Sorting Through the Noise on Social Security

By Erin Wood

It’s ironic: We live in the Information Age, where any information we could ever want is available to us within seconds, but due to the overwhelming wealth of info and sources – not to mention neck-break speed of the instant news cycle – it feels hard to know what’s really going on. From government changes to celebrity romances, the landscape changes every time you put your foot down.

Social Security is no different. Everybody seems to have an opinion on it, from the alarmist to the laissez-faire, and it can be hard to discern between well-worn rumors and real advice that could save you thousands.

Let’s look at a few facts and rumors about Social Security, and try to sort between what you need to actually be concerned about right now and what you should simply be aware of as a Social Security participant.

What You Should be Concerned About

When FDR signed Social Security into existence in 1935, life expectancy was around 61, today it is closer to 80. Public health and medical services have changed dramatically, which brings huge changes in longevity and transforms the retirement discussion fundamentally. Your 65th birthday was always the time to trade your briefcase for golf clubs or a hammock, but that’s not necessarily the case anymore.

Full Retirement Age

Full Retirement Age (FRA) is actually 66 right now and will be 67 in the very near future. At the moment, you can still take early retirement benefits at 62, but you can also delay benefits until age 70. The difference there is huge, however, especially when you look at it over time. Your benefits at age 70 could be up to 32% higher than if your took retirement at FRA. If you take early retirement at 62, your benefits are reduced by 30%.

It’s a matter of paper-and-pencil math. For example, you took a FRA retirement benefit of $1,000 per month and added 32%, you come to $1,320 per month. Now, look at that year over year if you lived to age 95. Over that time, that’s nearly $50,000 more you’d receive in benefits. Month over month and year over year, that little extra bump in your check adds up quickly.

The questions then get a little personal. Does longevity run in your family? What is your personal health like? Do you like your job? Do you have a job you can physically do until age 70? We never know what the future will bring, and the conversation is more complex than simply dollars and cents.

A Taxing Reality

Even though you may not expect much in your monthly envelope, at least your Social Security money is yours free and clear, right? Unfortunately, this isn’t the case and taxes can be incurred, even though Social Security is essentially made of taxes.

Here are the breaks:

Single
- Combined income between $25,000 and $34,000 – 50% benefits taxed
- Combined income over $34,000 – up to 85% of benefits taxed
Married (filing jointly)
- Combined income between $32,000 and $44,000 – 50% benefits taxed
- Combined income over $44,000 – up to 85% of benefits taxed

Your benefits are taxed based on your combined income, meaning your total taxable income including 401(k), etc. No more than 85% of your benefits can be taxed, but still, that adds up, especially year-over-year. Strategizing with an advisor can help reduce the tax bite, but this question is complex and shouldn’t be pursued on your own.

What You Should be Aware Of

After looking at immediate personal concerns, let’s take a step back to look at the national state of facts and rumors around Social Security. What are the larger questions and movements of this financial institution that will shape its future?

(Not Really) Going for Broke

One of the alarmist cliches out there is that Social Security is running out of money. Take it now, or there won’t be any left! The year 1984 was supposed to be the absolute end of Social Security, and the doom’s date has been changing ever since.

No, Social Security is not going broke. Revenue is still coming in and rolling over in the system – however, the population density has gone up and people are living longer. Without reform, Social Security’s trust fund will be depleted by 2035. Even then though, your benefits will be reduced, not eradicated.

At worst, we could be looking at Social Security benefits being paid at 79% of what they are today. Now, that takes some planning and it’s good to be aware of, but it’s no reason to start stuffing money under a mattress and/or losing sleep. Plan accordingly, with the guidance of trusted advisors, and you can be prepared for this kind of change.

A Permanent Fixture

Another thing to be aware of is how much Social Security is a fixture in our country’s financial culture. The check may not seem like much to some of us, but a large part of our population depends on it.

Right now, 63 million people take Social Security benefits in the US. That’s one in every six citizens that draw on the fund. This is not an issue for lower, middle or upper classes, but all of them. Those who have paid into the system want to be able – naturally – to withdraw the benefit, and so it affects everyone.

Another reality is those who not only draw on Social Security but really depend on it. Without the program in place, over 39% of elderly Americans would live below the poverty line. That’s millions of people in desperate circumstances, which would result in a (very expensive) humanitarian crisis.

Social Security, for better or worse, is still a cornerstone of the edifice of American retirement. Fortunately, it’s still a fairly solid one, although it can’t be taken as a given.