Social Security Basics
• The most frequently asked question at the Social Security Administration
• The most frequently asked question about Social Security in financial advisers' offices
• Coolest strategies you've never heard of for claiming benefits
• Best calculators and sources of information
• Biggest myth -- and most misused words
• Best source of information on how to fix Social Security
• Most arcane, but important, debating points
• Biggest misunderstanding
• Biggest surprises
• Best day of the year to visit a Social Security office
The toughest questions. The best calculators. The coolest strategies. And a lot more.
Starting in January, the first of an estimated 78 million baby boomers turn 62 years old and become eligible for Social Security.
Time to reach for the aspirin.
Now in its eighth decade, Social Security is arguably more important -- and certainly more complicated -- than ever before. Boomers, for the most part, are on their own when it comes to planning for later life; pensions and related safety nets are disappearing from the workplace. Thus, Social Security checks -- the closest thing to a sure bet in most retirement budgets -- are expected to play an ever-larger role in older Americans' financial security.
The process of getting that check, however, is sure to cause headaches for boomers and bureaucrats alike. The Social Security Administration's 1,300 offices nationwide already see 850,000 visitors each week and field about 68 million telephone calls a year. Would-be retirees, meanwhile, are about to discover that many factors -- taxes, a spouse's earnings history, life spans -- can muddy decisions about how and when to file for benefits.
You can, of course, keep things simple and take the plunge on your 62nd birthday. (About half of workers do.) Even if that's your plan, you owe it to yourself -- and your spouse -- to learn about Social Security and how to get the most out of the system.
"Don't let Social Security just 'happen,' " says Joseph Matthews, a lawyer in San Francisco and author of a guide to the program. "There really are a number of variables that people should consider before they start."
The basics are available from the Social Security Administration. (More about that in a moment.) But to supplement your education, consider the following -- some of the most interesting, obscure, misunderstood and surprising parts of the 72-year-old program:
The most frequently asked question at the Social Security Administration
"How much can I earn and still receive Social Security benefits?" Based on a survey of visits to the agency's Web site, more people -- 315,847 in the first six months of this year -- wanted the answer to that question than any other.
The question refers to the agency's "earnings test" and the apparent penalty for collecting a salary and Social Security at the same time. It works this way: If you are under your "full retirement age" (the age at which you qualify for full benefits) when you first receive Social Security payments, and if you have earned income, $1 in benefits will be deducted for each $2 you earn above the annual limit. In 2008, the limit is $13,560.
In the year you reach your full retirement age, the "penalty" shrinks: $1 in benefits is deducted for each $3 you earn above a higher limit, $36,120 in 2008. Then, starting with the month you reach your full retirement age, the deductions end.
What most people don't realize, says Andrew Biggs, deputy commissioner for Social Security, is that once they reach full retirement age, the agency recalculates their future benefits to compensate for any benefits lost due to the earnings test. For most people, Mr. Biggs adds, "the earnings test isn't a 'tax' so much as a delay in benefits, and so they shouldn't stop working or limit their earnings in order to avoid it."
The most frequently asked question about Social Security in financial advisers' offices
"When should I file for benefits?" Invariably, that's the question planners hear first.
When it comes to the answer, the conventional wisdom is changing. Where many advisers once recommended grabbing benefits at age 62 (at which point your monthly check is reduced permanently by as much as 25%), experts today say extended life spans and the demise of traditional pensions argue for waiting until your full retirement age, or later, to collect a paycheck. (You get your largest possible benefit at 70.)
Even "foolproof" strategies are no longer looked upon as foolproof. "Let's say your doctor tells you that you have six months to live," says Bruce Schobel, a New York actuary who worked in the Social Security Administration in the 1980s. "So, it's obvious: You take benefits at 62, right?" Maybe not. Because of Social Security rules involving spousal benefits, Mr. Schobel says, "taking a reduced benefit at 62 could serve as a cap on the surviving spouse's payout, reducing that person's future benefits by tens of thousands of dollars."
"So even an apparently simple decision becomes complicated," he says.
Calculators, of course, can help. (We discuss some of the better ones below.) But first, take a few minutes to read a new report: "Rethinking Social Security Claiming in a 401(k) World," written by James Mahaney and Peter Carlson, retirement specialists at Prudential Financial Inc. It's the best discussion we've seen about filing for benefits and possible strategies for doing so. (Note to the give-me-my-money-at-62 crowd: The authors conclude that changes in Social Security in recent years "make the value of delaying the receipt of...benefits greater than in the past.")
The report, published in August, can be found at the Pension Research Council, part of the Wharton School at the University of Pennsylvania. (Go to pensionresearchcouncil.org and click on "Working Papers" and 2007. Registration is free.)
