8/20/2012 2:15 PM ET|
What you'll get in Social Security
Whether you’re years or decades away from retirement, here’s what you need to know about what you can expect from Social Security. Plus, tools to plan ahead.
Despite what you've heard, Social Security isn't going to disappear.
Many younger people, and even some older ones, are convinced the retirement system's coffers will run dry before they get a chance to claim benefits.
The reality is quite different. Even if Congress does nothing to fix the troubled system, and its trust fund is exhausted in about two decades, Social Security will still collect enough in payroll taxes to pay out 75% of promised benefits at that point.
Seventy-five percent isn't ideal, but it's sure better than nothing.
The system has other problems. The surplus that Social Security has built up over the years is invested in $2.7 trillion of special Treasury bonds. As payouts exceed tax revenue, Social Security will have to start cashing in those securities. The federal government will have to find the money to make good on the bonds, and that's going to put more pressure on the federal budget.
Even if you can imagine the United States defaulting on its debts -- and few experts believe we're at risk of a Greek-style crisis -- the fact remains that Social Security collects enough in taxes from current workers to pay most of the benefits it has promised.
There are a number of ways to fix Social Security so it could pay everything it has promised. One way would be to raise payroll taxes by 0.9% on both workers and employers. Another would be a series of smaller changes, which were recommended by a bipartisan Debt Reduction Task Force, including gradually increasing the full retirement age, slowing cost-of-living increases, slightly reducing benefits for top wage earners, boosting the amount of earnings subject to the payroll tax and bringing some newly hired state and local government workers into the system.
Creating private investment accounts, as some have suggested, wouldn't resolve the funding gap. What it would do is change the nature of the Social Security program, which was conceived as an insurance program, not an investment scheme. For those of us without traditional pensions, Social Security is the one part of our retirement income that we can't outlive or lose in the stock market.
To see what the Social Security system has promised you, you'll probably need to go online. Social Security used to send annual statements to every worker that included that person's earnings record over the years as well as how much he or she was estimated to receive in retirement. The system suspended the mailings to save money but has since resumed sending statements to workers 60 and older who haven't yet started to receive benefits.
Everybody else needs to:
Go here and create an account. The Social Security Administration uses Experian credit bureau data to help verify your identity, so in addition to your name, address, birth date and Social Security number, you'll need to answer some multiple-choice questions about data included in your Experian credit report. (If you've ever gotten your free credit reports online through AnnualCreditReport.com, you'll be familiar with the type of questions asked.)
Explore your benefits. Once you've created your account, you'll see your promised benefit at "full retirement age." That age, which used to be 65, has been inching up. This year, it's 66. It will rise to 67 for those born after 1959.
You can click on the "estimated benefits" link to get a fuller picture. The next tab will show you how much you can earn if you delay retirement to age 70; your benefit will rise 8% each year you delay. You can also see the lower amount you're scheduled to get if you retire early, at age 62. (More on that in a minute.)
Social Security is more than just a retirement system, of course. You also can see what monthly benefit you'd get if you were severely disabled and couldn't work. Further down, you'll find what your spouse and children would receive if you died.
If you're married, compare your estimates with your spouse's. The lower-earning spouse is entitled to up to half the higher-earning spouse's retirement benefit, if it's greater than his or her own -- something known as spousal benefits. If, for example, your wife would be entitled to $2,000 at full retirement age and your own check would be $750, you could opt to take half of her benefit ($1,000) instead. That would make your household benefit $3,000, rather than the $2,750 you two would get based on your own earnings records. Your spousal benefit would be reduced permanently if you applied before your own full retirement age, however.
The higher-earning spouse must have applied for benefits before the other can claim spousal benefits, but the higher earner has the option to "file and suspend" -- file for benefits, so his or her spouse can claim spousal benefits, and then suspend the application so that his or her own benefits can continue to grow.
If you're divorced, you probably won't be able to compare estimates with your ex. But if the marriage lasted at least 10 years, you should be able to qualify for spousal benefits based on your ex's record if you aren't remarried by the time you reach retirement age. Your ex needn't have started benefits for you to get a spousal check, but he or she would need to be old enough to qualify for retirement benefits (at least 62). You can read more about divorced spouse's benefits here.
AARP has a free calculator that can help you determine the best time to file for benefits. If you want to fiddle with the numbers and assumptions a bit more, for $40 you can try the Maximize My Social Security calculator, created by economics professor and author Laurence J. Kotlikoff.
Check your earnings record. The third tab shows the Social Security record of what you've earned each year since you started to work. It's important that these records be correct, because your benefits are based on them. Your retirement benefit, for example, is calculated from your 35 highest-earning years. A too-low number in any year could mean you won't get all the benefits you've earned. If you've kept your tax returns from previous years, you should be able to compare those to the Social Security record and spot any errors. Social Security provides a link to help you report any errors.
By the way, if you're a high earner, the numbers in the "Taxed Social Security Earnings" column will differ from those in the "Taxed Medicare Earnings" column. That's because there's a cap on how much of your income is subject to Social Security taxes (this year it's $110,100), but there's no such limit on how much is subject to Medicare taxes. "Taxed Medicare Earnings" has the numbers you'll want to check against your tax returns.
Knowing your estimated benefits is important for your financial future. Here's why:
You can make better retirement calculations. If you want to retire someday, you should be using retirement calculators to get a handle on how much you need to save each year (MSN Money has a handy calculator here). But those savings goals can be pretty daunting, especially if you started late or haven't saved much, when you don't include your promised Social Security benefit. Even if you reduce your promised benefit by 25%, to reflect the haircut to come if Congress doesn't act, adding in Social Security income can help lower your savings goal to a more manageable amount. That, in turn, can inspire you to start saving more, since your goal won't seem so impossible to achieve.
(Whether you can customize your Social Security benefit calculations depends on the calculator. Retirement calculators typically will estimate Social Security benefits based on your current earnings, but some, including MSN Money's, allow you to override that amount with a figure of your own choosing.
You can see the substantial penalty for filing early.
Most people apply for Social Security before their full retirement ages, and that's often a mistake. Applying early permanently locks you into a smaller check. If you live beyond your mid-70s -- as most of us will -- you'll get less overall than if you'd waited. If you apply early for Social Security and keep working, your checks will be reduced by $1 for every $2 you earn over a certain amount ($14,640 in 2012), thanks to the earnings test. Once you reach full retirement age, the earnings test disappears.
Waiting longer to file for Social Security is also a kind of longevity insurance. If you live into your 80s or 90s, your "retirement price tag" could be much bigger than you expect as inflation raises the cost of living, notes Jonathan Peterson, the author of "Social Security for Dummies." The chances of depleting your retirement savings also rise the longer you live. A bigger Social Security benefit could help you offset both risks.
Filing early has particular hazards for married couples. Someone who applies for spousal benefits before her full retirement age gives up the option of switching to her own benefit later. Only if she applies for spousal benefits at full retirement age can she later switch.
Those who file early also may be locking in a smaller benefit for their surviving spouse. Unlike spousal benefits, which are based on what the higher-earning worker would receive at full retirement age, survivors benefits for retirees are typically based on what the higher-earning worker actually was receiving in retirement.
The closer you are to retirement age, the more relevant all these calculations become. But even if you're decades away, knowing your promised benefits can help you better plan for retirement.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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