Social Security

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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.

Contents

Planning Social Security Benefits

Resources from the SSA:

Program Operations Manual System (POMS): The Program Operations Manual System (POMS) is the internal operating instructions used by SSA field employees when processing claims for Social Security benefits.

To help decode the POMS, you will need:

Regulations:

Under the rules of Social Security, your Primary Insurance Amount (PIA) = the benefit you receive in the month of your Full Retirement Age (FRA). For each month that you begin before this date, you reduce your PIA by 5/9 of 1 %. So if your FRA is 66, which, lets say, you reach in December 09, and you elect to begin your benefit in, say, June 09, then the reduction to your PIA would be 6 X 5/9 = -3.33%. This monthly reduction rate occurs for the first 36 months that you begin prior to your FRA. For months > 36, its 5/12 of 1%/month. The only other factors that would change the 5/9% reduction would be if the individual has earned income in the previous year, as the PIA will not include this, and the annual inflation adjuster for the new year.

Social Security is unisex and roughly actuarially fair. If you are a single unisex person of average health, it doesn't matter when you take it. There is a rough trade-off between fewer dollars for more years (start early) and more dollars for fewer years (start late).

Since females outlive males on average, single males will live fewer years than a unisex person and should take it earlier; single females will live more years than a unisex person and should take it later.

Since widows and widowers get the greater of their own benefit and their deceased spouse's benefit, married couples have to consider their joint life. A high earning male with a low earning wife should wait to collect the higher benefit, not because he will live long enough to make up for what he gives up by not starting early, but because his wife will.

Here is a concrete question from the forums that shows the potential complexity of Social Security planning:

Wife and I are same age, 62 this summer. Her SS that she qualifies for on her own is about half mine. The wrinkle is she still is working. Her 35 highest years have a lot of zeros, so each year she works will replace a zero. I am retired and when I turn 62 my pension drops by more than half, called a level income option because it assume SS will be started at 62. We need to make up some of the income lost by the drop in pension. Wife contributes 1000 per month to her 401(k) so we can stop that. Having her file for SS as the link suggests might be an option but she plans to work to age 66. Her salary is very modest but her job provides us health benefits. Do you think this "Team Play" technique would work for us or does it assume both spouses are not working?

The full answer:

The Team Play described assumes neither is working at 62. There are several issues for you to consider.

Her own benefits: If your wife is going to continue to work for the health benefits, then it doesn't make sense for her to apply for her own benefits before age 66 if she makes much more than $20,000. The earnings limit for 2009 is $14,160 - for every $2 over the limit, $1 is withheld from benefits. If her benefit at age 62 would be $800 a month ($9,600 a year), she would get to keep none of her social security if she makes $33,360 ($19,200 over the limit - benefits reduced by $9,600).

Spousal benefits: When you reach 66, you can either file or file and suspend. Your wife can then apply for wife's benefits on your record. At 66, she will get half of your PIA (age 66 benefit) if her own PIA is a lesser amount. If your PIA is $1,800 a month and hers is $800, she can get $900 as a wife. If hers is $1,000, she won't get a wife's benefit, but she will get her own $1,000 (this assumes that she starts benefits at 66 - it is possible for her to delay her own benefits while collecting spousal benefits). Since she is still working and replacing some of those zero years, she may well end up with a PIA greater than 1/2 of yours (in spite of your statement that her benefit is about 1/2 of yours, that may not be true after her additional earnings are included in her calculation). You however, could follow part of the team play plan. When your wife applies for her own benefits at age 66, you can apply for your husband's benefit while delaying your own benefit. If her benefit is $800, you could get $400 at age 66 as her husband. By not taking your $1,800 at 66, you will increase the amount you eventually get at 70 (assuming you delay the maximum).

Some Computational and Payment Details

(taken from the POMS)

  • Benefits are rounded down to the nearest dollar.
  • All reductions and credits are computed using fractions, not percents. Someone who starts a retirement benefit 6 months early will have a reduction of 6 X 5/9% or 30/900 = 1/30. For a PIA of $1723.40, the benefit would be 1723.4 X 29/30 = 1665.95 rounded down to the nearest whole dollar or $1665. Using a reduction of 3.33% would give an answer of 1723.4 X 96.67% = 1666.01, which would seem to yield a benefit of $1666 a month. This is incorrect.
  • The COLA is computed in percents to one decimal place, e.g., the 2009 COLA was 5.8%. The COLA is applied to your PIA, not your benefit.
  • When the PIA is computed, it is rounded down to the nearest $0.10. For example, when a COLA of 5.8% is applied to a PIA of $1723.40, the new PIA is 1723.4 X 1.058 = 1823.36 rounded down to 1823.30. With a reduction of 1/30 for starting a retirement benefit 6 months early, the new benefit will be 1823.3 X 29/30 = 1762.52 rounded down to $1762. The actual increase in the retirement benefit is (1762 - 1665) / 1665 = 5.826%. With another PIA, the benefit could go up slightly less than 5.8%.
  • If you delay retirement past your full retirement age, the delayed credits are applied in January of the following year or in the month of attainment of age 70 if applicable. For example, if your full retirement age is 66 and you apply for retirement benefits on your birthday in March at age 68, your initial benefit will include 22 months of delayed credits. The additional 2 months of delayed credits for January and February will be applied the following January.
  • Benefits are paid in the month following the month earned. In a year with a COLA, the COLA is used to compute the December benefit paid in January. Thus the 2009 COLA, while based on the increase in CPI-W from the third quarter of 2007 to the third quarter of 2008 and applied to the December 2008 benefit, is referred to as the 2009 COLA since it first showed up in the January 2009 benefit payment.

Taxation

The tax aspects of Social Security benefits are laid out in IRS Publication 915 (2006), Social Security and Equivalent Railroad Retirement Benefits. For a simpler reference and examples, see Taxation of Social Security benefits.

See also

Links

Articles

Investopedia Articles

Academic papers


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