Coolest strategies you've never heard of for claiming benefits
One way many couples can maximize Social Security benefits over their lifetimes is for wives to claim benefits at age 62, and for husbands to delay filing until almost 70, says Alicia Munnell, director of the Center for Retirement Research at Boston College. (That's based on a number of factors, including income levels, life spans and survivor benefits.) You can find Dr. Munnell's research in the June issue of the Journal of Financial Planning. (See fpanet.org/journal and click on "Past Issues and Articles.")
Of course, 70 is a long time to wait for Social Security. So, here's a way -- courtesy of Steve Potter, a retired public-affairs specialist at Social Security -- to avoid the wait and still get a sizable benefit at age 70.
The scenario: George, at his full retirement age of 66, expects a benefit of $2,000 a month. His wife, Martha, at her full retirement age of 66, expects a benefit of $1,000 a month.
The strategy: Martha files for a reduced benefit on her own at age 63, or $800 a month. George, at age 66, files for just a spousal benefit, based on Martha's earnings. He would get $500 a month as Martha's spouse. (Yes, Social Security allows George to get half of what Martha was projected to receive at her full retirement age.) Then, at age 70, George applies for benefits based on his earnings history. With the "delayed retirement credit" (the additional dollars one receives for waiting until age 70 to claim Social Security), George's benefit would be 32% higher, or $2,640 a month.
Social Security would stop George's spousal benefit of $500 a month because he's entitled to the $2,640, based on his own earnings, at age 70. Again, for this to work, George must wait until his full retirement age or later to file for a spousal benefit.
The nice part about this strategy is that George -- if he's trying to maximize his and Martha's combined benefits -- doesn't have to wait three or four years beyond his full retirement age for a paycheck; he can start collecting benefits at 66 based on Martha's earnings history -- and jump to a considerably bigger benefit at age 70. As far as the "break-even" point goes -- the age at which the accumulated value of benefits from this strategy will start to exceed the accumulated value from both spouses filing for full benefits at age 66 -- it's 79. Beyond that age, the 63-66 strategy yields a larger total return. (This example assumes George and Martha are the same age.)
Note: Some Social Security representatives we spoke with weren't aware of this strategy. If you try this at your local Social Security office -- and if the staff balks -- ask them to confirm the strategy with Social Security headquarters in Baltimore, which confirmed it for us.
Best calculators and sources of information
Start with the Social Security Administration and its Web site, ssa.gov.
The calculators alone are worth the visit. Three benefits calculators -- "Quick," "Online" and "Detailed" -- estimate payouts using different retirement dates and levels of future earnings. (Click on "Calculate your benefits" on the home page.)
In addition, an "Earnings Limit" calculator illustrates how a salary -- if you file for benefits before full retirement age and are still working -- might affect your monthly check from Uncle Sam. A "Retirement Age" calculator shows how retiring early reduces your monthly payout (as a wage earner or spouse). And a "Break-Even" calculator shows the age at which the accumulated value of higher benefits -- for a person who claims Social Security, say, at age 66 -- will start to exceed the accumulated value of lower benefits for a person who opts for Social Security, say, at age 62.
The site also provides extensive lists of frequently asked questions in 24 categories; offers access to dozens of forms and publications; and, perhaps most important, allows you to perform a number of tasks online -- including filing for benefits (and, thus, avoiding a trip to the Social Security office). In all, a very valuable tool.
Another useful resource is analyzenow.com, a Web site devoted to retirement issues. Started by Henry K. "Bud" Hebeler, a retired aerospace executive and author of two books about retirement planning, analyzenow features a number of helpful articles about Social Security and two calculators that can help users determine the best age to file for benefits.
Two other online resources: The National Committee to Protect Social Security and Medicare, a Washington advocacy group, has a spot on its Web site called "Ask Mary Jane" (www.ncpssm.org/maryjane). There, you can email a question to Mary Jane Yarrington, a congressional caseworker who joined the group in 1986 as a senior policy analyst. (Before you write, check the archives for earlier questions and answers.)
Second, Stanley A. Tomkiel III, a New York lawyer, is the author of the "Social Security Benefits Handbook" -- the contents of which are available free at socialsecuritybenefitshandbook.com.
Finally, if you prefer print, Mr. Matthews, the San Francisco lawyer, is co-author of "Social Security, Medicare and Government Pensions," one of the best general guides to the program.
Biggest myth -- and most misused words
The biggest myth is that Social Security will go "broke" or "bankrupt" in coming decades.
