Social Security Q&A

Recently the Wall Street Journal posted what I consider to be a decent question and answer piece on Social Security. A couple of the highlights:

Will I receive Social Security benefits?

That's a big "It depends." If you're over 65, no sweat. If you're 45-65, you might see some changes from the relatively generous benefits enjoyed by your parents. If you're under 45, you have plenty to worry about.

I am just under 50, so I'm likely in the "transition group." I say "likely" because I'm also high income and high net worth, which could result in low or no benefits when retirement time comes around.

My point of view has been that I will save for retirement assuming I got zero benefit from Social Security. The level of benefits seems so uncertain now, this appears to have been a wise decision. Then if I get any money from Social Security, it will all be gravy.

What can I do about [the uncertainty surrounding Social Security benefit levels]?
 
A: Save. Save. And save some more. Social Security was always meant to be a supplement to savings, family support and pensions.

A recent survey from Banker's Life and Casualty found that two-thirds of middle-income wage earners believe Social Security will pay at least half and some as much as 75% of their retirement costs. Some Americans consider Social Security their major income stream during retirement. Bad idea.

Several good points here:

1. You need to save, save, and save for retirement. That advice never goes out of style.

2. "Social Security was always meant to be a supplement to savings." Yes, it was meant as a supplement -- not complete retirement savings. And yet many people treat Social Security as their one and only (or at least major) source of retirement income. Bad move.

3. "Some Americans consider Social Security their major income stream during retirement." SS is a supplement and that's it. It's not a "major" income stream unless you can live on very little money. As such, we should all plan on it just to be "a little extra" in retirement -- certainly not be 50% to 75% of what we'll need.

Anything else to add?

Comments

[Jonathan]

Not that I'm informed enough on this issue for my opinion to carry any authority, but I think it's more likely that those in the lower-to-middle income/wealth range will see the full social security benefit as they do today, but that there will be some sort of means testing for those at higher income or wealth levels. This would be sold to the public as just affecting the wealthy, but gradually the "means level" would drop to where only the poor get social security. Similar to the way the income tax was first proposed.

Of course, once again under this scenario, it would further discourage the average american from saving for themselves for retirement - the value of every personally saved dollar for retirement would be reduced.

[Lance @ Money Life and More]

I feel bad for those that choose to rely on social security because most of them haven't even calculated what their benefit will be. They'll be in for a shock and major lifestyle reduction once they get that first check.

[Old Limey]

My wife and I have been retired since 1992 for me and since 1993 for her. We started taking SS at age 62. Our combined SS income is $1,553.40 after Medicare Part A is subtracted. We also pay an additional $305/month for a Medicare Advantage health plan through my former employers group insurance. The plan is excellent, all we pay is $20 to see our primary care physician and $40 to see a specialist. My wife's recent surgery involved a 14 day hospital stay, the cost of which was about $200K of which we were only responsible for a $1K co-pay. We do not have dental insurance.

The one thing that obviates having to dip into our savings is that we both have pensions that add another $2,845 making a total net income of $4,398/month after all deductions. With zero debt and no rent or house payments we can live comfortably on that, particularly now that we are 78 and 80 and have ceased going on vacations.

Fortunately our investments produce an additional $330,000 of tax exempt or tax deferred income which moves us up into the "wealthy" class. This income is largely reinvested and grows larger each year. Since reaching the age of 70.5 the MRD withdrawals from our IRAs create a fairly large tax obligation so we pay that out of the withdrawal and move the remainder into our trust account to purchase more muni bonds.

During our 20+ years of retirement (and even before that) we have been on a great many expensive vacations to foreign countries, these were paid for out of our savings. Fortunately I am a very successful investor which is the primary reason why we are in such a comfortable financial position. We have also been fortunate that we never had to pay anything for our children's education, since we lived through the "Good Old Days" unlike today's parents.

