When it comes to the Social Security system, the only absolute facts are that changes must be made to keep it solvent. With the arrival of retirement age for the baby boom generation, the system will have two workers for every retiree by 2030; currently there are 3.2 workers per retiree paying into the system. With the well running dry, there are many ideas about how to fix the problem, and everyone has a strong opinion. There are three basic schools of thought, though with many variations as to how to accomplish each goal.

Raising Taxes

A highly unpopular option with cash-strapped Americans, raising taxes would fill the coffers. Discussions about raising taxes usually center on which taxes can be raised, and for which segment of the population. Raising payroll taxes is the worst case scenario, and instead deliberations have centered on eliminating loopholes in the tax code for wealthy Americans, and the possibility of reinstating estate taxes while earmarking the money for Social Security.
There is an additional element to these negotiations. Though hotly debated around the country, some point out that legalizing immigration could give the government the needed taxes to ‘right the ship’, and that we have plenty of workers to pay into the system if all of the undocumented workers are counted.

Reduce Spending

Other models have been suggested with reduced spending of the Social Security money. An absolute distinction between retirement money and other government money is essential, since surpluses from the system have often been usurped for other government needs.
Ways to reduce spending are certainly not fashionable either, because they usually are centered on lowering already low benefits or raising the age at which benefits can be collected.

Privatize

The third option is to privatize part or all of the system and allow each person to direct investments in stocks, bonds, and mutual funds for increased return on investment of their funds. This would enable future retirees to control the structure of their income and build a nest egg that they could use as they see fit.
Careful planning would be required to implement privatization, as there are a number of problems to consider. A few major considerations are current retirees or those near retirement age, and widows or children who depend on survivor’s benefits to live.

Every year in mid-September, the Bureau of Labor Statistics releases inflation data for the last year and tax mavens get to calculating how much all the various tax numbers will move. It turns out inflation was a mere 0.19%, meaning most of the figures won’t change at all.

For referential purposes, the 2010 IRS Tax Brackets will remain unchanged:

2010 IRS Tax Brackets

Here are the projected federal income tax brackets for 2010:

This also means that every other number pegged to inflation will probably remain unchanged, such as the COLA for Social Security, as reported earlier.

Earlier this week Treasury Secretary Timothy Geithner revealed that the Social Security trust fund might be exhausted as early as 2037, which is four years earlier than the estimate last year! The main reason for this adjustment comes from the rising unemployment rate, which affects how much is being paid into the trust fund, tax breaks in the stimulus package, and an increase in demand for benefits. By definition, the Social Security trust fund is exhausted when they can only pay 76% of benefits.

It’s not all that surprising when you consider that since January 1, 2008, approximately 5.7 million jobs have disappeared and another 4.3 million jobs are now part-time. That’s going to hit the Social Security collections pretty hard.

Medicare is worse off than Social Security and it’s forecast to be exhausted by 2017, two years earlier than was estimated last year. For Medicare, exhaustion means they can only pay out 81% of costs. The cause is again rising unemployment, since it’s funded from payroll deductions, and what’s especially shocking is that it has paid out more than it collected starting last year.

Experts say the only way to fix it is for broader healthcare reform…

Recession hits Social Security hard [CNNMoney.com]

If you’re retired or getting close to retirement, the stimulus package recently signed into law has a few perks in it that could benefit you a little bit. While much of the focus and discussion was on the infrastructure spending, there’s quite a few provisions in there for folks in or nearing retirement. It’s not as sexy to write about in mainstream media, it’s perfectly suited for all you loyal My Retirement Blog readers.

Social Security – $250 Tax Free

If you’re on Social Security right now, you will get a $250 tax-free payment from the government regardless of your income. If you’re a retired government worker who doesn’t get Social Security, you’ll get a refundable $250 tax credit, which is as good as $250 in your pocket. If you and your spouse are both collecting, you’ll each get $250. Not bad right?

Make Work Pay Credit

If you are working, even part-time, you may be eligible for a $400 tax credit ($800 for married couples filing jointly) for ’09 and ’10. The credit phases out if your income exceeds $75,000 ($100k if married) and is gone if your income exceeds $100k ($200k for married). Another gotcha is that you have to deduct the Social Security benefit if you get it, so if you get the $250, then you’re only eligible for $150.

There are other provisions in there that might affect you but these two are the most direct.

I recently received an email that contained some personal finance advice from two individuals I’ve always held in high regard – Scott Burns and Laurence Kotlikoff. Burns is a syndicated personal finance columnist, chief investment strategist for AssetBuilder, and originator of the couch potato lazy portfolio. Kotlikoff is a professor of economics at Boston University and the two teamed up to write The Coming Generational Storm, a book that doesn’t paint a rosy picture about retirement in the future America. They’re teaming up again to write a new book, Spend ‘Til the End — The Revolutionary Guide to Raising Your Living Standard Today and When You Retire, and offered up these two tips for retirees:

1. A tip for retirees: Buy TIPs.

For households who are retired or close to it and relying on the stock market to finance their retirements, moving their funds to inflation-protected long-term Treasury bonds (TIPs), makes good sense. So does using their regular financial assets to pay off their mortgages. There is no guarantee the stock market will rebound any time soon. And it could get worse before it gets better.

