Congress Must Act Sooner Rather Than Later
In theory, the AWI problem could be fixed anytime before 2022, when, for example, workers who turn 60 this year are first eligible to retire at the age of 62. But that delay would cause significant anxiety for these workers, whose future benefits would be at risk. Moreover, people decide when to retire based on projections of their incomes in their initial year of retirement and in the remainder of their lives. It would be most unfair to workers decision-making processes to have the expectations of their future incomes be uncertain for some period of time while they are trying to make such an important decision.
Congress needs to act sooner rather than later to ameliorate this problem. One possibility would be to include a fix in the stimulus legislation to cope with the economic effects of the COVID-19 pandemic that Congress is currently considering.
You’re Afraid Social Security Will End
Social Security is one of those benefits that’s supposed to be around forever. But the system is in trouble, and benefits may change in the future. That worries people of all ages.
While older peopleparticularly ones in or nearing retirement ageworry about the fate of Social Security, they likely won’t see much impact. Still, if the thought of losing out on Social Security benefits is keeping you up at night, it may be better to start claiming early or at full retirement age rather than to hold off for an increased benefit.
How To Calculate Social Security Benefits
Lets say your FRA is 66. If you start claiming benefits at age 66 and your full monthly benefit is $2,000, then youll get $2,000 per month. If you start claiming benefits at age 62, which is 48 months early, then your benefit will be reduced to 75% of your full monthly benefitalso called your primary insurance amount. In other words, youll get 25% less per month, and your check will be $1,500.
That reduced benefit wont increase once you reach age 66. Rather, youll continue to receive it for the rest of your life. It may go up over time due to cost-of-living adjustments , but only slightly. You can do the math for your own situation using the Social Security Administration Early or Late Retirement Calculator, one of a number of benefit calculators provided by the SSA that can also help you determine your FRA, the SSAs estimate of your life expectancy for benefit calculations, rough estimates of your retirement benefits, individualized projections of your benefits based on your personal work record, and more.
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You Think You Can Get A Better Return
You’ll get an 8% increase in your benefit each year past your full retirement age, up until you reach age 70. That means if you’re 67 and wait three years to claim benefits, your check will be 24% larger when you finally start.
But if you’re a savvy investor, it might make sense to start collecting those benefits sooner rather than later. Why? You could collect your Social Security benefits early, invest the money, and beat that 8% annual return.
Of course, there are risks associated with this strategy. Unless you have a crystal ball, you have no idea how the markets will perform. One bad year could wipe out any gains as well as your initial investment.
Claiming Social Security At Age 65
Those whose Full Retirement Age;is 65 are already that age or older. For those born after 1955 and before 1960,;Full Retirement Age;is 66 and some months. By retiring at age 65, those beneficiaries lose at least 12 months worth of increases. For those born in 1960 or after,;Full Retirement Age;is 67, so they lose up to 24 months of increases if they retire at age 65.;
Below, we show how a person born in 1960 and entitled to a full benefit of $2,500 could see his or her monthly benefit change based on claiming age:
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How To Work The Formula For Bigger Benefit Checks
Better still, as long as you’re at least a few years from retiring, there are ways that you can make your future benefit checks bigger. For example:
- Work a little longer. Ideally, you should have 35 years of earnings, so that no zeroes are factored into the calculations. Even if you have 35 years now, if you’re earning a lot now relative to your past earnings, for each additional year that you work, your higher earnings will kick out a low-earning year.
- Earn more. If you can really beef up your earnings for at least a few years, you’ll end up with fatter benefits. You might, for example, take on a side gig for a few years, such as driving for a ride-sharing service, making and selling hand-crafted items, doing freelance work , or tutoring young people online.
- Delay starting to collect. While you can start collecting Social Security retirement benefits as early as age 62, doing so will shrink your checks . Delaying collecting will make them bigger — by about 8% for every year past your full retirement age that you delay. Delay from 67 to 70, for example, and your checks will be about 24% bigger . Do some reading and thinking before deciding when it’s the best time for you to start the benefit checks flowing.
You may not end up with that fat $3,895 monthly benefit, but by acting on a savvy strategy or two, you may be able to collect a lot more from Social Security.
Social Security: What Is The Best Age To Begin Collecting
Have you ever wondered how the FICA;tax information on your pay stub;impacts your future retirement benefits?
FICA is a payroll tax that funds both Social Security and Medicare, amounting to a 7.65 percent contribution from each paycheck, an amount which your employer matches. It gets deducted from your first paycheck all the way up to the time you retire, when you can collect benefits.