[Jenny @ Frugal Guru Guide]

Every time a European news source covers SS, they call it a "pension." Drives me bonkers! It's called SUPPLEMENTAL for a reason, and it is an enormous waste of money. If you work minimum wage your whole life, it STILL pays out way less than the same amount of money in any decent investment would pay. :( I really think it needs to be killed for future generations--the sooner, the better. People need to realize that if they aren't retiring in the next 5 years, they won't get out anything like they've put into it even in the "best case" scenario. Cut your losses and run....

[Jane]

We're 54, and have been told our entire adult lives not to count on Social Security, so we haven't. All our retirement planning has been around accumulating enough NOT INCLUDING SS, so it's been a relatively pleasant surprise lately as crunch time nears (retirement within five years)and we see that IF there is anything from Social Security for us later on in our retirement it will have the effect of allowing for extras and indulgences as we don't plan to need it for regular living expenses. Of course they might wise up and reform it in the next decade or two, so even though we are not by any means really wealthy we might be means tested out or reduced. If this happens it will be okay, also. All around me I see people who have not saved, and are not saving now, and they will be needing that government help. I hope it's there for them, but I'd be glad if they'd ignore the complaints of current recipients about chained-CPI meaning they'll be eating cat food and focus on making it a system that makes a little sense for younger folk in the future. It bothers me how much my three grown sons pay into this system (ages 26 to 33) while maxxing out their own 401k contributions because they do not expect to receive any Social Security OR defined benefit pensions.

[LarryinLA]

The WSJ has an express political viewpoint in parading this nonsense, the reality is that SS, even if nothing is adjusted, will have enough coming in to pay 75% of currently promised benefits into the indefinite future. So, it is highly unlikely that anyone retiring in the next 40-50 years would see anything less than 75% of currently promised benefits. The likely scenario is that an increase in the wage cap, plus some benefit cut will result in payouts higher than 75%, but smaller than 100% of currently promised levels, but no one is going to see 0% from SS.

That said, it's hardly enough to be the primary source of income, so save, save, save. But everyone reading this site knows that anyway...

[Matt]

I agree with LayyinLA in that there will be something. What it will be I do not know.

But it is wise to plan like you will get nothing and what you do get is a "bonus" that was not in your plan.

Plus it was first called Old-Age, Survivors, and Disability Insurance (OASDI) federal program per wikipedia and never called "retirement plan". FDR made it so that the elderly, survivors, and the disableled we not out on the street living in poverty.

[Cherleen @ My Personal Finance Journey]

I so agree with you. NEVER depend on Social Security nor 401 for your retirement savings. It is always best to have a separate savings account for our retirement.

[BD]

Social Security is so frustrating. I'm under 45, and my entire life, social security taxes have been forcibly taken from me, despite the fact that I've always been a low-income earner. The government forcing it from me meant I didn't have as much to save as I might have had if they hadn't taken the money. Now, I won't get ANY benefits when I'm older, and worse, because I've been a low-wage earned, I haven't been able to save enough either. I feel like I was just born at the wrong time, and was always in the wrong place at the wrong time. Despite being frugal and trying as hard as possible to do the right thing in life, nothing has ever worked out for me, and now, even Social Security will be taken away.

[Jane]

BD, even the more cynical about government's ability to manage money amongst us (like me) don't believe that those who are "low-income earners" who haven't "been able to save enough" (as you classify yourself) will be left without Social Security. I do think the age for receiving it will be going up, and I'd be surprised if means-testing doesn't start at some point, but there are too many in the "low income and couldn't save enough" boat to be left without any income. I do think the concerns about the system holding up under the strain are positive, really. My parents expected to get a defined benefit pension and Social Security and never tried to save anything, they didn't think there was a need. Now my mother lives on $1100/month Social Security as her only income. At that income level she qualifies for a lot of programs that stretch her means to cover all her basic needs but there really is nothing much left for "wants" and as time passes she is growing increasingly bitter about the things that others have and can do that she cannot. Retirement can be a long period of time (if you're blessed with good health) to have to sit and dream about travel you can't afford, and look at houses you'd love to live in but cannot, and all the many other things that you can imagine. Maybe the truth is you don't need to save money for retirement to keep from starving, but it would be nice if you had the means to do things you enjoy in those years. Save whatever you can.

