Sunday, October 3, 2010

A Few Social Security Tips, Just for Fun

Not that you are old enough to qualify for Social Security, but let’s talk about it anyway. Don’t believe you have understood everything you pick up from idle chatter or even from various official and unofficial websites. When it’s nearing time to file for Social Security, go in and talk to a human. Otherwise, you may misinterpret what you are entitled to, and then be disappointed at how little your monthly payment is. I know somebody who thought that if claiming benefits was delayed a few months, the payments could rise 8% a month. Not so. We have many false ideas about Social Security. It pays to do some investigating.

Of course there will be Social Security when you retire. Who would dare to vote it down? As people often say, Social Security is the third rail of American politics; messing with it is the easiest way to commit political suicide. Millions of people have looked forward all their lives to receiving it. They do not intend to be disappointed. I include myself. Sure, people bring it up as something to be tinkered with. There even are a few diehards who still talk about putting it all in the stock market, despite the stock market’s recent dramatic dips. Right. Ain’t gonna happen.

On the other hand, Social Security payments are not a lot of money. The average woman gets just $11,000 a year, which is less than $1,000 a month. Try paying for all your living expenses on that, and footing some medical costs, too. Cat food will start looking more likely as a grocery item. The average man can expect higher payments, nearer $14,000 a year. Still not a princely sum.

If you want your Social Security checks to be larger, what can you do about it right now regardless of your age? Earn more money. Social Security is indexed to your lifetime earnings. It also is essential to earn for 35 years, because if you don’t, any zero-earning years will be averaged in. Ouch. That will lower benefits substantially. To overcome a history of some zero-earning years---very likely for women who take time out to raise children or care for elderly parents, or for the few men who do the same---consider taking part-time jobs or not claiming business expenses against income if you run a small home business. More income will result in more Social Security tax paid this year, true, but also in a larger Social Security check for years to come.

Even without working more, many women (and some men) have the option of switching from their own benefits to drawing on those of their spouses, or ex-spouses from long-term marriages. The catch is that the spouse must be old enough to qualify for Social Security. Thus, if a woman is older than her husband, she’ll have to use her own benefits first, and then when her husband reaches retirement age she can draw on his. Or if a husband is older than his wife but wants to draw on her benefits, he’ll have to wait until she hits retirement age. Why bother switching from one set of benefits to another? Simple dollars and cents. In most cases, men have earned more than women, and so a husband’s Social Security benefits will be larger than a wife’s.

What about taking benefits early, at age 62? Try to avoid this. The loss of up to 30% of your lifetime income from Social Security is not worth it unless you have good reason to believe you won’t live past age 73. It takes approximately 11 years for the advantage of getting benefits early to become the disadvantage of getting a lower rate the rest of your life. Thus for men, with their far lower life expectancy, taking benefits early may make sense; their average life expectancy is only 75. For women, who are likelier to live to 85 or beyond, taking Social Security early is a mistake. Even if they switch to a husband’s higher benefits, if women take Social Security early, they don’t receive full benefits. Who among us is average? Do we want to risk playing the odds?

By the way, Social Security is not tax-free income unless you have no other income. A lot of people remember the old system and don’t understand the new one. Years ago, the Social Security Administration construed all of the payments issued in the first years of retirement as the return of previously taxed dollars you contributed in the past. Thus in the first couple of years of receiving Social Security, regardless of other income, most or all of the Social Security payments received were not taxable. If people died in the first years after drawing on Social Security, they might never have had any Social Security income that was taxable. However, the government changed to a prorating system a while back, in part no doubt because of longer life expectancies. Under this system, a small percentage of each year’s Social Security income is considered nontaxable, i.e., the return of your own already taxed contributions. It takes about 17 years to earn that out, thus giving a person with other taxable income a bit of a break. This is significant because if you have income other than Social Security, some of it may be taxable. There’s a cute little ratio by which your Social Security income is compared to your other income. offers a chart and an explanation. The IRS also has an explanation. Neither explanation is particularly complicated; it is the whole rigmarole of taking half your Social Security, adding your other taxable to income to it, comparing it to a base amount dependent on your marital status, and then subtracting the excess amount over the base that I find confusing. That determines the amount that is federally taxable. (At the state level, formulas are completely different and vary widely.) Again, if you have no other income, all your Social Security is likely to be tax free. I say likely because every description hedges on this. There are mitigating circumstances, but most explanations do not cover them. Frankly, I can’t imagine what they would be.

Clear as mud? I thought so. Maybe you have decades to go before you contemplate Social Security. Maybe you think it will be dismantled (over my dead body) by the time you’re ready for retirement. Maybe all these rules will change between now and when you are eligible to file for Social Security benefits. Whatever your situation, Social Security does affect you in the form of a tax on your earnings, and a potential lifetime pension. So pay attention. You are in the program whether you like it or not.

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