shortened to SSRB for this article, is a major cornerstone for most Americans. Many people wonder: how it works, whether it will be there for them when they are eligible, will it change, and should their plans include the assumption that it will be there for them. This article addresses these questions.

The Dependability of SSRB is questionable by many younger workers today. Many people wonder if there will be enough in the trust fund for them when they retire. When old-age retirement benefits were originally designed back in the 1930’s, the life expectancy was much shorter than it was today. When someone retired, the Social Security Administration didn’t have to pay out benefits for very long on average. With many workers paying into the system, and these short pay-out periods, it was easy to be financially solvent. Today proportionally fewer people are paying into Social Security and as our population ages, and with people living longer, challenges will be great to make changes. People even wonder if Social Security Retirement Benefits will be there for them and if their financial plans should take into consideration Social Security retirement income.

Social Security will probably survive, because retirees and pre-retirees are one of the largest blocks of voters, so no politician who wants to be re-elected will ever want to see the end of Social Security during his/her watch. In addition, the government can easily print or borrow money, but at the end of the day they will be forced to make changes, especially during long-term economic down turns with tax revenue down.

Changes to Social Security always happen during economic and demographic shifts. If you were born in 1937 or earlier, your Full Retirement Age (FRA) is 65, but you can start receiving SSRB at age 62 with a 20% – 30% reduction in benefits. If you were born after 1937, your FRA is older than 65, as late as age 67 for those born in 1960 or later. Your actual FRA depends upon your date of birth. It is very possible we will see older FRAs being proposed.

The Social Security Tax (also known as FICA Federal Insurance Contributions Act) is made up of Old Age, Survivors and Disability Insurance (OASDI) and Medicare. The FICA tax rate for employees is 7.65% (OASDI 6.2%, Medicare 1.45) and it is 15.3% (OASDI 12.4%, Medicare 2.9%) for those who are self-employed. The taxable wage base for OASDI is $110,100 for 2012, which means your income above this figure is not taxed OASDI, except for Medicare.

If you are not following all of the haggling in Washington, politicians are fighting over the Tax Relief extension from 2011 into the coming year of the OASDI tax reduction from 6.2% to 4.2%.

As our government looks for ways to reduce expenses and increase revenue, it is considering many solutions, such as increasing the FRA, increasing or eliminating the OASDI wage base, and finding some way to change high income retirees’ benefits. If you think the current battle over temporary tax relief is intense, we have seen nothing yet when politicians and voters fight over benefits and income cap on OASDI.

Supplementing income has always been the original intent of SSRB, not providing more than 50% of a retiree’s income. The original design was to help provide some of the basic necessities of daily living for the elderly. However, today it is often the only source of income for some, or it provides a significant source of income for many. Given that corporate America is cutting back on defined benefit pension plans, and people are losing substantial value of their retirement investments because of a bad stock market, SSRB will continue to play an important part in retirement planning for many people.

Your decision to include Social Security in your retirement calculation is a personal one. When you use financial planning software be aware of this, most provide the choice to or not to include it in your calculation. You may be well advised to use conservative assumptions for Social Security and rates of return when running your calculation.

Social Security Retirement Benefit estimates can be calculated within your software, which bases your estimated income on your age and income. Your actual benefit will be based on your earning history and eligibility; the Social Security Administration provides this more accurate estimate at www.ssa.gov. That website instantly calculates your benefit after you input your name, Social Security number, income and state of residence. They track your earnings history so they can provide you a more accurate estimate of retirement income at 62 and at your full retirement age.

People wonder when they should start receiving SSRB: take the reduced benefit at age 62, full benefit at the Full Retirement Age (FRA), or delay it, thus increasing the benefit. The answer to this is a little difficult; it depends on the life-span of the person receiving benefits, the inflation rates for both SSRB increases and the cost of goods in the future, and rates of return earned on investments. Financial planning software will help you make these calculations, because you can enter different retirement ages and income amounts, and you can compare the growth of your investments. Then you can determine which scenario allows your assets to last longer or to be larger.

Break even analysis can also be used to help you make your decision. For example, assume someone was eligible for $24,000 in SSRB at FRA (age 65) or could wait until age 70 and receive $31,800, but the person decides to retire 3 years early and receive $19,200. For this example comparing Age 62 to FRA, the BEY (Break Even Analysis) is 12 years for age 62, compared to 12.19 years for age 70. Comparing FRA to age 70, the BEY is 15.38 years. There are several Web sites I found that can run the breakeven analysis for you.

Other considerations: if you continue to work and receive SSRB benefits prior to FRA, your benefits may be reduced. In addition, a portion of SSRB may be taxed as well for beneficiaries with income above $25,000 for a single individual and $32,000 for a married couple filing jointly. Also, don’t forget that Medicare health insurance doesn’t start until age 65, so your plans must consider the cost and issues related to individual health insurance.

Your trusted professional tax and financial advisors should be consulted before making final decisions about the best way for you to receive income; they can also help you with some of the other related issues.

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