[Jnew]

I have given quite a bit of thought to the SS Selena that is today's topic.
The truth is that no one really knows what the future holds.

The discussion board,as usual, is excellent and covers the bases for the most
Part. We will probably have an increase to the wage cap, we will
Probably have means testing that phases out the "wealthy"
And the age limit will continue to decrease.

As stated, the younger you are the more likely these changes will affect
You.

I am trying to prepare for retirement looking at SS as a plus but not relying on it.

I think that Old Limey makes a good point by reminding us that
Even if you get SS, like your income today, the government deducts
Taxes and medical from your check.

So, it is smaller that you think it is on a net basis right from the start.

The best advice is probably to take your SS as late as possible. At
70 years old your SS will be much larger than if you take it at
62 or 63.

Of course , if you have not saved for whatever reason, you have to take
The lower amount. And taking it later is not always smart. If you are
Sick or have lower lifespans in your family-- it is wiser to take it early.

It boils down to the same principles. Save. Live below your means.
Rely on yourself- do not rely on the government.

Wrote this on a phone. I apologize for the formatting and typos.

[Paul]

Just a reminder that the Wall Street Journal is now owned by the same people that bring us Fox News... Rupert Murdoch

[Apex]

@BD,

1. Socially Security will never be killed. NEVER! It will probably be adjusted but as others have pointed out with 75% of benefits covered even with no changes, the fixes do no have to be extremely drastic for social security. Medicare is a disaster but that's an entirely different problem. Social Security is easily fixable.

2. As a low income worker your results are going to be spectacular. What you will draw out of social security when you retire will be a huge benefit compared to what you put in. Social Security has 2 bend points in its formula and the very lowest workers get 6 times more per dollar they put in than the very highest wage workers do. It's still less total dollars but as a percentage of income your returns on the social security dollars they took will be quite good.

3. There is zero chance as a low income worker that you will get zero or that you will even get any noticeable reduction in benefits at all. There is a chance they will increase benefits at the bottom.

Paying taxes is never fun. No one likes it. But I assure you, your social security contributions are going to work out very well for you when you get to be 65. Given your very low income I am sure it makes things more difficult now. But as dire as your income situation is now, without social security you would be destitute after retirement.

[Apex]

@Jenny,

SS actually works out pretty good for minimum wage workers. It is only ok for median wage workers and it is net negative for upper income workers.

I find myself in a bit of a strange position here defending social security because it is far from my favorite program. But the zealous attacking that it takes every time it is brought up is overly harsh. I have only worked for 20 years as a W2 employee, yet my current benefit at full retirement age of 67 if I were to stop working right now is right at $2,000 per month. Just for me as an individual. That's in 2013 dollars. My employer and myself combined over my working life have paid right at $200,000 in taxes into the social security system (this does not count Medicare taxes).

So that's 100K that came out of my check and 100K that was paid by my employer that they could presumably have paid me if they had not had to pay into the system. I know this doesn't account for return on investment, but in 8 years of drawing I will have the 200K back (4 years to get back the 100K that actually came directly out of my check). And I have paid on the max for most of that working time, so my results are worse than most because of the way the formula works. By the time I draw it will be adjusted for inflation so that will account for any loss of purchasing power.

I know if I had that money invested else where it could do better but as all things go, paying into a system like this and then getting it back in 8 years at retirement, is not the terrible deal many people try to make it out to be. Those of lower income will get it back in much less than 8 years because of the way the formula works. Those who continue to make high income and work for 40 years will find their deal is worse. They will take more like 14 years to get it back and at zero return.

It's not an ideal system but as government systems go, it is not too horrible. Abuse is rather low and many low to moderate income people are kept out of poverty and come out money ahead. The high income people pay extra to make that happen but that is true with everything about our tax system. There is nothing unique about social security in that regard.