But claiming Social Security benefits can be a tricky business.
How Will Working Affect Social Security Benefits
In a recent survey, 68% of current workers stated they plan to work for pay after retiring.1
And that possibility raises an interesting question: how will working affect Social Security benefits?
The answer to that question requires an understanding of three key concepts: full retirement age, the earnings test, and taxable benefits.
Who Should Delay Benefits
If you are married and the higher wage earner, it generally makes sense for you to wait as long as possible to claim.
One reason for that is Social Security payments are based on mortality tables that have not been updated since 1983. And life expectancies have increased since that time.
People are living longer than they would have been expected to back in 1983, and therefore the credits that you get for delaying Social Security are worth more to you than they would be if they were actuarially fair, Jones said.
Holding off until age 70 makes sense particularly for the higher earner of a married couple because their benefits will in turn determine spousal and survivor benefits for their significant other.
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The Magic Number Is 35
The Social Security website offers an explanation of how your benefits are calculated, but its difficult to follow. A simpler explanation can be found at MyRetirementPaycheck.org, which is sponsored by the National Endowment for Financial Education.
Your Social Security payment is figured using a complex calculation based on a 35-year average of your covered wages. Each years wages are adjusted for inflation before being averaged.
If you worked longer than 35 years, the government will use the highest 35 years. If you worked fewer than 35 years, the government will average in zeros for the years you are lacking.
You dont have to be a math genius to figure out the impact of that it drags down your average. If you can avoid zeros by working longer, youll increase your Social Security payment.
You Expect Your Investments To Grow Faster Than The Increased Benefit
If you’re the next Warren Buffet, it’s possible you could do better taking Social Security early and investing the money than you could by waiting to take a larger benefit later. When weighing the best decision, consider the inflation rate, the rate your benefits increase and how much you can expect to earn in your portfolio. Given that benefits increase by 8 percent per year for each year you wait after full retirement age, however, it’s hard to outperform that rate of increase in the market. These safe investments do have high returns.
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How Can The Social Security Disability Programs Be Improved To Increase Economic Security And Work Opportunities For Beneficiaries
Disability Insurance and Supplemental Security increase economic security for millions of disabled workers. For beneficiaries whose conditions improve, the programs also provide important incentives and supports for returning to work. Still, the programs could be further strengthened to increase disabled workers economic security and provide a more seamless transition for those who are able to return to work.
Modernize Supplemental Security
The value of Supplemental Security benefits has eroded considerably since the programs inception in 1972, as the programs income exclusions and asset limits have not kept pace with inflation and living standards. The current maximum benefit is equivalent to just three-quarters of the also-outdated federal poverty line for a single person. The general income exclusion and earned income exclusion have never been increased. To address this erosion, H.R. 1601, the Supplemental Security Restoration Act, sponsored by Rep. Raul Grijalva and introduced in Congress in April 2013, would increase the monthly maximum benefit to $937, which is 100 percent of the current federal poverty line, and would increase the general income disregard to $110 per month and the earned income disregard to $357 a month. Increasing the income exclusions and indexing them to inflation going forward would restore the monthly benefit amount to its intended value and significantly increase beneficiaries economic security.
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Timing And Your Health Coverage
Your health insurance coverage can also play a role in deciding when to claim Social Security benefits. Do you have a health savings account to which you would like to keep contributing? If so, note that if youre age 65 or older, then receiving Social Security benefits requires you to sign up for Medicare Part A, and once you sign up for Medicare Part A, youll no longer be allowed to add funds to your HSA.
The SSA also cautions that even if you delay receiving Social Security benefits until after age 65, you might still need to apply for Medicare benefits within three months of turning 65 to avoid paying higher premiums for life for Medicare Part B and Part D. If you are still receiving health insurance from your or your spouses employer, however, then you might not yet have to enroll in Medicare.
On March 17, 2020, all Social Security offices were closed completely due to the COVID-19 pandemic. As of Aug. 5, 2021, they are only open by appointment, and to get an appointment, you need to be in a limited, critical situation. Most people will have to transact their business online, by phone, or through the mail.
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Understanding The Full Retirement Age
Social Security uses full retirement age to calculate 100 percent of your benefit amount. For individuals born in 1942 or earlier, full retirement age is 65. Individuals born from 1943 to 1954 reach full retirement age at 66.
