When Ida May Fuller, from Ludlow, Vermont, received the first payment from Social Security in the sum of $22.54, I doubt very seriously that she had any idea of the complexities to come over the next 75 years. That was January 31, 1940, she paid for 3 years in total of $24.75, lived to be 100, and collected $22,888.92 in benefits.
In the course of my day at Bridgeworth one of the most oft mentioned topics is Social Security. No matter the age of the client, it seems social security is on their mind. Retirees are often fearful they will not receive their cost of living adjustment, the middle aged folks are highly skeptical, and the thirty something’s are just plain cynical about whether they will receive any benefit after all of the taxes that they pay. I hear the same postulations on what Congress will do and sympathize with the grumblings of a benefit that may be forever lost.
Social Security Important to Retirement Planning
Make no mistake about it, your Social Security benefit is an important factor in your retirement planning and you should be aware of how it works and any possible changes. In 2010, the Social Security Administration Office of Policy estimated in Fast Facts and Figures About Social Security that to the average earner, social security is a retirement benefit that replaces approximately 40% of the income needed in retirement, if trying to sustain 80%-100% of pre-retirement income. If you had 40% of your income reduced or removed, you would certainly notice.
According to the 2014 Social Security Administration Annual Statistics Supplement, 73% of Americans (nearly 37.9 million people) received reduced benefits because they elected to begin taking their benefit payments before Full Retirement Age. In my opinion, this could indicate an immediate need for the income, a lack of patience, and perhaps skepticism that the benefit will be available down the road.
One of the most often cited reasons for stress upon the Social Security system and what I believe is one of the biggest contributors to the aforementioned doubt that one will receive the benefit that is “owed them,” is the fact that people are living far longer today than when Social Security began. According to ssa.gov, life expectancy at birth in 1930 was indeed only 58 for men and 62 for women, and the retirement age was 65. As Table 1 shows, the majority of Americans who made it to adulthood could expect to live to 65, and those who did live to 65 could look forward to collecting benefits for many years to come. In Table 2 we can observe that for men who turned 65 in 1940, almost 54% of the them could expect to live to age 65 if they survived to age 21, and men who attained age 65 could expect to collect Social Security benefits for nearly 13 years (and those numbers are even higher for females). Perhaps not as extreme as it may appear at a cursory level, longer life today among participants has no doubt changed the dynamics of Social Security.
“Voluntary Suspension of Benefits”
In 2000, Congress passed the Senior Citizens Freedom to Work Act, which introduced a new concept called “voluntary suspension” of benefits that allowed those who had already started Social Security benefits to stop their payments and earn delayed retirement credits. However, the new voluntary suspension rules opened several additional Social Security claiming strategies, including “claim now, claim more later” tactics involving File-and-Suspend and Restricted Applications for spousal benefits.
To put this strategy into action, an individual at full retirement age files for benefits and then suspends them, while the spouse files for a restricted application to collect a spousal benefit only. Both individuals will then be able to earn delayed credits until age 70, while one gets Social Security benefit in the interim.
Recent Changes to Social Security
In the most recent move on November 2nd, and perhaps the most meaningful in many years, President Obama signed the Bipartisan Budget Act of 2015. While ushering in a series of legal and public policy changes meant to prevent a shutdown of the government, one of the Act’s most important features includes significant changes to Social Security benefits and related claiming strategies. The Social Security strategies impacted by the recent legislation, often called loopholes or perhaps even aggressive strategies, have long been on the radar of both political parties. These changes will also impact several valuable claiming options for recipients.
The new rules will not go into effect for 6 months, so if you are already 66 or will be in the next six months, you may want to consider filing and immediately suspending your benefit. Web Phillips, senior legislative representative at the National Committee to Preserve Social Security and Medicare, says, if you won’t turn 66 until after the six-month window closes, you may have lost the opportunity to take advantage of this strategy.
There will be exceptions made. Families that are already using these strategies will be grandfathered. If you turned 62 this year or are older, you will still be able to file a restricted application for a spousal benefit when you turn 66. According to Anne Tergesen of the Wall Street Journal, There will be a similar 6 month window for folks at or near age 66 that have children under the age of 18 or disabled adult children, which will allow for them to receive dependent benefits. Widows and Widowers may not be affected by this new law. Beginning at age 60, a surviving spouse can take a reduced benefit based on his or her deceased spouses benefit, then switch to their own benefit later if it is higher. Alternately, a survivor can start their own benefit as early as age 62 and then later change to a full survivor benefit at their full retirement age.
Notwithstanding all the new changes to the Social Security rules to limit the File-and-Suspend and Restricted Application claiming strategies that were created when the Senior Citizens’ Freedom to Work Act was passed in 2000, the original rule allowing for voluntary suspension of an individual’s retirement benefits remains in place. Now more tightly construed, the rule exists for those who started retirement benefits prior to full retirement age, who have now “changed their mind” and wish to delay Social Security benefits and earn delayed retirement credits. Given that the Social Security Administration shut down the “withdraw-and-reapply” Social Security strategy about 5 years ago, voluntary suspension remains the only way for someone who has a change of mind (or circumstances) and wants to earn delayed retirement credits after having already received benefits for at least a year.
Congress’ goals are well intended, though unpopular, as the United States works to reduce our Social Security deficit. Perhaps it isn’t so unreasonable to expect and accept changes to a system that is more than 75 years old. I would encourage you to truly examine the facts that shape our current Social Security situation and educate yourself on your Social Security benefit and work to maximize your benefit as it best suits your family’s needs. Social Security planning is a case-by-case decision with many components. What may be most suitable for your neighbors, may not be best for your situation.
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This commentary is provided for information purposes only and does not pertain to any security product or service and is not an offer or solicitation of an offer to buy or sell any product or service. Unless otherwise stated, all information and opinion contained in this publication were produced by Bridgeworth LLC and other sources believed by Bridgeworth LLC to be accurate and reliable. The views expressed are the personal views of Jonathan Hornsby as of the date published or indicated and may be superceded by subsequent market, legal, policy or other reasons. Investors should seek tax advice from their own tax advisor regarding the appropriateness of any strategy discussed or recommended. Neither Bridgeworth, LLC nor its advisors provide tax advice.
The charts and/or graphs do not reflect past of current recommendations of Bridgeworth LLC. They are provided for educational purposes only and should only be considered as tools to aid in your own Social Security elections.