Social Security (--> Wiki)

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Social Security (--> Wiki)

Postby Barry Barnitz » Tue Sep 18, 2007 10:03 pm

An expanded version of this page can be found on The Bogleheads Wiki.


[contributions welcome] Social Security

Note: This topic is devoted to the financial planning aspects of social security; questions regarding the structural aspects of the system, as well as its financial condition, are essentially political issues, and will not be taken into consideration.

Social Security retirement benefits can be considered an inflation-adjusted life annuity. Therefore it has a close connection to withdrawal strategies during retirement, as well as immediate annuities.

The best source of information about Social Security can be found at the site social security on-line. The site has convenient links to the primary concerns of the average citizen which include:

1. Your Social Security records
2. Retirement
3. Medicare
4. Disability & SSI
5. Widows, widowers & other survivors
6. Get help with your situation

Details on how the retirement benefit is computed can be found at Your Retirement Benefit: How It Is Figured.

Other source materials from the Social Security Administration include:
The Social Security Handbook
A Glossary of Social Security Terms

Vanguard has a Plain Talk Publication on Social Security:Understanding your social security benefits.

The tax aspects of Social Security benefits are laid out in IRS Publication 915 (2006), Social Security and Equivalent Railroad Retirement Benefits.

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Last edited by Barry Barnitz on Sat Aug 16, 2008 1:07 pm, edited 6 times in total.
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Postby Cb » Tue Sep 18, 2007 10:20 pm

I thought John Greaney's analysis of starting SS at 62, then repaying & restarting at 70 was interesting:

http://www.retireearlyhomepage.com/cheap_annuity.html

"A little-known Social Security provision effectively allows you to "purchase" a life annuity from the Social Security administration at a substantial discount to what a commercial insurer would charge for the same monthly benefit. Delaying taking Social Security benefits until age 70 gives a retiree a monthly check as much as 77% larger than a retiree who started taking benefits at age 62. But you don't have to delay taking benefits until age 70 to take advantage of this. The Social Security Administration allows you to "withdraw your application" for benefits, reapply at a later date, and get the same larger monthly check as someone who delayed taking Social Security until that age. Of course, you'll have to pay back all the Social Security benefits you've received to date, but you won't have to pay back interest on the money and you'll be eligible for either a tax deduction or tax credit on the income taxes you paid on the Social Security benefits collected to date. If you save and invest the Social Security benefits you collect from age 62 to age 69 and then reapply at age 70 for the larger monthly benefit, you'll likely have tens of thousands of dollars in after-tax earnings beyond the amount that you repay to the Social Security Administration."
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Planning Social Security Benefits

Postby Barry Barnitz » Tue Sep 18, 2007 10:53 pm

Planning Social Security Benefits

Bud Hebeler's site analyzenow contains excellent resources on planning social security benefits. The Articles section contains a segment on Social Security where the timing of taking Social Security benefits is considered. The Free Programs section provides Social Security Spreadsheets.

The following papers examine the planning of social security retirement benefits:

1. Estimating the Value of Social Security Retirement Benefits by William W. Jennings and William Reichenstein, August 20, 2001
There are three objectives of this paper. First, we explain the current structure of Social Security retirement benefits. Professionals who advise individual investors should
have knowledge of the benefits structure. With this knowledge, they can add value to clients by helping them decide when to begin receiving benefits. Second, we provide models to estimate the present value of expected Social Security retirement benefits. These models rely on the similarities between inflation- linked Treasury bonds and Social Security. Third, we
demonstrate that including the value of Social Security benefits can substantially change the calculation of the current asset mix.


2. Rethinking Social Security Claiming in a 401(k) World by James I. Mahaney and Peter C. Carlson, PRC WP 2007-18 Pension Research Council Working Paper (August 2007)
This chapter argues that previous research on Social Security take-up alternatives has failed to recognize critical factors that greatly impact the discussion on when it is most beneficial to start Social Security retirement benefits. We show that the effect of taxes can have a dramatic effect on the financial security of retirees, yet the taxation caused by IRA withdrawals and the interaction with Social Security has been largely misunderstood. In addition, changes made under the Senior Citizens’ Freedom to Work Act of 2000 make delaying Social Security for married couples much more favorable. We also show how the traditional approach of starting Social Security benefits early and deriving income from stock and bond mutual funds is expected to under-perform a strategy that takes income from personal retirement assets first and is followed by increased benefits from Social Security.

