The U.S. government created an insurance program in 1935 to help older people avoid living in poverty. Today, that program has expanded to help the disabled and survivors of loved ones who have died. You probably realize I am talking about Social Security, but do you understand all there is to know about this program? There is a lot of money at stake! Let's take a look at this very large insurance program.
The Social Security tax (FICA that also includes Medicare) is 6.2% for the employee (you pay an extra 1.45% for Medicare). Your employer pays the same amount on your behalf. If you are self-employed, you pay the entire amount and get a tax credit for half of it. You pay that on every dollar you make (FSA and HSA avoid paying it) up to $147,000 in 2022, then the Social Security tax goes away. The Medicare tax stays.
What does that tax get you? A great deal actually, to include inflation adjustments (8.7% for 2023). The benefits include: retirement, disability, spousal, divorced, widow, child, disabled child, divorced widow, parent, grandchild, and death. There are rules attached to each benefit identifying when you qualify and when you don't. No matter how many benefits you have, you can only take one at a time. Timing is important!
Step 1 is to identify what benefits apply to you now. Step 2 is identifying what benefits might apply to you in the future. It is key to better understand the system and the many benefits so you are prepared to file when the time is right. Social Security will not do it for you in most cases. Benefits wait on you to file for them. Oh, and be careful speaking to Social Security employees. They make mistakes; many mistakes!
Where is the best place to learn about Social Security? Socialsecurity.govis a fine place to do your research and Get What's Yours by Lawrence Kotlikoff is a good book that has many of the details. Where should you probably avoid? Friends and family tend to be misinformed. The worker down at the local Social Security office usually has minimal understanding of the program. The internet is hit and miss. Be careful!
You want a Social Security strategy when applying for benefits when you have two or more. You might pull one for a period of time and then drop it and pull another, allowing that second one to grow over time. Patience and knowledge is key. You want to lock in the biggest benefit for your remaining days and that might mean locking in the survivor benefit at FRA or the retirement benefit at 70.
You want to understand the earnings test in 2022 as it relates to receiving a benefit before full retirement age ($19,560), at FRA ($51,960), and after FRA (none). If your earned income goes over the earnings test, some or all of that benefit will be taken away and put back in your FRA benefit. These earnings tests apply to ALL Social Security benefits so get yourself a plan if you are younger than FRA.
Taxes come into play on Social Security benefits based on provisional income coming in to supplement your monthly Social Security benefit(s). If all you are receiving is Social Security, then taxes at the federal level will not apply. But, if you have that other income, then get ready to pay some tax to Uncle Sam. Each state decides for themselves on whether they tax Social Security. See a chart on your state here.
Is Social Security going to run out of money? No, the U.S. government will fill in the holes if the program runs short and then politicians will "fix" the system at the bloody last minute as usual. DO NOT let people scare you into pulling a benefit early because you may not get it. That response to fear mongering will not serve you or your spouse well over time. Take emotions out of the decision making process.
Is Social Security going to change? Yes, it will. It has changed plenty since 1935 and it will continue to change over time. Future workers will probably see higher taxes and FRA will probably get extended beyond 67 as we as a society continue to get older. Other taxes will probably go up either with the earned income limit or elsewhere that ends up funding this program. People under age 55 should expect changes.
Social Security is a great longevity insurance program. It protects you in case you live a very long time. Waiting until age 70 is a no-brainer for the majority of Americans (that does not mean you work until that age, it just means you access other money prior to filing at 70). It is imperative that you think long term when making these really BIG Social Security decisions. Reject retroactive benefits when you do!
You can suspend your benefit at or after FRA. Why? You either don't need it for your living expenses now or you have other money you could use in the bank or an IRA. Suspending the benefit allows it to grow at 8% a year until age 70 and then you kick it back in gear at a much higher amount for the rest of your life. This strategy is worth considering as you prepare for the possibility of living a long time.
Think about the spouse. One very simple strategy lies with the person with the biggest benefit waiting until age 70 to lock in the biggest benefit for you or the spouse if they outlive you. The person with the lower benefit might wait until 70 or they might take it earlier to bring in some fixed income in retirement. Which is the best option? That is a tough one, based on many variables. Think long and hard on it.
Let's discuss those survivor benefits for a spouse and children in the home if a parent were to pass. This is basically a life insurance policy that could be worth $400,000 or more paid out over time with benefits going to children and a surviving spouse. Make sure your loved ones who have kids in the home know this. Go to Socialsecurity.gov to open an account and identify their benefits.
Let's wrap this up. It is very important to identify all benefits that are due you under the Social Security program. NO ONE is going to call you and tell you about them. It is up to YOU to educate yourself so you and your loved ones get the benefits that you have paid for over time with the FICA tax that came out of each and every paycheck. It's up to YOU to take control of YOUR Social Security benefits!
