With today’s demographics, the number of workers paying into Social Security through payroll taxes is less than in previous generations, creating a shortfall in funding. Now, the pandemic-related shutdowns have created high unemployment, resulting in even fewer tax payments into it. This is causing concern as to whether or not benefits will be available for future retirees.
Depending on your age now, you may be counting on receiving Social Security benefits in retirement. A vital component of financial planning is correctly calculating this potential future income and considering important factors such as the age you plan to start benefits, the cost of living adjustment to apply for future years, and deciding how they all fit into your plan. In addition, you will need to factor in possible taxes if you plan to start receiving benefits while you are still working.
Social Security – a brief history
The Social Security Act was signed into law by President Franklin D. Roosevelt on August 14, 1935. Spurred by the Great Depression of 1929, which the nation was still climbing out of, the new act created a social insurance program designed to pay retired workers age 65 or older a continuing income.
Social Security is a ubiquitous financial planning topic because most people in the US are either paying into it now, have paid in the past, or are currently receiving it. In fact, 97% of Americans age 60-89 receive Social Security benefits in one form or another.
The financial planning experts at Blue Summit Wealth Management, have been providing portfolio management and financial planning services to families, corporations, and private foundations since 1994 and have provided below, information to know about Social Security.
Will Social Security be here in the future?
This topic is one that is continuously discussed in the media and deserves to be addressed first. The short answer is YES. According to former Acting Commissioner of Social Security, Carolyn Colvin, “I take this question very seriously, and I am sure Social Security will be there in the future.” The program currently operates with a surplus; however, the more important thing to understand is that there are options available for ensuring the program remains solvent into the future. Some of these options were utilized in the 1980s when Congress shored up the program by gradually increasing the full retirement age from 65 to 67 and started to tax benefits based on income levels. There are various other levers that can be used incrementally to ensure the program can pay out promised benefits. You should feel confident this system will be here for you, no matter your age.
How are benefits calculated?
Three things factor into future Social Security benefits.
- How long you work – You must pay into Social Security for a minimum of 40 quarters (with a minimum income of $1,410 per quarter) to be eligible.
- How much you earn – The higher your earnings, the higher your retirement benefit is likely to be with a cap of $137,700 as of 2020. If you want to see your Social Security earnings history, you can do so here.
- What age you file for benefits – You can claim benefits as early as age 62, but the benefit increases until you reach age 70. Exactly how much you get at what age depends on your full retirement age (FRA) which varies by year of birth.
Are these benefits taxed?
This will depend on whether or not Social Security is your only income. If so, then it is unlikely you will have to pay taxes on it. If you have other sources of income, which most people do in some way, you might have to pay taxes on between 50-85% of your Social Security. You will never pay taxes on more than 85% of your Social Security. On the state level, most states do not tax Social Security (including California), but some do. More info here.
Claiming Social Security Benefits (between age 62 and FRA) while still working:
There are reductions in your social security for doing this. Again, this only applies if you are claiming Social Security and between age 62 and your FRA. For 2020, you will lose $1 in benefits for every $2 in wages you earn over $18,240 per year until the month you reach the normal retirement age. You could lose $1 for every $3 in wages earned in excess of $48,600 in 2020.
If you have more questions about Social Security, please reach out to Blue Summit Wealth Management at www.bluesummitwealth.com.
