Social Security: What You Need To Know

Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

As the weather tilts towards the cooler side, and snow, slush, and blowing winds are in your future, the idea of retirement to Florida, Arizona, or southern California may start to appeal to you. The mainstay of retirement for most of us will be our Social Security retirement benefits.

A Little History

Some type of economic security is seen in the ancient Greek civilization when people took care of themselves by storing olive oil, which was nutritious and could be stored for long periods. The social evolution continued and finally codified in English law with the Poor Law of 1601, which provided for taxation to fund relief activities, and distinguished between the ‘deserving’ and the ‘undeserving’ poor.

The Civil War left a lot of disabled and survivors, which Congress provided for in 1862 and later by giving a pension to soldiers, widows and orphans. One loophole allowed surviving widows to receive Civil War pensions, resulting in young women marrying older veterans to collect benefits, which were actually paid as late as 1999!

Without going into a lot of detail, there were calls for various programs from the late 1800s through the 1930s. One such call was from Governor Huey Long of Louisiana, who called for “the federal government to guarantee every family in the nation an annual income of $5,000, so they could have the necessities of life, including a home, a job, a radio and an automobile.” He also proposed “limiting private fortunes to $50 million, legacies to $5 million, and annual incomes to $1 million. Everyone over age 60 would receive an old-age pension.” Finally the beginnings of the current program were set into law on August 14, 1935.

How Benefits Are Calculated

The key is your Primary Insurance Amount. This is your benefit at your full retirement age. It is then adjusted depending upon when you start taking benefits (between ages 62 and 70).

It is based upon your earnings, called Average Indexed Monthly Earnings (AIME) as follows:

1. Select your highest 35 earnings years, (Highest annual amount being the maximum social security contribution limit (Link).
2. Adjust these earnings into today’s dollars,
3. Total, and,
4. Divide the total by 420 (35 years in months)

Your benefit is then computed by: (for an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2012, or who dies in 2012 before becoming eligible for benefits):

1. Ninety (90) percent of the first $767 of his/her average indexed monthly earnings, plus
2. Thirty-two (32) percent of his/her average indexed monthly earnings over $767 and through $4,624, plus
3. Fifteen (15) percent of his/her average indexed monthly earnings over $4,624.

Reviewing the above shows that lower-earning workers receive the greater proportion of their earnings than higher wage earners. The maximum monthly benefit a higher earner can receive for 2010 is $2,346.

The Social Security Administration use to send out annual statements with an analysis of your account, but discontinued this practice due to budget cuts. You can, however, estimate your retirement benefit using the Retirement Estimator here.

Common Issues

• Should I retire? If you are nearing retirement, consider the impact the additional social security wages would have on your benefits. Why? Because high earnings now will replace the very low earning of your overall 35 years of work, especially if you had zero earnings for any of those year.
• Should I collect at 62 or 70? Depends on several factors including how long do you expect to live (family history), do you need the money to live on (what do you have in savings, investments, retirement accounts), what rate of return would you earn if you invested the money, taxes. Delaying collecting benefits to age 70 is much like buying an inflation-adjusted lifetime annuity — and one with a high payout and unusually low credit risk.
• Do I have enough work history to retire? If you have worked for 10 or more years (on the books), you are probably eligible for retirement benefits. You need 40 quarters of employment, with minimum earnings per quarter (Link). There are exceptions. Federal employees hired before 1984 aren’t eligible to participate; clergy can opt-out; railroad workers receive benefits through a separate system.
• Will my spouse receive any benefits? Yes. Spousal benefits are based on the higher earnings of yours or theirs. This means that without working a day in their life, your spouse can collect 50 percent of your benefit once you start collecting.
• How does divorce affect benefits? If you were married at least 10 years, you can collect retirement benefits on your former spouse’s Social Security record if you are at least 62, if your former spouse is entitled to or receiving benefits, and you have been divorced for at least two years.
• Where is the Social Security money I have withheld from my paycheck? The government has it. Actually after current beneficiaries receive their benefits, bonds are purchased from the US Treasury with the surplus. Therefore, the Treasury has the money, but the Social Security trust fund has the Treasury’s IOU. The trust fund is now redeeming those bonds to pay benefits, and Congress has to find money to redeem those bonds.

Social Security has three major components, Retirement and Survivors Insurance, Disability Insurance, and Supplemental Security Income and, like the Income Tax code, is not a do-it-yourselfer. Discuss your situation with your tax preparer, and expect that other professionals (insurance advisor, stockbroker, and lawyer) will also be called in to help you make the right decisions.

Remember: A harp is a piano after taxes.

Have a good week.

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.