Persons born after 1960 reach full retirement age at 67, and a birth date between 1955 and 1959 increases the full retirement age two months for every year. An individual born in 1955 reaches full retirement age at 66 years and 2 months; 1956 is 66 years and 4 months.
The Maximum Being Paid Out At 62 65 And 70
If you’re at the maximum taxable earnings limit and you retire in 2018, then the most you can receive in monthly benefits at age 62, 65, and 70 is $2,158, $2,589, and $3,698, respectively.;;
|Maximum Social Security if You Retire in 2018|
Data source: Social Security. Chart by author.
Clearly, waiting to claim Social Security until you’re older pays off. That’s because Social Security will reduce your payment by a fixed percentage for every month you claim prior to reaching your full retirement age, or the age at which you qualify for 100% of your benefit. Full retirement age varies depending on your birthday, but in 2018, it’s 66 years and four months.
If you delay claiming Social Security until after your full retirement age, then your benefit is increased by two-thirds of 1% for every month you wait, up to age 70. If you have fewer than 35 years of work history, waiting also benefits you by increasing your monthly full retirement age benefit amount. Since Social Security uses zeros in its calculation when there are fewer than 35 years, any additional years you work will replace those zeros and increase your benefit.
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Chapter : How Much Will You Receive In Survivor Benefits
After the passing of the worker, Social Security pays a one-time death benefit of $255 which can be collected by the widow or child.
Then there is the monthly Social Security survivor benefit. That benefit is based on the Social Security benefit the worker was receiving .
The benefit can be up to 100% of what your spouse would have received at full retirement. If the benefit you would receive as a survivor is higher than the benefit you receive on your own, Social Security will pay you the higher of the two amounts,;not the two combined. However, survivor benefits, unlike;spousal benefits, dont have to be claimed at the same time as your;own;retirement benefits. You can, in many cases, receive one benefit for a time and then file for the other one later. This is a common strategy for widows to take to maximize their benefits.;
Did you Know?
Just How Rare Are Nawi Declines
In the last 70 years of Social Security payments, a wage index decline has only happened once . But that decline was so inconsequential , that Congress didnt see any reason to act.
If the current decline in the NAWI remains the same for the remainder of 2020, Congress will have until about the end of 2021 to fix this predicament.
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Costs Of The Solution
Two issues that are likely to arise in any discussion of fixing this problem are its cost to the Social Security trust fund and its cost to the federal budget. With regard to the cost to the Social Security trust fund, there are three ways to look at the issue.
One way is to view the cost relative to costs in a world in which no pandemic had occurred. For example, the cost could be measured using the economic assumptions in the most recent ;Social Security trustees report , which were formulated before the pandemic began. From this perspective, the cost would be zero because the legislative change would restore the world of Social Security benefits to what it would have looked like had there been no pandemic.
A second way of looking at the issue is to view the cost of the change relative to costs in a world that reflected economic assumptions indicative of the economic recession caused by the pandemic. From this viewpoint, there would be a cost associated with fixing the problem. For example, the chief actuary of the SSA estimates that if the AWI in 2020 were to fall 5.9 percent below its 2019 level, the AWI adjustments proposed by Chairman Larson would cost $90 billion in present-value dollars for the 75-year period from 2020 through 2094about 0.02 percent of taxable payroll over that period. . The cost over the 10-year period from 2020 to 2029 would be about $21 billion in nominal dollars.
Claiming Social Security At Age 70
If you are able to delay claiming your Social Security benefit until you reach age 70, you will earn a significantly higher benefit. After your Full Retirement Age;of 66 , your benefit;goes up by eight percent each year. Consequently, if your full retirement benefit at age 66 was $1,000 per month, and you delay claiming your benefit, it will be $1,080 per month by age 67 or an additional $960 per year. If you delay until age 70, it will be 124 percent of your expected benefit or $1,240 a month. That comes out to $2,880 more each year.
Delaying past age 70 will not increase your benefit, however.
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What About Taxes On Social Security
Keep in mind that Social Security benefits may be taxable, depending on your combined income. Your combined income is equal to your adjusted gross income , plus non-taxable interest payments , plus half of your Social Security benefit.
As your combined income increases above a certain threshold , more of your benefit is subject to income tax, up to a maximum of 85%. For help, talk with a CPA or tax professional.
In any case, if youre still working, you may want to postpone Social Security either until you reach your full retirement age or until your earned income is less than the annual limit. In no situation should you postpone benefits past age 70.