June 29, 2013, 8:13 a.m. EDT
10 things Social Security won’t tell you
The truth about the agency’s bottom line
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Jason Ford
1. “Long-term deficit? We can hardly
afford our bills today.”
About a third of workers in their 50s expect Social
Security benefits to be their primary source of income in retirement, according
to the Transamerica Center for Retirement Studies. That reliance gives
pre-retirees reason to worry about the future of the program. The Social
Security Administration itself has said that unless something is done to reform
the system, it will have to reduce benefit payments to retirees within the next
few decades.
Less talked about, perhaps, is the concern that the
program is having a hard time paying its bills today. In 2010, the Social
Security Administration began collecting less revenue in taxes than it needs to
cover benefit payments, forcing the agency to tap its $2.7 trillion trust fund
sooner than some had expected. It was the first time since 1983 that
expenditures had exceeded noninterest income, and the shortage is expected to
continue. “It’s almost like a family running huge deficits throughout their
budget,” says Eugene Steuerle, an economist with the Urban Institute, a
nonpartisan think tank in Washington, D.C.
A Social Security spokeswoman points out that interest
income from the Treasury bonds held in the trust fund will allow it to keep
growing until 2020—even if the agency has to siphon off some money to offset
shortages in tax revenue. The fund won’t be exhausted until 2033, around the
time Gen Xers are expected to begin retiring. But that is already a few years
earlier than previous projections. After that, the agency says, tax income under
the current system will only cover about three-fourths of benefit payments
through 2087.
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2. “Disabled? A benefit cut is coming your way soon.”
The number of workers collecting disability benefits
through Social Security has spiked in recent years, hitting 8.9 million in
April, up 50% from 5.9 million in 2003, according to agency data. Some of that
change can be attributed to demographic changes—as more women have entered the
workforce over the past several decades, the number of people qualifying and
collecting disability benefits overall has grown. As more baby boomers age, the
population of people who might qualify for disability benefits is growing,
economists say. And the expanded eligibility for people with psychiatric
disorders has contributed to an increase in the number of younger people
collecting benefits—a population that is also likely to stay in the system for a
prolonged period of time, says David Stapleton, director for the Center for
Studying Disability Policy at nonpartisan consulting firm Mathematica Policy
Research. Other drivers include the slower economy: the number of people
applying for and receiving disability benefits grew during the recession after
some workers saw their jobs disappear or found that they qualified for fewer
jobs after becoming disabled, says Stapleton. Plus, he says, some states are
tightening eligibility for workers’ compensation and encouraging people to move
onto the Social Security disability program, which is federally funded, to lower
state costs for Medicaid and welfare programs.
Health-care costs, not income, a retirement crisis
Employee Benefit Research Institute CEO Dallas Salisbury says health care costs are the ticking time bomb for American retirees.
It’s those added factors that are draining the Social
Security Trust Fund for disability insurance at a faster pace than expected, he
says. The trust fund could be depleted by 2016, according to agency estimates,
and if Congress fails to act, people collecting disability payments will face a
20% cut to benefits, according to agency projections. “We’re getting to a point
where they’re running out of money,” says Mary Johnson, a Social Security and
Medicare policy analyst with the Senior Citizens League.
Some reform proposals call for limiting the cost of
living adjustments issued to people receiving the benefits or for raising the
maximum income that can be taxed to supplement the trust fund. Lawmakers could
also decide to tighten eligibility, reduce benefits for some groups or tap the
retirement fund to supplement disability payments, but that last option would
erode the retirement trust fund sooner than expected, says Johnson. One option
for longer term reform is to develop a program that helps people continue to
work instead of claiming benefits after they become disabled, says Stapleton.
The Social Security Administration says it projects that the number of
disability beneficiaries will continue to grow, but only at the rate of increase
in workers.
3. “This used to be a much better deal.”
Today’s workers—boomers, Gens X, and Gen Y—frequently
carp about Social Security, but it isn’t all sour grapes or skepticism about
paying into a system with an uncertain future. Employees today pay more in
Social Security taxes than previous generations did. They’re also likely to get
smaller benefits relative to the taxes they paid in when it is their turn to
retire.
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Over the years, as the Social Security Administration has
come to grips with the cost of its benefit program and the ranks of eligible
beneficiaries has swollen, taxes to fund the program have gone up and up, a
trend that experts say is likely to continue over the coming years. Workers now
pay 6.2% in payroll taxes (temporarily reduced to 4.2% in 2011 and 2012)—nearly
double the 3.6% tax rate workers paid in 1965. Over the same time period, the
maximum earnings eligible for taxation have also increased from $4,800
(equivalent to about $35,400 in 2013 dollars) to $113,700 in 2013.
For example, a single man who retired in 1980 at age 65
after earning an average wage of $44,600 (in 2012 dollars) would have paid about
$98,000 in Social Security taxes, and probably received $207,000 in lifetime
benefits, according to a study by the Urban Institute, a nonpartisan policy
think tank in Washington, D.C. By contrast, a single man making the same average
wage today and retiring in 2030 will likely pay $404,000 in lifetime taxes but
receive just $339,000 in lifetime benefits—about 16% less than he paid in.
