My Retirement Blog

Yesterday, Henry Paulson, Secretary of the Treasury, gave some grim news about Social Security and Medicare. If left unchanged, by 2041, Social Security will only be able to pay out 78% of benefits, unless the government begins paying back what it owes to the fund. In order for the program to be fully funded and paying out 100% of benefits, they estimate that they would need to increase the payroll tax rate from 12.4% to 14.1%.

Medicare is even worse. At the current rate, it’ll go bust by 2019, in eleven years! The cost to fix? Increase the payroll tax from 2.9% to 6.44%.

Source: CNN Money

Social Security has been a hot issue this Presidential Primary campaign and now that the field has been narrowed to two in either party (though John McCain has pretty much sewed up the Republican nomination), it makes sense to take a look at what the candidates’ positions are on Social Security. CNN has a recap of their positions and they are:

Democrats

Hillary Clinton: Opposes all efforts to privatize Social Security. Has stated her plan for Social Security is fiscal responsibility first, and then deal with any long-term challenges. Would support the creation of a bipartisan commission.
Barack Obama: Strongly opposed to privatizing Social Security. Believes that the first place to look for ways to strengthen Social Security is the payroll tax system. Currently, the Social Security payroll tax applies to only the first $97,500 a worker earns; Obama supports increasing the maximum amount of earnings covered by Social Security. Would work with Congress to choose a payroll tax reform package that will keep Social Security solvent for at least the next half century.

Republicans

Mike Huckabee: Would eliminate all federal income and payroll taxes, including Social Security. The program would be funded by the Fair Tax. Advocates the “personalization” of Social Security funds, allowing a person greater freedom over how to invest the money.
John McCain: When asked about Social Security during a GOP debate, he stated: “Every man, woman and child in America needs to know it’s going broke, and we’ve got to do the hard things. We’ve got to fix it for the future generations of Americans … It’s got to be bipartisan. And you have to go to the American people and say we won’t raise your taxes. We need personal savings accounts, but we [have] to fix this system.”

Commentary

Luckily both party’s candidates recognize that Social Security, in its current form, needs to be revised to remain a solvent entity. The Democrats are opposed to privatization but Hillary Clinton only speaks about creating a commission and thinking about it. Barack Obama has a much more clearly detailed plan, one that actually raises payroll taxes on wage earners and would be an actual concrete change that could help Social Security survive.

On the Republican side, Mike Huckabee’s adherence to the Fair Tax is admirable but leaves much to be desired in terms of actually fixing Social Security. Privatization may work but it’s something that requires additional analysis. John McCain, however, appears content to simply repeat the fact that the system is broken. While I respect John McCain’s history and acumen, I find his response to be lacking.

Of course this is all based on CNN’s interpretation and collection of the facts, I didn’t visit each candidates site to read more in depth as to their position on the issue. Given this cursory examination, I would trust Barack Obama to lead us to a point where we can honestly claim Social Security is “fixed.”

Here are ten random facts about Social Security that you may find interesting.

1. Social Security was enacted when President Franklin Delano Roosevelt signed the Social Security Act on August 14th, 1935.
2. Social Security benefits weren’t indexed to inflation until 1972.
3. Social Security actually has two parts: “Old Age and Survivors” program and the “Disability” program. Most people are familiar with the first program, the second “Disability” program wasn’t added until 1956.
4. There is actually a third part, “Supplemental Security Income.” That provides income to “aged, blind, and disabled people” without any consideration for prior work. The program is only administered by the Social Security Administration, its funding does not come from SS taxes.
5. The current Social Security tax rate is 12.4%. Employers cover half, employees cover the other half. For the self-employed, you get the fun of covering both halves!
6. The Social Security tax paid by employees has a threshold, above which you no longer pay Social Security tax. That threshold for 2008 is $102,000.
7. In 1935, that threshold was $3,000! (and it wasn’t indexed to inflation)
8. The threshold is indexed to the national average wage. In 1951, the threshold was 129% the national average wage. In 1998, it was 237%.
9. In order to qualify for benefits under the “Old Age and Survivors” program, you must work at least ten years and earn at least $3,120 each year.
10. In 2001, Social Security pays an average of $10,140 a year to those receiving old age benefits.

Last Friday, the Treasury Department announced that they were working with Comerica Bank to begin rolling out new debit cards linked to social security and other federal income benefit programs in an effort to save the taxpayers some money and reduce some of the headaches related to the issuance of paper checks. The cards, according to CNNMoney.com, would be Direct Express debit cards with FDIC insurance and be completely rolled out by the end of the summer. Part of the impetus for this move was that a lot of Social Security recipients don’t even have bank accounts and 90% of the SS payment problems were linked to this, so the issuance of paper checks was becoming cumbersome. This move would save an estimated $44M a year, which is significant savings in my book.