I know the results I just posted can't be fully funded under the current demographics so things will change somewhat. It was just meant to show that for most people social security is actually not too bad of a deal and it will continue to be that way for most people, while there will certainly have to be some adjustments to it in the future.

You can hope for it to be killed for future generations but how do you think that would work? The money to pay current and near to retirees comes from those paying now. It is not sitting there waiting for them. Killing it means picking 2 generations of workers, making them pay in for 40 years and then giving them nothing.

We can talk about what we wished the system was like but that is pointless at this point in time. The system we have is what it is. We can try to make some adjustments to it and eventually we will as we have in the past, but it is not going to be killed for the next generation or any generation in any of our lifetimes. Social Security is here to stay. Nobody reading this no matter how young, will ever see the day that taxes are not being collected to support social security. That is a fact and I am as confident of it as the rising of the sun.

[FMF]

Apex -

Kind of like "the US will never lose its AAA credit rating"? :)

[FMF]

Paul -

So what is your point? That saving a lot is a bad strategy? Or that there will be no changes to Social Security for those under 45?

[Apex]

FMF,

I think that comment is a little bit tongue in cheek but I don't think it is quite applicable. I certainly never was in the camp that said we couldn't lose our AAA rating (I fully expected it in fact), and I certainly was not implying that social security was financially solvent on its current path. I have argued with others here about that exact topic. Some on the more optimistic side here have quoted Paul Krugman and argued that perhaps social security needs no adjustment and the projections are wrong and things will turn out better than we had predicted. I certainly don't believe that. The system has real problems and they will need to be dealt with. They just aren't as dire as some want to argue. Medicare is the one with dire finances. People made many of these same arguments in the early 80s, but tip O'Neil, and Ronald Reagan worked out a compromise and saved it from doom and yes that compromise involved significant tax increases for social security.

But as to the credit rating and how that could be a metaphor for the future of social security, consider why we lost our AAA credit rating. We lost our credit rating because of our refusal to cut back on spending and balance our budget, not because we were cutting into govt program spending. So I don't think the analogy is correct.

If you are suggesting the whole country could go bankrupt, default on our bonds, go into a huge depression, perhaps have anarchy overthrow the entire system of government, then yes, anything can happen in that environment. I never make arguments based on the stone age scenario because if that actually happens then we there are many far greater issues that we would be facing than any of the topics being discussed here.

But as a case in point, lets take the city of Stockton in CA which just filed for bankruptcy and had a judge accept it. They are actually going to default on their bonds. And the reason why is because they refuse to make significant cuts to welfare programs, pensions, and benefits for city retirees. So rather than cut those programs they are going to leave all their bond holders with a worthless piece of paper. Lets look at Cyprus which is now confiscating large amounts of money from the rich depositors in their banks. Rather than cut the govt programs for the masses, they are going to actually steal the money from the rich. This is the greatest case of out right govt theft of rich people's money that I have ever witnessed.

The real threat is the money the rich have stored up for themselves. When things get really desperate and the govt is faced with significant cut backs or confiscating more funds, they always go for confiscation first if it is at all possible.

The point I am trying to make is not that social security doesn't have problems. It does and they are real. I would just encourage people to look at how governments actually operate and think about the ramifications of making any significant or drastic cuts to a program as popular as social security and as effective. Govt's don't say that we are running low on money we better trim all the spending back. That is an absolute last resort. Republicans have been trying to trim govt for the last 20 years, with some very concerted efforts at doing so (rhetorically speaking anyway, not so much in action). They had full control of all branches of govt from 2000-2006. And what did they do? They increased spending drastically on the military, increased spending on education through no child left behind, increased spending on Medicare drastically through Medicare part-D. And they were the ones talking about smaller government.

No, governments do not reduce spending and specifically they do not reduce spending on broad based programs for the poor or the elderly. Social Security is not going to go anywhere. There will be adjustments and the most rich may see their benefits drastically reduced, so I can't say for sure we will all get our money out of social security but the vast majority will. 90% + of people will get most of what they expect out of social security. I am not exactly sure how it will work out for those other 10%.