“People who were first in the system got a great rate of return,” says Alan
Gustman, an economics professor at Dartmouth College. “It’s the younger
generation that is going to be in the most difficult position.” The Social
Security Administration said in a statement that Social Security taxes have
increased because the number of people collecting benefits is growing at a
faster pace than the number of people working and paying taxes. The imbalance is
also partly due to the fact that the earliest beneficiaries only paid taxes in
the later stages of their careers.
4. “Want a bigger check? Go back to work.”
Most people within 10 years of age 62, the earliest
eligibility age for retirement benefits, have already started doing the Social
Security math problem: How much do I get if I wait one year to take payments?
How much if I wait two years? To get the biggest bump in benefits, workers have
to delay their benefits beyond full retirement age—around 66 for people born
before 1957, closer to 67 for people born after. (To find your exact date, see
Social Security’s website) For every additional year you wait, you’ll get an
increase in payments of up to 8% a year until you hit age 70. (Find your yearly rate
of increase here.) A man who could receive a monthly benefit of $1,000 at
his full retirement age of 66 would collect a smaller check of $750 a month if
he started collecting benefits at age 62, but could get $1,320 a month if he
waited until age 70 -- a 32% boost.
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If you’ve already started collecting benefits and you’re
under full retirement age, it isn’t too late to get a raise. One strategy: Go
back to work. If you earn more than $15,120 annually through your employment,
the Social Security Administration will dock $1 in benefits for every $2 you
earn. But once you reach full retirement age, your benefits will be recalculated
to account for the money you didn’t get while working. So, for example, someone
who took their benefits at 62—at a 25% reduction compared with full benefits—but
went back to work from ages 63 to 66 and earned enough to zero out his entire
Social Security check could end up collecting close to full benefits at age 66.
5. “You can be unemployed and retired.”
A growing number of people in their 60s are collecting
unemployment and Social Security benefits at the same time. Since 2002, 19
states have changed the rules to allow people to qualify for more unemployment
benefits while they receive Social Security, according to the National
Employment Law Project, which has advocated on behalf of allowing seniors to
claim both. It’s perfectly legal; you just have to report the income to both
agencies.
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There is no clear data on how many people are drawing
both. About 11% of people who collected unemployment benefits in 2012 were 60 or
older, according to the Department of Labor; the minimum age to collect Social
Security retirement benefits is age 62. For those who qualify, the option has
obvious appeal for older Americans struggling to find work in today’s weak job
market. “They’re unemployed and they’re still looking for work,” says George
Wentworth, an attorney with the National Employment Law Project, adding that
many of these seniors would be willing to give up their Social Security benefits
if they landed a job.
Receiving unemployment benefits doesn’t affect your
Social Security payments, but the reverse isn't always true: In some states,
collecting Social Security can reduce your unemployment checks. In Illinois,
Louisiana, South Dakota and Minnesota, your unemployment benefits can be reduced
by half of your monthly Social Security benefit.
6. “Your Social Security number is no state secret.”
Don’t carry your Social Security card in your wallet.
Don’t give your number over the phone. Don’t use it as a password. For all the
precautions workers are told to take to protect that nine-digit number, a Social
Security number is still surprisingly vulnerable. So far this year, more than
6.4 million names, along with Social Security numbers, driver’s license numbers
and other pieces of sensitive personal information have been exposed to
potential theft as a result of more than 301 data breaches at employers,
government agencies and elsewhere, according to the Identity Theft Resource
Center, a nonprofit that helps victims of identity theft.
But a Social Security number need not even be stolen to
be compromised. A 2009 study from Carnegie Mellon University found that it is
possible—and not too difficult—to guess a Social Security number using details
easily gleaned from a Facebook profile, such as date of birth and hometown.
Researchers were able to accurately guess the first five digits of 44% of Social
Security numbers issued after 1988 on the first try, just by using the date and
the state the number was issued in; they were able to guess the complete numbers
almost 9% of the time. The authors used a list of known Social Security numbers
from the Social Security Death Master File, an index of deaths that have been
reported to the agency, to find patterns on how the last four digits are
assigned—the first five digits are based on the state the number was issued
in—and they found that they are largely assigned in order, based on when the
number was issued.
In 2011, the Social Security Administration implemented a
more randomized process for assigning Social Security numbers, making more
combinations available in every state. Anyone with a number issued before then
might want to guard their birth date and place of birth as carefully as they do
their Social Security number -- or at least tighten their Facebook privacy
settings.
7. “If you make too much, we’ll tax your benefits.”
Your Social Security benefits come from paying taxes
while you were working, so surely they can’t be taxed, right? Wrong. You may be
taxed on your Social Security benefits if you have substantial taxable income
from other sources, such as dividends, self-employment, investment interest and
pensions, or IRA and 401(k) distributions. And studies find many Americans
aren’t aware of the fact: Some 42% of pre-retirees surveyed by the Financial
Literacy Center didn't know that benefits could be taxed if their income in
retirement exceeded a certain amount.