Source: CNN Money

When Should I Apply? Approximately three months before you want the benefits to begin, this allows the SSA time to file the paperwork and get things in order.

How Can I Apply? There are three ways:

1. Online: It’s easy to apply through the SSA website, or,
2. Telephone: 1-800-772-1213, they can take your application over the phone or,
3. In Person: You can go into an SSA office to fill out and submit your application. To schedule something, you can call 1-800-772-1213.

What Information Will You Need?

• your Social Security number
• your birth certificate
• your W-2 forms or self-employment tax return for last year
• your military discharge papers if you had military service
• your spouse’s birth certificate and Social Security number if he or she is applying for benefits;
• children’s birth certificates and Social Security numbers, if applying for children’s benefits;
• proof of U.S. citizenship or lawful alien status if you (or a spouse or child is applying for benefits) were not born in the U.S.; and
• the name of your bank and your account number so your benefits can be directly deposited into your account.

They will want a certified copy of your documents or the original, I recommend sending in certified copies because you don’t want to have your originals lost in the mail (especially documents like your birth certificate).

That’s it!

The full retirement age for social security depends on when you were born and will determine when you can begin collecting social security. If you were born in 1937 or earlier, your full retirement age is 65. If you were born 1960 or later, your full retirement age is 67. The Social Security Administration has provided this chart for figuring out when your full retirement age is (clicking on the year will take you to the SSA’s page for that age group, breaking down the rules even more clearly).

With Social Security, you can start taking benefits as early 62 if you’re willing to take a hit on your overall benefits. Depending on a number of factors, if you start taking Social Security payments at a reduced rate when you’re 62, your total benefit could be reduced by as much as 25%. To maximize your total Social Security benefit, you should wait until the full retirement age or later (if you’re willing to wait until 70 until you take the benefit, that’s when you’ll get the most).

The problem is that there are so many factors involved that telling someone to wait until 70 or start at 62 may not be the best idea. If you pass away before you benefits are paid out, your spouse still gets survivorship benefits so if you’re concerned about your life span, that’s no reason to start taking benefits early. (if you have a strong financial reason, as in loss of income or increase in expenses, that would be a reason to start taking benefits)

It helps to play with social security calculators (use these if you have your benefits paper), of which there are many but none of which are tied to your actual benefits.

If you earn a salary and want to collect benefits from social security, you have to pass the social security administration’s “earnings test.” While the earnings test looks like a penalty on those who collect a salary, it’s really not and I’ll explain why in a moment.

First, to calculate your “penalty,” you have to look at a few factors. Are you under the “full retirement age?” If so, then if you start receiving Social Security payments and earn income, your benefits will be reduced by half of what you earn over the annual limit. The 2008 annual limit is $13,560. If you earned $13,562, or $2 over the limit, then your Social Security payment will be decreased by $1.

In the year of your full retirement age, the “penalty” is 33% of what you earn over an even higher limit. That higher limit in 2008 is $36,120. When you reach full retirement, the reductions end and you are no longer “penalized.”

Why is it not a penalty? It’s not because when you reach full retirement, your benefits are recalculated and those reductions are added back into your balance. In reality, it’s really just delaying your benefits and not reducing them - which is better for you anyway.

Over 20% of every tax dollar paid by every American goes to paying out Social Security benefits to existing retirees. Twenty percent to existing retirees, not retirees that are going to retire in the future, just the ones collecting checks right now. Did you know that 6.2% of your salary goes towards Social Security and another 6.2% is paid by your employer? That’s only 12.4%, which means it looks like we have a shortfall of 6.6% each and every dollar for Social Security. Ouch.

I’m not complaining about what I have to pay or whatever, I’m just saying that the math doesn’t lie… Social Security is in trouble, right?

Source: Yahoo Finance

US News and World Report had a little piece where they discussed some good New Year’s resolutions related to retirement and I thought that I’d put each of them through their paces. The sixth retirement resolution was to review your Social Security statement.

Watch for your Social Security statement in the mail each year, says Salisbury. Be sure to review it for accuracy and contact the Social Security Administration with any corrections.

I don’t know if I’d spend too much time checking out your social security statement because there isn’t much you can do about it. It’s important to know what your benefits are come retirement, just so that when you’re planning you have all the pertinent information.

When should you receive your social security statement? Your social security statement is automatically sent to you three months before your birthday. If you were born in March, expect your social security statement in December. If you really want your statement, you can request for your statement.

Source: US News and World Report