Social Security
We get a lot of questions related to social security. How it works, when should it be taken, and what happens if a spouse passes away, are some of the more popular questions. In this blog post we will be addressing these questions and some other things that are on people's minds regarding social security.
History
President Theodore Roosevelt enacted the Social Security Bill on August 14, 1935, introducing a social insurance program designed to protect people “against the hazards and vicissitudes of life.” The Act, consisting of 32 pages, was the product of the Committee on Economic Security, which Roosevelt established on June 29, 1934. During the signing ceremony, he described it as “a cornerstone in a structure which is being built but is by no means complete.” Half a century later, Wilbur J. Cohen, a former Secretary of Health, Education, and Welfare, reflected that the Social Security Act was truly “historic and revolutionary” for its departure from past policies and its enduring impact. The Act provided two forms of old-age security: federal support to states for pensions for the elderly in need, and a federal benefit system for retired workers (Social Security History, SSA.gov, accessed 2024).
How it works
Social security provides a guaranteed income stream for people who qualify by having worked 10 quarters of qualifying employment. Qualifying employment is when you have had a deduction from a paycheck for social security benefits. There are certain pension programs that disallow taking the pension and social security income together which are explained in the IRS code. The earliest age people who qualify may begin taking benefits is age 62, the latest age is 70. The benefit amount is calculated based on a person’s earning history. Each year you defer taking the benefit, the annual amount is increased by around 8% per year, so there is a significant difference between age 62 and age 70. There is also a spousal benefit, that entitles a spouse to one half of the benefit that the other spouse receives at that spouse’s normal retirement age. The normal retirement age for each person is defined by the social security administration and can be found on the social security statement. There is also a widow’s benefit where if marriage criteria were met, a widow is eligible for the deceased spouse’s benefit. Also, a divorcee benefit is available when criteria are met, and benefits for children in the event of death of a parent.
Strategy
We address a lot of questions around when people should enroll in social security and when they should start their benefits. The key consideration is when a person is going to retire. There are earning limitations regarding how much income a person can make each year prior to the normal retirement age and take their social security benefits. In 2024, the annual earnings limit is $22,320 if you are taking the benefits before your normal retirement age (Receiving Benefits While Working, SSA.gov, accessed 2024). Any amount earned over the earning limit from a job paying a wage will require the social security amount paid be paid back into the social security system. The amount deducted from your benefits is one dollar for each two dollars earned over the earnings limit threshold. That is why a person should not take the social security benefits until they retire, unless they know the wages they earn will be less than the annual earning limit. If a person is retired, then the question centers around if they need the income now, or does it make sense for them to defer to a later date and get the higher income benefit amount.
Strategy continued
How does one figure out which path to pursue when it comes to the decision to begin social security benefits? There are many calculators available to help people calculate the cost benefit analysis of the social security benefits. We use a software program called Emoney which breaks down the options and shows results for different scenarios. The conclusion I have arrived at after having completed hundreds of analyses, is that if a person needs the income immediately, they should enroll in the benefit. If they don’t need the income now, due to having a portfolio or other income sources like a pension that will provide the income they need, then the decision becomes more arbitrary. Also, if they don’t need the higher payout from the social security benefits due to portfolio income or pension income, then the decision becomes less important about deferring. However, if a person needs to defer so they have a higher income later to offset a potential gap in retirement income later in the life, then it probably makes sense to defer the social security benefits if they don’t need the income. Another factor to consider is that social security is a taxable income source, based on income from wages, earnings from self-employment, interest, dividends, and other taxable income.
“Social Security History.” Ssa.Gov, Social Security, www.ssa.gov/history/50ed.html. Accessed 10 Oct. 2024.
“Receiving Benefits While Working.” Ssa.Gov, Social Security, www. https://www.ssa.gov/benefits/retirement/planner/whileworking.html#:~:text=If%20you%20are%20under%20full,earn%20above%20a%20different%20limit.. Accessed 10 Oct. 2024.
Securities and investment advisory services are offered solely through registered representatives and investment adviser representatives of Equity Services, Inc. [ESI], known as Vermont Equity Services in WI, NH, CO & MO, Member FINRA/SIPC, 1 N. Franklin Street, Suite 3450, Chicago, IL 60606. PH: 312-236-2500. Weyers McKeever Financial Partners is independent of ESI.
This content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes advice. It has been prepared for educational purposes only and does not replace information provided to you by The Social Security Administration or your tax advisor. All other people and entities mentioned are not affiliated with any government agency.
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