The govt finances and credit rating are a complete mess and I don't know how that will play out. I just know it won't play out with killing or even any drastic reductions to social security payments for the vast majority of Americans.

[FMF]

Apex -

It was tongue in cheek. But I am of the opinion that you never know what can/will happen. Remember, only death and taxes are certain.

[jeffinwesternwa]

if your not a saver, or under 35, plan on working till 70 and delay benefits to then (I probably will anyway myself though I retired at 47), hopefully, at some point reduced benefits age will be raised to 65 with "normal" retirement and I hope medicare moved to age 70) and the ability to defer to age 75 will be the norm vice ages 62/70 today. That, along with a chained CPI and nominal changes in the formula can go a loooong way. It's medicare that is broke NOW, SS is soon to be w/o changes...

[JimL]

Just my opinion - At some point, the government is likely to look at the large pile of money sitting in retirement accounts. They might not directly some and take those funds, but they could come at this a different way. As mentioned many times, we can expect to see some level of means testing in the future. It has already been mentioned in the current budget discussions with respect to having higher medicare payments for the "wealthy". Imagine an expanded definition of who is considered wealthy. We could see people that have had very modest incomes during their working years, that have lived very frugal lives in order to build up a comfortable retirement. The government could determine that people over a certain level of retirement savings could see greatly reduced or eliminated social security payments as well as reduced coverage/higher copayments with medicare.

The longer we wait for a fix to both programs, the greater the risk that we could see more changes to future benefits of these two programs.

[jim]

To 'fix' Social Security they only have to raise the tax rate and/or reduce benefits. And they don't really have to change it much.

Over the past 75 years they've raised the tax rate on Social Security a good 20 times. Twenty times. One more increase isn't the end of the world nor doom of the system.

Should you assume SS will be exactly the same 30 years from now? Certainly not. Should you assume that it will be 'gone' and you'll get 'nothing'. Of course not.

There are a variety of changes that could fix it:
http://en.wikipedia.org/wiki/File:CBO_-_Effect_of_Policy_options_on_Social_Security.png
Shortfall is 0.6 right now.
Using chained CPI-U instead of CPI-W will resolve 1/3 of the shortfall. If they tax earnings up to $250k that would more than handle the rest of it.

[jim]

As Apex said: "Medicare is the one with dire finances." Yeah. Thats the bigger problem on the horizon.

[Catherine]

Like Jane, my mother gets by on just her Social Security. However, my mother thrives on it, and hasn't had to touch her savings at all. Indeed, when my father was alive and drawing a pension, they saved nearly all of his pension for 20 years, amassing an even larger nest egg between the ages of 65 and 85.

My mother is able to get by on $1300/month because of the following:
1. She is healthy and active. She eats right, gets plenty of exercise and has no need for medications.
2. Their home was paid off twenty years before retirement and has a full bath on the ground floor. Few changes will need to be made if she becomes unable to use steps.
3. She has always been frugal. All the clothing she owns would fit into carry-on luggage. All of it. She has two pairs of shoes, a few changes of clothing, cuts her own hair, cooks all her meals from scratch. She doesn't go to restaurants, go shopping as a hobby or have cable tv & internet.

To meet her on the street or in her home, you'd have no idea that she gets by on such a modest income. Her expectations about what is necessary are vastly different from the typical American consumer and she doesn't feel the least bit deprived.

This could all change on a dime, and any number of unknowns may eventually upset the balance. But the take-away for me, personally, is that two pillars of security in late life are good health and a paid-off home that is livable with declining mobility. Making these a reality takes consistent good descisions throughout midlife.

[mysticaltyger]

Apex's posts on this topic totally nailed it and were factually accurate regarding the reality that neither political party ever really reduces spending.

[mysticaltyger]

I also agree with others who have stated that the real crisis is in Medicare spending. The sad part is we spend huge amount of money treating diseases that are largely preventable. That has to change.