How flattering to have our paper posted as one to read. We do really think that few people really understand the advantages to making optimal Social Security decisions. I encourage everyone who wants to retire early to read the section on taxes. Most people can dramatically reduce taxes by creating larger SS income streams. - Jim Mahaney

3. The Effect of Retirement Under Social Security at Age 62 by Robert Muksian, Ph.D. Journal fo Financial Planning, (January 2004)
Executive Summary

* The reduction in Social Security benefits due to early retirement at age 62 is greater than often realized.
* When calculating how much benefits will be reduced by retiring as early as age 62, observers often underestimate the reduction because they fail to account for the annual cost-of-living adjustments and make other incorrect assumptions relative to the reduction.
* The article explains how Social Security calculates a worker’s “average indexed monthly wage” and how the primary insurance amount is in turn calculated from that, using “bend points.”
* An accurate calculation of early retirement benefits is also key to spousal benefits, because a reduction of benefits for the primary worker may affect the amount of benefits the spouse receives both during the marriage and after the worker’s death.
* One of the subjective arguments for collecting Social Security benefits early is that if death occurs before normal retirement age, no retirement benefits are collected. But a 62-year-old male has more than a 93 percent chance of living to normal retirement age, and a couple has more than a 99 percent chance that one of them will reach normal retirement age.
* A spreadsheet calculates the break-even point for the age at which total benefits from an early retirement and normal retirement age are equal.
* Unless early retirement is “mandated” due to health reasons, it appears one should wait until normal retirement age or later to begin collecting Social Security.


4. Calculating Break-Even Ages for Delaying Social Security Beyond Normal Retirement Age by Robert Muksian, Ph.D. Journal fo Financial Planning, (March 2006)
Executive Summary

* Planners must frequently advise clients on the future economic effects of the timing of collecting Social Security benefits. In addition to such factors as the client’s health and financial status, the timing decision frequently depends on determining the break-even age, which is defined as that age when total revenues from Social Security will be equal regardless of the elective start of those benefits.
* This paper provides a freely available spreadsheet for planners for specifically determining the break-even ages between taking benefits at the normal retirement age and age 70, when taking benefits becomes mandatory and there is no economic benefit from further delay.
* The paper looks at three options for a worker who decides to continue working past normal retirement age, or has other adequate sources for retirement income, but takes the benefit at the normal retirement age: (1) always spend the after-tax amount, (2) always invest the after-tax amount, or (3) invest the after-tax benefits until age 70 and then make monthly withdrawals from the accumulated fund.
* Under the first option, most workers with normal life expectancy would be better off financially to delay taking the benefits. The second option of investing the money is investigated under different after-tax-return scenarios. Generally, it pays to begin taking benefits at normal retirement age. Under the third option, building an accumulating fund until age 70, then to be depleted monthly, will produce a shortfall if the worker lives beyond the break-even age.


5. When Should Women Claim Social Security Benefits? by Alicia H. Munnell and Mauricio Soto, Journal of Financial Planning (June 2007)
Executive Summary

* This paper summarizes the incentives facing older women when deciding when to claim their Social Security benefits. Nearly 60 percent of women opt for actuarially reduced benefits at age 62—a greater percentage than men. Yet women are expected to live longer than men. Longer life expectancy would generally suggest delaying Social Security benefits. But the analysis shows that single women and married women face very different choices.
* Married women are entitled to three types of benefits: (1) benefits based on their own earning records, (2) spouse's benefits based on their husband's earning records, or (3) survivor's benefit equal to 100 percent of their husband's benefits. These benefits are reduced if claimed earlier than the full retirement age.
* From the authors' study, two key points emerge. First, in the case of survivors' benefits, the husband usually can maximize the benefits of the couple or his surviving wife by delaying his claim.
* Second, the wife is usually better off claiming her own Social Security benefits as early as possible, though this can change depending what percentage her own benefits are of her husband's benefits.
* For most married women, the Social Security benefit structure actually encourages them to grab their benefits as soon as possible. While this may maximize the wife's Social Security "wealth," it also encourages them to withdraw from the labor force, creating a loss of earnings and 401(k) savings, and extending the period over which they need to support themselves in retirement


