If you’ve ever spent time reading about the history of the US Social Security system, then you know that it is a vastly different system today as compared to when it first began in 1935.
It was initially intended to contribute towards financial security for older Americans. It was designed to help compensate for limited job opportunities available to older people. It was also originally intended to help bridge the gap created by the disappearance of the multigenerational family households. This occurred as the need for Americans to move around the country to find decent employment increased. It was not designed to be the sole source of income during retirement.
The creation of the Social Security system was a direct response to the Great Depression, and was adopted to help prevent such a situation from recurring. It initially provided retirement benefits for only about 60% of the country’s workers. Now it covers more than 97% of workers. In 1940, benefits totaled $35 million. In 2012, nearly 56 million Americans received $778 billion in Social Security benefits, making it the number one federal entitlement program.
In order to pay for the original Social Security system and all of the additional benefits that have been added over the years, such as disability benefits, widow and children’s benefits, and spousal benefits, the tax rate to cover benefits has increased significantly. In 1937, the government began collecting taxes of 1% of wages up to $3,000 per year, payable by each the employee and employer. Now the rate is 6.2% up to wages of $117,000 for 2014, with self-employed workers covering both the employee and employer contribution amount. In addition, employee wages are taxed at 1.45% to pay for Medicare, with 1.45% also being paid by employers, resulting in a total Medicare tax of 2.9%.
Social Security Solvency and Your Financial Strategies
There has been much speculation about how long Social Security will last before it becomes insolvent. Recently, the Congressional Budget Office projected Social Security’s trust funds would be depleted in 2030 – a year earlier than its previous estimate. If this happens, the program could then pay only about 75% of its scheduled benefits. There have been a number of suggested solutions to address the shortfall, such as raising the age of eligibility as well as the designated age for full retirement. There have been discussions about removing the income cap for high wage earners so that they and their employer will pay 6.2% of all earned income, regardless of how much you earn. There have also been proposals to raise the tax rate to 7.2% and to means test for benefits which would mean that benefits could be eliminated or reduced for people who have other retirement income above a certain threshold. Still another proposal would be to change how the cost-of-living adjustment is calculated.
Based on the projections, it seems highly likely that some of these changes will be implemented in the next 15 years, affecting you or your family members. We are at the mercy of our government to sort this out. Many of Premier’s clients are currently receiving benefits from Social Security or will be receiving benefits in the next few years. Our advisors are often asked about when the best time is to start taking benefits. Our reply is often “It depends”. There are a number of variables that one should consider when deciding the best time to take Social Security benefits. They include the pros and cons of deferring benefits, other sources of income, life expectancy, your spouse’s benefit amount and whether you plan to still work once you begin benefits. An analysis of this decision often involves your accountant as there are various tax implications.
There isn’t a simple answer as to when is the best time, but often after gathering information and careful consideration, clients arrive at a conclusion as to when they would like to start receiving benefits. And if you aren’t certain and you wish to delay your start date, there isn’t a lot of downside to waiting. We are happy to run through the details for your personal situation with you as well as with your accountant.