Global View Investment Blog

Social Security – A Major Financial Decision

Social Security is a common concern we are asked about at Global View, so here’s a brief breakdown. 

Social Security was passed into law in 1935, as a result of a financial hardship hitting the U.S. due to the Great Depression, people moving away from farming into cities, and decreasing family size. It was designed as a safety net and a base for supplementing a portion of income during retirement. However, more and more people have become dependent on the benefits to cover much of their retirement expenses. 

Currently, for people with lifetime average earnings, Social Security will replace only about 40 percent of their income. This leaves more of a dependence on savings or other sources of income than most plan. 

 

Summary and Sustainability 

Social Security was designed to be a “pay-as-you-go” program. When it started, there were 40 workers paying into it for every retiree taking out of it. Today, there are three to four workers for every retiree. 

Over the years, other family benefits were added, including spouses, dependents and survivor benefits. Later, disability benefits were added. 

Some are concerned about the sustainability of the Social Security program. It is not in the dire financial shape that some may believe. The government can use many tactics to increase its solvency issue. For example, the government can:

  • Increase maximum earnings taxed to Social Security (for 2020, $137,700)
  • Increase the Full Retirement Age (currently, for anyone born after 1960, it is 67)
  • Decrease the Primary Insurance Amount (calculated based on the last 35 years of earnings)
  • Increase the amount of Social Security benefits taxable (this depends on your other income while collecting benefits and if you are married or single)

With the addition of various benefits and the potential changes mentioned above, Social Security planning becomes more important. The last time changes took place, opportunities were created that were very beneficial. With these opportunities, the need for software to run these complex situations became a much-needed tool. Most Americans start taking Social Security at their earliest eligibility, permanently reducing future benefits. However, for most, the break-even point is 79 and the average life expectancy exceeds this. 

Before applying for Social Security, you should consult a trusted financial advisor or do a deep analysis to see what is in your best interest.

 

Have questions about your financial future? Contact Global View to see how we can help. 

 

The Basics 

How Do You Qualify? 

Once you have worked 40 quarters under a covered employer, you qualify for Social Security benefits.

  • Each year, an adjustment is made to the amount you must earn to receive a quarter credit. For 2020, the amount was $1,410. 
  • You can only earn four quarters a year. 
  • Your income is taxed by Social Security at 6.2 percent of earnings up to a “Maximum Taxable Earnings,” which, for 2020, is $137,700 p.a. (adjusted for inflation each year). The employer pays an additional 6.2 percent on your earnings. This is FICA tax.
  • Social Security will take the highest 35 years of income adjusted earnings before age 60 with a cost of living adjustment to get an average monthly earnings amount. Each year’s income is capped at the annual amount taxed, which is $137,700 for 2020. This will give you your Average Indexed Monthly Earnings, which is used to calculate your Primary Insurance Amount (PIA). This is the amount of Social Security benefits you will receive at your Full Retirement Age. This is what many call “getting their full retirement.”

After You Qualify for Social Security … 

You can start receiving benefits as early as age 62. 

  • If you take Social Security at age 62, you will receive a permanently reduced benefit.
  • If you wait until your Full Retirement Age, you will receive the full benefit. This depends on the year you were born and is between 65 and 67 at this time. 
  • If you wait longer, you can increase your benefit by 8 percent per year until age 70. 
  • Once you are 70, there is no benefit to waiting any longer. 

The One Chance to Change Your Benefit Option 

Once you sign up for Social Security, you can only cancel for the first 12 months and then you must pay back all benefits already paid out. 

Other benefits: Social Security will also provide family benefits based on certain circumstances as well as disability benefits.

Doing your research and analysis before applying for Social Security is prudent. The Global View staff is a great resource for this. 

 

The Complexities

Born Before 1954

If you were born before 1954, you can still qualify to file for a restricted application. This means that spouses can apply to take their spousal benefit once the other spouse files for his or her benefit. They can then delay their own benefit and let theirs grow. If filed early, the benefit will be reduced permanently. 

For example, if Mrs. Jones files for her benefits, Mr. Jones at that time can file for a spousal benefit, leaving his alone to grow. 

If you were born after 1954 and file for Social Security benefits, you file for all benefits you qualify for.

Single, Married and Divorced

If you are single and expect to live past age 79, it is almost always better to wait to take Social Security until your Full Retirement Age or even 70 to provide the highest benefit. If you are married, the higher earning spouse should wait, if possible, leaving a higher survivor benefit to the lower-earning spouse. Possible survivor benefit recipients could include:

  • Children at home and in school under 19
  • Spouses with children under 16
  • Disabled children who were disabled before 21

Married couples can take either their benefit or an amount of up to half of their spouse’s benefit, whichever is highest. If they are eligible for their spouse’s benefit, they will receive theirs and a spousal benefit up to the maximum. 

For example, if Mr. Jones’ benefit is $2,400, and Mrs. Jones’ benefit is $900 on her earnings record but $1,200 on her spouse’s, then she will receive the $900 on hers and $300 on her spouses. However, if Mrs. Jones’ benefit was $1,300 instead, she would only qualify for her own Social Security benefit. 

Divorcees can qualify for Social Security benefits off their ex-spousal earnings record if they were married for at least 10 years (this does not impact the ex-spouse’s benefit). If you are divorced for at least two years, you can claim benefits even if your ex-spouse is not/has not claimed their benefit yet. This is called “independently entitled.”

Reduced Social Security Benefit: WEP and GOP

Your Social Security benefit may be reduced. The Windfall Elimination Provision (WEP) comes into the picture when someone has worked for an employer that had no Social Security taxes withheld from their pay through that employer and is provided a “non-covered pension” for retirement. Most of these individuals worked for the government or as teachers. Someone in this situation will receive their pension and a reduced Social Security benefit. If they also have work that is covered by Social Security tax withholdings, the reduction will be less depending on how many quarters of earnings they had that were covered by Social Security. 

The Government Offset Provision (GOP) will reduce a spousal Social Security benefit as well if you have a non-covered pension just as your own Social Security benefit would reduce your spousal Social Security benefit. A spousal benefit would be reduced by two-thirds of the pension.

 

Expertise, Tools and Early Planning are Essential

There are a lot of factors that will affect Social Security benefits: Being single, married or divorced; having kids at home; being born before 1954. If you plan to retire before your Full Retirement Age, it could save you thousands to delay taking benefits and supplement your income with other savings or income from a part-time job. This could avoid a permanent reduction of Social Security Income. 

Everyone should run an analysis and look closely at their situation before starting their benefits. One should start Social Security planning about five years from retirement. 

Decisions on when and how to take Social Security benefits will permanently impact you and your spouse for the remainder of your lives. There are financial professionals, like those at Global View, who are willing to help answer any questions you may have and run an analysis to help you make the right decision. Global View’s team includes two Registered Social Security Analysts. 

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Amanda Baize

Written by Amanda Baize

Amanda Baize is a Paraplanner with Global View. As an accountant, she provides in-house support for clients and develops tax strategies with our advisors. She also assists with financial planning, portfolio accounting, performance monitoring, and client reviews.

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