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What's The Deal With Social Security?

"Don't count on Social Security!"

I've heard that enough times that I went ahead and saved myself the mind space and gave Social Security little to no thought. I have always assumed "not counting on it" meant I likely won't be getting any by the time I retire. Come to find out, I have written it off more than I needed to. Any money in retirement is good money, so let's talk about how Social Security works, and with that, get a better sense of what we can (or can’t) count on in the future.

Let’s start with the benefits. How much are typical Social Security payments? The average retiree receives $1,461 per month in Social Security (totaling roughly $17,500 in benefits for the year).(1) For 48% of married retirees, Social Security represents at least half of their income, and that rises to 69% for unmarried retirees, so it's a significant piece of the retirement picture for many Americans.(2)

How is the monthly benefit calculated? It's not a black box, as it may seem. I'm going to get into the weeds a little bit, to explain the basic steps and components of the calculations:(3)

  1. First, your average indexed monthly earnings are calculated. What does that mean? Each year of your earnings throughout your working lifetime (up to the Social Security taxable maximum), is adjusted for inflation, or “indexed.” Your 35 highest years of earnings are then added together, divided by 35 for an annual average, and then divided by 12 to determine your lifetime monthly average. This establishes your base payment amount.

  2. Each year there is a new formula that is applied to your base payment amount. Your formula will be determined in the year in which you turn 62 and become eligible for Social Security. The formula is tiered and operates similarly to how tax brackets (i.e. you receive X% of the first $X of your base payment, Y% of the dollars from $X-$Y, and Z% of any dollars above $Y).

  3. Then comes the Cost of Living Adjustments (COLA). If you claim Social Security after the year you turn 62, your benefit numbers will be adjusted upwards by the increased cost of living for each year you wait (ex: cost of living went up 3% in the year you were 63, so your benefit goes up 3% for that year, etc.).

  4. The last major consideration – and your decision to make – is when to start claiming Social Security. The benefit calculation above is based on your “full retirement age” (more on this later), but you can begin drawing Social Security as early as age 62 and as late as age 70. For every month you take Social Security prior your full retirement age, your benefit amount is reduced. Claiming benefits at age 62, for example, if your full retirement age is 66, will reduce your payments by 25%. Every month counts the opposite direction as well. For every month you wait after full retirement age, your retirement benefit increases, totaling 8% per year. This accumulates up until age 70. If your full retirement age is 66, your payments will be 32% higher if you wait to start claiming benefits until age 70.

So what is the “full retirement age”? Well, it depends on when you were born. If you were born in 1960 or later, your full retirement age is 67. If you were born between 1943-1954, your full retirement age is 66. And if you were born between 1955 and 1959, your full retirement age falls somewhere in between. Regardless of when yours is, the maximum Social Security benefit at full retirement age is $2,861 for 2019 ($34,332 per year).(1)

Note: We always encourage our clients to visit the Social Security Administration website ( to get your benefits estimate so that we can include this in our financial and retirement planning, so please do so!

Now that we’ve covered how benefits are calculated, let’s talk about the big picture: Will Social Security even be around when I/you/we retire? As you may have heard, Baby Boomers are retiring. 10,000 Americans turn 65 every day.(4) The ratio of workers to retirees is expected to decrease pretty significantly over the next 15 years. In the 30+ years leading up to 2008, the ratio was about 3.2 workers for every retiree, but that is projected to drop to 2.2 workers per retiree by 2035.(2) That issue is compounded by the fact that Social Security is slated to run out of reserve funds in about 16 years (which also bring us to 2035… which just so happens to be the exact year Greg hits “full retirement age”… what a coincidence!).

People often talk about Social Security like it's going to disappear. To set the record straight, it's not going to just go bankrupt and stop paying out benefits. If no action is taken to fix things in the next 16 years, (which is doubtful), it is estimated that benefits would have to be reduced by about 25%. However, Congress is already weighing some ideas.

The top ideas under consideration currently are:

  1. Additional tax revenue only: Increase payroll tax to 15.1% (from today's 12.4%).

  2. Cut benefits: Reduce Social Security payouts by 17% for everyone (including current retirees) OR by 20% to all new beneficiaries starting in 2019.

  3. Some combination of the above.

Increasing taxes and/or reducing benefits... no surprises there. It's less costly to address it now, however, rather than wait. By 2035, when the reserves are expected to be used up, the payroll tax needed to sustain Social Security would be 16.05%, and/or benefits will need to be reduced by at least 23%.(2)

The other option under discussion involves investing a portion of Social Security funds in the stock market (a maximum of 40%). The Social Security fund reserves – about $2.9 trillion – is invested exclusively in U.S. Treasuries. Treasuries are a very safe investment, but with minimal risk comes minimal returns. By taking on some investment risk by investing in the stock market, data shows that there would be significantly better potential returns. This option would greatly decrease the need for the taxes/benefit cut options mentioned above, both of which are a bit of a hard sell.

Rest assured that Congress hears the clock ticking! While there is no action plan in place yet, it’s an ongoing conversation and an issue that impacts everyone, so it is unlikely to be ignored.

In the meantime, this is something we routinely incorporate into our financial planning conversations. We use eMoney, our financial planning software, to help us see your holistic financial picture, and we model best- and worst-case Social Security scenarios to help give you a sense of the impact it may have on your retirement planning. So, if you have any questions, or if this is something you would like to discuss in more detail, please let us know!





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