The rule is that if your combined income—a measure that
includes other sources of income and half of your Social Security
benefits—exceeds $25,000 for an individual or $32,000 for a married couple
filing a joint return, you may be taxed on up to 85% of your benefits. People
who find themselves in this group can make quarterly estimated payments or
choose to have federal taxes withheld from their benefits. The Social Security
Administration began taxing benefits in 1983 as part of a law intended to
increase income for the Social Security program and Medicare.
8. “Your cost-of-living adjustments come up short.”
Every year, Social Security recipients get a
cost-of-living adjustment, a little bump based on the current rate of inflation
and designed to cover the rising cost of everything from toothpaste to airline
tickets. But some critics say the current measurement of inflation doesn’t
reflect the higher costs that seniors truly face. For example, many people in
retirement may spend a large share of their budgets on health care, and the
adjustments might not cover the steep rise in housing costs that can occur when
seniors need to move into assisted housing, says Catherine Collinson, president
of the Transamerica Center for Retirement Studies. “In many parts of the
country, a monthly Social Security benefit isn't enough to cover basic living
expenses,” she says.
The pricing pressure means some retirees could find
themselves struggling to cover essentials like gas, medicine and housing, says
Collinson, meaning they will have to cut spending in other areas. For
pre-retirees, it means ramping up your savings today so that you can struggle
less in your golden years, she adds. The Social Security Administration says it
has been using the Consumer Price Index to measure inflation for the
cost-of-living adjustments since legislation instituting automatic
cost-of-living increases was enacted in 1972, and changing the benchmark would
take an act of Congress.
9. “Good luck reaching us.”
Nearly 182,000 people stop by one of the Social Security
Administration’s local offices daily, and more than 445,000 people a day call
the agency for help filing claims, to update their information and other
guidance, according to a 2012 report by the Office of the Inspector General. But
the administration’s shrinking budget (the agency’s budget for fiscal year 2013
is $11 billion, nearly $1 billion less than it was in 2010) and smaller staff
(the agency lost about 10,000 employees since the start of 2011) are making it
harder for employees to handle the growing workload. The average call wait time
grew to nearly 5 minutes last year from three minutes in 2011, the report found.
And the agency merged 20 field offices last year. The obstacles could grow as
more employees retire—the administration estimates 45% of its employees will be
able to retire by 2020—leaving fewer experienced workers on staff, the report
found.
The Social Security Administration is trying to improve
its customer service by increasing the range of services offered online and
launched a new mobile-friendly site for smartphone users. Last year, the agency
rolled out an online Spanish application and improved the online appeals
application. It also made it possible for people applying for disability
benefits to electronically submit medical information, which could speed up the
claims process. “Given our significantly reduced funding over the last three
years, we have had to find innovative ways to meet the needs of the American
people,” says a Social Security spokeswoman. Collinson says people should take
advantage of online services and set up appointments with their local offices to
be sure someone can help them when they go.
10. “We punish dual-earning households.”
The Social Security program, in a way, rewards marriage
by providing spouses with retirement and survivor benefits to husbands and
wives, even if one spouse never worked. But those perks all but disappear for
couples where both spouses are working and earning roughly the same amount, says
Alan Gustman, an economics professor at Dartmouth College
It comes down to the way spousal benefits are awarded. If
a person at full retirement age has never worked or paid Social Security taxes
but is married to someone who did, that person is still entitled to receive
benefits of up to 50% of the payments being awarded to their spouse and 100% if
their spouse passes away. If both spouses worked but one person earned much
more, the benefits of the lower-earning spouse would be topped off to equal at
least half of the payments being given to the higher earning spouse. (Say the
husband earned benefits equal to $20,000: The wife is entitled to receive
$10,000 in benefits even if she would only receive $5,000 based on her own work
record.)
WHO
SAID IT?
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'Ask for all your money back about every two years to make sure [an investment firm is] legitimate. If my clients had done this with me, I would have been caught sooner.'
READ THE FULL STORY.
But in households where both spouses earn roughly the
same income, each person only receives the benefits they earned through their
own work history and the taxes they paid—getting no boost from their spouses,
says Gustman. “Two-earner households are at a big disadvantage,” he says.
To be sure, households where both spouses worked could
receive more in Social Security benefits overall in retirement, even if they did
pay more in taxes. (Picture two people collecting $20,000 a year as opposed to a
home where one spouse gets $20,000 and the other gets $10,000). And fewer women
overall are expected to collect spousal benefits, as more women enter the
workforce and earn as much as or more than their partners, says Gustman.
But for now, it appears high-earning couples are getting
more out of Social Security spousal and survivor benefits, says Gustman, who
co-wrote a report with Thomas Steinmeier and Nahid Tabatabai funded by the
Social Security Administration through the Michigan Retirement Research Center
that found women in higher income households are less likely to work when
compared with lower income households, where both spouses are more likely to
work. The Social Security Administration says it projects that the number of
women collecting benefits based on their work records will double to 36.4
million by the end of 2037, from 18.2 million at the end of 2012. The number of
women collecting spousal benefits alone will decline slightly over that same
time period to 2.1 million from 2.2 million.
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