The Social Security Administration, in its annual report to Congress this year, identified three important dates regarding the health of the program. First, starting in 2017, the agency will begin paying out more in benefits than it collects in revenue. Second, in 2027, Social Security will have to tap the principal in its "trust fund" (its savings account, if you will) to meet its monthly obligations. (The trust fund itself is a flash point in debates about the health of the program. Some observers, including President Bush, say the fund, which lends excess revenue to the federal government and receives special-issue bonds in exchange, is simply a box full of IOUs. But it's a safe bet that when Social Security needs to draw on the trust fund, future Congresses and presidents will make sure the Treasury doesn't default on those bonds.)
Finally, in 2041, the trust fund will be exhausted, at which point the agency will be able to pay only about 75% of promised benefits.
It's certainly not a pretty picture. But at no point will Social Security collapse. Uncle Sam, it's safe to assume, will continue to collect taxes in 2041 and beyond. Part of that revenue will go to Social Security, which will continue to write checks. Again, starting in 2041 (as things stand now) beneficiaries will wind up with payouts worth 25% less than current rules call for. And that's grim.
But broke? Bankrupt? No.
Best source of information on how to fix Social Security
Earlier this year, the Center for Retirement Research at Boston College published "The Social Security Fix-It Book." The cover of the 52-page booklet describes it as "everything the earnest but over-burdened citizen needs to know. Cheerfully narrated and handsomely presented."
That quirky beginning belies what follows: the single best guide we've seen that explains why Social Security is in the mess it's in -- and the leading proposals for restoring it to health. You can download a copy free at crr.bc.edu. Keep it handy when presidential candidates hold forth on their plans to fix Social Security.
Most arcane, but important, debating points
Speaking of presidential politics, the following issues could well figure in the fine print of any "solutions" involving Social Security. Depending on a candidate's stance on these issues, his or her particular solution could end up sounding very painful -- or just painful. Try dropping these nuggets into the conversation at your next dinner party:
Time Horizons: Some policy makers argue that we should look ahead 75 years when estimating the shortfall in Social Security's finances -- in which case, about $4.7 trillion is needed to close the gap. Others argue for adopting an "infinite horizon" -- in which case about $13.6 trillion is needed. (A trillion here, a trillion there...)
Changing Work Force: Some evidence suggests that older workers are remaining in, or rejoining, the work force in greater numbers. If so, and if the trend continues, it could ease (somewhat) the coming strains on Social Security. But there's no telling what baby boomers actually will do in retirement.
Buying Power: Annual cost-of-living adjustments in Social Security are based on the CPI-W, the consumer price index for urban wage earners and clerical workers. But groups including the Senior Citizens League argue that adjustments should be tied to CPI-E, an experimental index for the elderly started in the 1980s. This index tracks expenditures among individuals age 62 and older and better reflects (theoretically) this group's higher spending on health care and other goods and services.
Biggest misunderstanding
The biggest misunderstanding is that your particular tax dollars are being set aside for you at Social Security.
Social Security is not, and never has been, a savings account. " 'Your' money is not in 'your' account," says Dennis Oliver, a retired Social Security Administration manager who now works as a Social Security consultant in Cookeville, Tenn. Rather, Social Security is largely a pay-as-you-go system, in which your tax dollars are used to pay current benefits. (Since the mid-1980s, Social Security has been running annual surpluses that have gone into the trust fund.)
Consider Ida May Fuller, who received the very first monthly Social Security check in January 1940. She was 65 at the time. Ms. Fuller worked for three years under Social Security before retiring, and the taxes on her salary totaled $22.54. By the time she died in 1975 at age 100, she had collected $22,888.92 in Social Security benefits.
Biggest surprises
In 1983, Congress raised the age at which people qualify for full Social Security benefits. Once pegged to age 65, the threshold is increasing gradually until it hits 67 for workers born in or after 1960.
The problem: According to a survey earlier this year by the Employee Benefit Research Institute, 30% of all workers think -- incorrectly -- that they will be eligible for unreduced benefits at age 65. Worse, 21% think they will be eligible for unreduced benefits before age 65.
Separately, for all the discussion about claiming benefits at age 62 or at full retirement age, the decision isn't an either-or proposition. You can take benefits at any point -- any day, month or year -- after 62. The longer you wait, of course, the smaller the reduction in your benefits.
If your full retirement age is 66, and if you file for benefits at 62, your monthly check will be reduced about 25% from your full benefit; file at 63, the reduction is about 20%; file at 64, the reduction is about 13.3%; file at 65, and the reduction is about 6.7%.
Best day of the year to visit a Social Security office
The Friday after Thanksgiving. Yes, the agency's local offices are open on that day -- and are usually very quiet.
Mr. Ruffenach (encore@wsj.com) is a reporter and editor for The Wall Street Journal in Atlanta and the editor of Encore.
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