6 .Estimating the Social Security Windfall Elimination Provision's Impact on Clients by Richard Mason, Ph.D., J.D.; John R. Mills, Ph.D., CPA; and Brian Ferrell, CPA, Journal of Financial Planning, (December 2005)
Executive Summary

* Social Security's windfall elimination provision (WEP) reduces Social Security retirement benefits for those workers, typically employed in the public sector, covered by a non-Social Security retirement plan and who became first eligible for that non-Social Security plan after 1985.
* It is estimated that up to 9 percent of future retirees may be affected by the provision. As a rule of thumb, essentially all workers who have paid into the Social Security system for less than 30 working years at "substantial earnings" and have worked in the public sector in non-Social Security positions are likely to have their Social Security retirement benefits reduced by the WEP.
* Current annual Social Security benefit statements overstate the worker's estimated benefits by not reflecting any potential WEP reduction. Accordingly, financial planners should be aware of the potential reduction and how it works to reduce the monthly benefits that clients may receive.
* It is particularly important to factor in the WEP for those clients who have 20 or fewer years of substantial earnings, as the WEP reduction for these individuals is far more pronounced.
* This article describes the WEP and its workings through a detailed example. It shows how to estimate Social Security retirement benefits, upon which any potential WEP impact must be based, with a quick yet accurate back-of-the-envelope calculation.
* The article also discusses the fact that workers who leave the private sector for a non-Social Security covered position may well lose their Social Security disability coverage that requires current Social Security work credits to remain in force.
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Postby sscritic » Wed Jan 02, 2008 11:42 pm

Here are some additional links to information on the Social Security Administration website.

The Social Security Handbook (similar to link given in first post)

The Program Operations Manual System at https://secure.ssa.gov/apps10/poms.nsf/partlist

The Code of Federal Regulations (Social Security Section) (see section 404)

The Social Security Law [42 USC Chapter 7] (Also here)
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Additional Points for Social Security

Postby ThePrune » Fri Nov 12, 2010 4:10 pm

Most folks get an annual "Your Social Security Statement" each year. On page 2 of this mailing are a number of estimated (extrapolated) benefit dollar amounts.

It would be useful for the Wiki Social Security article to discuss how to use these dollar amounts for retirement planning. In particular, I think folks should be be reminded that:

(1) These dollar amounts assume that there is NO CHANGE in the Average Wage Index (AWI) going into the future. [But historically the annual AWI increase has been about 5%.] This assumption strongly influences the AIME and Bend Point amounts required to calculate the PIA.

(2) These dollar amounts assume that there is NO CHANGE in the CPI-W Index going into the future. Same as assuming 0% annual COLAs. [But historically the COLA has run about 3.5%.] This influences the calculation of the dollar benefit amounts received after age 62.

(3) These dollar amounts assume that the worker continues to have the same amount of SS taxable earnings for each year going into the future, right up to the year that SS benefits are started.

All three of these assumptions are commonly violated, and this strongly influences the projected SS benefits that would be calculated starting with these dollar amounts.
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Re: Additional Points for Social Security

Postby sscritic » Fri Nov 12, 2010 5:44 pm

ThePrune wrote:Most folks get an annual "Your Social Security Statement" each year. On page 2 of this mailing are a number of estimated (extrapolated) benefit dollar amounts.

It would be useful for the Wiki Social Security article to discuss how to use these dollar amounts for retirement planning. In particular, I think folks should be be reminded that:

(1) These dollar amounts assume that there is NO CHANGE in the Average Wage Index (AWI) going into the future. [But historically the annual AWI increase has been about 5%.] This assumption strongly influences the AIME and Bend Point amounts required to calculate the PIA.

(2) These dollar amounts assume that there is NO CHANGE in the CPI-W Index going into the future. Same as assuming 0% annual COLAs. [But historically the COLA has run about 3.5%.] This influences the calculation of the dollar benefit amounts received after age 62.

(3) These dollar amounts assume that the worker continues to have the same amount of SS taxable earnings for each year going into the future, right up to the year that SS benefits are started.

All three of these assumptions are commonly violated, and this strongly influences the projected SS benefits that would be calculated starting with these dollar amounts.

(1)
AWI 2009 40,711.61
AWI 1989 20,099.55
Rate of change: 3.59% per year compounded, not 5%

AWI 2009 40,711.61
AWI 2004 35,648.55
Rate of change: 2.69% per year compounded, not 5%

(2) I want my estimate in dollars I know (today's), not dollars I don't (future nominal dollars).