2. Another tip for retirees: See if Uncle Sam will give you a better deal on Social Security.

Retired or soon-to-be retired households should also ensure they are getting the best possible deal from Social Security. This includes considering repaying the Social Security benefits received in the past and reapplying for higher benefits. It also includes deciding when to take Social Security, integrating that decision with the timing of retirement account withdrawals, and deciding which account to tap first. Most important of all is determining how much one can safely spend. Spend ‘Til the End focuses on making sure households have enough funds to maintain their living standard all the way to the end — to their maximum ages of life. It also has a strong message for retirees who invest aggressively, namely spend defensively.

An important question you should ask yourself, as a couple nears retirement, is whether they should stagger retirement. It’s a topic that is worth exploring with your loved ones because there are many financial and relationship issues that accompany retirement and those can be, in part, alleviated if you opt to stagger your retirements. An article on TheStreet.com outlines some of the financial considerations but there are also relationship ones to consider as well.

Retirement Contributions

By keeping one spouse at work, he or she can continue to contribute towards IRA and 401(k) programs. Every extra year of contributions will help ensure a solvent and fruitful retirement because it’s adding more into the retirement nest egg. Plus, the one income acts as a source of money so that the retired spouse can turn to that, rather than his or her accounts, for funding – thus increasing the longevity of their retirement nest eggs as well.

Healthcare

One of the biggest costs of retirement is medical and health insurance. With one spouse working, you can have a company help alleviate that cost (or more depending on the generosity of the company), which can help the bottom line. By waiting, you can have one spouse retire before 65, when Medicare kicks in, and then have both retire once they reach that age limit.

Social Security

You can begin taking Social Security as early as 62 but to maximize your total gain from the program, you have to wait until “full retirement age,” which can be four years later. By keeping one income, you can put off taking SS payments and maximize your total payout.

Relationship

One of the biggest complaints about both couples retiring is that they now find themselves spending nearly every waking moment together. It can be difficult on a relationship to spend that much time together. By staggering, one spouse gets to try out retirement, find a rhythm and some hobbies, such that both aren’t sitting there watching TV and not knowing what to do. When one discovers a routine, the other can join or discover their own routine. There isn’t a case of two people not knowing what to do other than they have to do it together.

The Social Security Administration recently released a report on an investigation into the practice of banks garnishing Social Security and disability payments for third party creditors, a practice that is illegal. It was discovered that approximately $171.4 million was garnished from accounts receiving direct deposits of SS benefits and other direct deposits and an additional $6.3 million was garnished from accounts that contained only Social Security payments. In addition to the garnishments, they found that in some cases the banks would freeze accounts and charge penalty fees after the freezes. Those fees totaled just over $1 million between September 2006 and September 2007!

Unfortunately, consumers can do little except wait for relief from lawmakers. Some states already have laws in place that protect SS recipient accounts. In New York, the governor is expected to sign a bill that would protect the first $2,500 of a depositor’s money from being frozen if they are getting SS direct deposits, a law that is similar to those in place in California and Connecticut.

Banks Continue to Prey on Social Security Recipients [Yahoo! Finance]

A week wouldn’t be complete without a nice myth busting post like the one put out by Rich White and Investopedia today. This week, it’s the top six myths about Social Security Benefits and some of these aren’t even myths I believe but here are the ones I think are worth noting.

Myth #1: Take Payments ASAP

The idea behind this myth is that the earlier you take it the better, because you can invest the money as it comes out. The flip side is the fact that you get less by virtue of taking it sooner. The fact of the matter is that each person is different so you have assess your situation before making any decisions.

Myth #3: Working Reduces Your Benefits

This is in part true because your Social Security benefit is reduced by 50% of your earned income above $13,560. If you earn $2 over, then your benefit is reduced by $1. As it turns out, your Social Security benefit isn’t reduced permanently… it’s just deferred until after your full retirement age.

Top 6 Myths About Social Security Benefits [Yahoo! Finance]

You can start receiving Social Security payments as soon as you turn 62 but you pay a penalty for taking payment so early. If you wait until full retirement age, which varies with the year of your birth, you maximize the total amount you can get from the Social Security program. If you begin taking it at 62, your benefit could be as low as 25% less than if you waited until full retirement age.

If you started taking payments early, before your full retirement age, there’s a way to reset the clock. It’s called the Social Security redo and the subject of a segment on Marketplace Money last Friday. Essentially all you do is repay all the money you’ve received so far and the clock will be reset.

Not bad!

Last friday, Democratic Presidential hopeful Barack Obama announced that he would try to apply the Social Security payroll tax to include incomes above $250,000; in addition to the current payroll tax which collects 6.2% from earnings to to $102,000 a year. It would create a “doughnut hole,” that is an area of no additional tax between $102k and $250k (though he did no elaborate on what income would be subject to this tax), in the amount of income subject to the tax. This was his plan to extend the solvency of Social Security without increasing the retirement age or reducing benefits.

Obama: Payroll tax on salaries above $250,000 [Associated Press via Breitbart]