Note that since the indexing and the bend points are AWI adjusted, if you want current dollar estimates, as I do, you should really only care about the extent to which the AWI exceeds the CPI-W. If the AWI matches the CPI-W, the value in today's dollars of your future AIME and PIA will be the same as today's value of your AIME and PIA.

For example,
CPI-W 2009 209.630
CPI-W 1989 122.6
Rate of change: 2.72% per year compounded (not 3.5%).

More importantly, the AWI grew at 3.59% while the CPI-W grew at 2.72%; the AWI grew 0.87% per year faster than the CPI-W. That will make a small difference in the constant dollar value of your PIA estimate. For the five year period ending in 2009, the difference was even less, only 0.13%.

(3) since the dollar amounts are indexed along with the upper limit, if you are at the max, the indexed values are roughly constant (there is some roundoff in the max and there is a two year lag - the 2009 AWI sets the 2011 max - which produces some fluctuations). For example, if you were born in 1946 and you maxed, your last 20 years of indexed earnings from 1987 to 2006 were
91,874.79 (1987)
89,961.20
92,303.94
94,294.24
94,627.87
93,530.15
96,241.43
98,607.47
95,745.93
93,519.05
92,168.10
91,601.68
92,094.10
91,595.52
94,392.23
98,685.67
98,713.57
95,304.27
94,136.67
94,200.00 (2006)

On the other hand, if that same person born in 1946 made the average wage every year, his indexed earnings were
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41
38,651.41

[That's what indexing does, adjusts everything to the year you turn 60.]
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Postby ThePrune » Mon Nov 15, 2010 3:30 pm

sscritic,

First, thanks for reading and responding to my post. I may be a new poster to the Bogleheads Forum, but I have already observed that you give excellent and very timely answers to posted questions. :D

In terms of retirement planning (which is at the heart of my original comment), folks tend to be divided into two camps: (1) current dollar projection approach, and (2) inflated dollar projection approach. Both approaches, when followed carefully, give the same result. I'm guessing from your response that you are a "current dollar" person. I teach the inflated dollar approach in my classes.

Whichever approach is used, the planner must keep careful track of how the dollar amounts are affected by inflation. Even in a "current dollar" approach the planner has to account for "shrinkage" in a fixed-dollar pension and "growth" in medical expenses over the course of a retirement.

But it is very important that anyone attempting to plan for retirement expenses understands which numbers are in current dollars and which are in future dollars. The Social Security Administration's projected benefits are in today's dollars. But some people might be confused about this, since the wording of the annual mailing gives dollar amounts at future ages. All I'm suggesting is that this fact (i.e. today's dollars) be highlighted so that your readers will be better equipped to intelligently and correctly use these important dollar amounts.

One other aspect of personal preference. I like to include economic data from at least 1970 in all my projections. Although I hope we never again have to suffer through the high living expense (and wage increase) inflation of the late '70s / early '80s, it's always possible. [How nervous are you right now about future inflation!] Anyway, that's why my AWI and CPI-W annualized percentages are much higher than yours.
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Postby sscritic » Mon Nov 15, 2010 3:49 pm

Actually, social security used to use the phrase today's dollars in the annual statement, but they no longer do. The reason is that CPI-W and the AWI do not grow at the same rate, so real benefits will be higher than what the current estimates report. Andrew Biggs had an article and blog post about this subject.
The short story is that the statement tends to underestimate future benefits by about 1.1% (the rate of real wage growth ) for each year between the time you receive the statement and the time you'll retire. So if the statement projects you'll receive around $1,000 per month and you're currently 45 years old, the best guess of your true scheduled benefits would be around $1,245.

One way to think about it is that the statement's projections would be accurate if we switched today from wage indexing to price indexing of initial benefits.
http://andrewgbiggs.blogspot.com/2008/0 ... urity.html
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Postby ThePrune » Thu Nov 18, 2010 2:03 pm

sscritic,

Thanks for your last post. It took me a few days to get around to thinking through your "Quote" and checking it out using my Excel model of future Social Security benefits.

Summary - I agree entirely with your post.

Since I tend to think in terms of inflated future dollars, it just took some extra effort on my part to think about dollar benefits as "real" dollars. But the mental and mathematical exercise was definitely beneficial. I find especially useful the observation that real wage growth runs about 1.1% annually. And your link to the Andrew Biggs Social Security blog was extremely useful, as I was not aware of its existence.
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Re:

Postby kate1234 » Tue Mar 20, 2012 4:22 pm

Cb wrote:I thought John Greaney's analysis of starting SS at 62, then repaying & restarting at 70 was interesting:

http://www.retireearlyhomepage.com/cheap_annuity.html

"A little-known Social Security provision effectively allows you to "purchase" a life annuity from the Social Security administration at a substantial discount to what a commercial insurer would charge for the same monthly benefit. Delaying taking Social Security benefits until age 70 gives a retiree a monthly check as much as 77% larger than a retiree who started taking benefits at age 62. But you don't have to delay taking benefits until age 70 to take advantage of this. The Social Security Administration allows you to "withdraw your application" for benefits, reapply at a later date, and get the same larger monthly check as someone who delayed taking Social Security until that age. Of course, you'll have to pay back all the Social Security benefits you've received to date, but you won't have to pay back interest on the money and you'll be eligible for either a tax deduction or tax credit on the income taxes you paid on the Social Security benefits collected to date. If you save and invest the Social Security benefits you collect from age 62 to age 69 and then reapply at age 70 for the larger monthly benefit, you'll likely have tens of thousands of dollars in after-tax earnings beyond the amount that you repay to the Social Security Administration."


I researched this a little and found that the SSA reduced one's ability to do this as of 2010: http://www.ssa.gov/pressoffice/pr/withd ... cy-pr.html
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Re: Social Security (--> Wiki)

Postby sscritic » Tue Mar 20, 2012 4:31 pm

The post you are responding to is from 2007. When the regulations were changed in 2010, there was a lot of discussion around here.

Does the wiki contain incorrect information on this point?

The link in the post you quoted contains this statement:
December 08, 2010 Breaking News
-- The Social Security Administration issued new rules today that end
the Withdrawal of Application strategy, effective immediately., see link.
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Re: Social Security (--> Wiki)

Postby kate1234 » Tue Mar 20, 2012 4:41 pm

Right, I started by reading the Wiki since I wanted to begin to understand this Social Security morass. I got all excited when I saw the post with this cool idea about buying it back. Maybe time to remove it from the WikI? And then remove my post too since it would just be confusing.
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Re: Social Security (--> Wiki)

Postby sscritic » Tue Mar 20, 2012 4:47 pm

OK, now I see it. The article is listed as a reference under Links. I could just remove it. Withdrawal is still allowed, but you have to do it within 12 months of your initial application. Perhaps I will remove the link but add a line about withdrawal in the same section with the basic rules on eligibility.

Suggestions anyone?

wiki article:
http://www.bogleheads.org/wiki/Social_Security
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Re: Social Security (--> Wiki)

Postby kate1234 » Wed Mar 21, 2012 8:04 am

It is not only in the links, but also is the first comment on the page we are on: viewtopic.php?f=4&t=6043

That's what I read and then followed the embedded link
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Re: Social Security (--> Wiki)

Postby sscritic » Wed Mar 21, 2012 8:17 am

kate1234 wrote:It is not only in the links, but also is the first comment on the page we are on: viewtopic.php?f=4&t=6043

That's what I read and then followed the embedded link

And that comment is four years old, and when you followed the link, one of the first things you saw was a retraction. I can't help you with dates and retractions. I also don't have the power to remove someone else's four year old comment. I thought you were discussing the wiki.

Note that laws and regulations change. Rules about paper I bonds (and comments on this board about them) from four years ago may no longer apply. The same goes for social security and tax laws. I would also note that the state of the economy has changed since September, 2007, when the comment you are objecting to was made. I don't let myself get too excited when reacting to a four year old post.
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Re: Social Security (--> Wiki)

Postby kate1234 » Wed Mar 21, 2012 9:38 am

Actually I think our discussion here has completely resolved the problem. If somebody is reading through all the comments, they will get to ours here and learn all the good things you had to say.

Cheers
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Re: Social Security (--> Wiki)

Postby sscritic » Wed Mar 21, 2012 1:13 pm

I added a section on withdrawal under the current rules to the wiki and removed the link to the outdated article.
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