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What Assumptions Can You Make
Under the Current
System? |
Will you be
able to collect your Social Security benefits or even
the contributions that you paid into the system? Where
will the money come from? These questions are troubling
many Americans, including President Bush and members of
Congress.
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A National
Challenge
"This year, the
first of about 78 million baby boomers turn 60,
including two of my Dad's favorite people — me and
President Clinton. This milestone is more than a
personal crisis — it is a national challenge. The
retirement of the baby boom generation will put
unprecedented strains on the federal government.
By 2030, spending for Social Security, Medicare
and Medicaid alone will be almost 60 percent of
the entire federal budget. And that will present
future Congresses with impossible choices —
staggering tax increases, immense deficits, or
deep cuts in every category of spending."
— President Bush,
2006 State
of the Union address |
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The Social Security Administration has
calculators to estimate your potential benefit
amounts using different retirement dates and
different levels of potential earnings. Click here to access the
calculators. |
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Road to
Retirement
How
long before you can collect full benefits? This
SSA chart tells you precisely that ... provided,
of course, nothing changes:
|
Year of
Birth |
Retirement
Age
to Receive Full Benefits |
|
1937 or earlier |
65
|
|
1938 |
65
and 2 months |
|
1939 |
65
and 4 months |
|
1940 |
65
and 6 months |
|
1941 |
65
and 8 months |
|
1942 |
65
and 10 months |
|
1943-1954 |
66 |
|
1955 |
66
and 2 months |
|
1956 |
66
and 4 months |
|
1957 |
66
and 6 months |
|
1958 |
66
and 8 months |
|
1959 |
66
and 10 months |
|
1960 and later |
67 | |
In
his State of the Union address last week, January 2006,
President Bush proposed the creation of a bipartisan
commission "to examine the full impact of baby boom
retirements on Social Security, Medicare, and Medicaid."
He noted that Congress failed to act on his proposal
from last year to partially privatize the system but he
warned "the rising cost of entitlements is a problem
that is not going away."
After the speech, a
White House spokesman said President Bush is not
abandoning his controversial plan to reform Social
Security by allowing people to divert some taxes into
private investment accounts, but he is not pursuing the
proposal as aggressively as last year.
So the
long-term future of the system remains uncertain. That
is even acknowledged in the statement of earnings you
receive from the Social Security Administration (SSA)
each year after age 25. The statement lists earnings
over your working years. Based on those figures, the SSA
estimates what your benefits should be when you
reach retirement age. Yet the same statement also
includes an ominous warning to future retirees: "We'll
need to resolve long-range financial issues to make sure
Social Security will provide a foundation of protection
for future generations as it has done in the past."
One thing we know for sure about Social Security
is the age to collect full benefits is creeping upward.
In fact, depending on your birth date, if you hope to
collect full benefits, you'll have to forget the notion
of combining your 65th birthday party with your
retirement party. Take a look at the right-hand chart
for an estimate of how long you need to work under the
plan as it stands today.
Here are some other
assumptions you can make under the current system to
help plan for retirement benefits:
Approximately
60 percent of working people choose to start receiving
reduced Social Security benefits at age 62. When
considering this election, look at your health and
your family's history of longevity.
From a
mathematical standpoint, it takes approximately 12
years for someone electing benefits at age 65 to
receive the same total benefits as someone electing
reduced benefits at age 62, assuming both individuals
have the same earnings. So if you start collecting
full benefits at 65, by age 77 you will have collected
just slightly more than a 77 year old who began
collecting at age 62.
Of course, no one knows how long they will live,
but if you're healthy and expect to live a long life,
it might be worthwhile to wait until your full
retirement age.
Suppose
your spouse hasn't worked enough to earn the minimum
credits to qualify for benefits. Can he or she collect
Social Security?
According to the SSA, even if
your spouse has never worked, he or she can, at full
retirement age, receive a benefit equal to one-half of
your full benefit. Or your spouse can receive benefits
at age 62 but the amount will be reduced.
What
if your spouse worked but didn’t earn much? The SSA
will pay retirement benefits on your spouse’s record
of earnings first. But if the spousal benefit on your
record is higher, your spouse will get a combination
of benefits that equals that higher
amount.
If you
choose to retire before full retirement age but
continue to work part-time to earn some money, you
might forfeit some benefits. Based on current laws,
let's say you begin collecting Social Security at 62.
If you have a job and earn more than the current limit
of $12,480, your benefits will be reduced $1 for every
$2 you earn.
If you expect to earn wages
substantially above these limits, you may want to
delay receiving benefits.
Note:
This only applies to earned income. You can
have unlimited unearned income without losing any
Social Security benefits. There is no limit on
unearned income from sources such as retirement plans,
annuities, interest, dividends, and capital
gains.
The
SSA uses its record of your lifetime earnings, listed
on your annual statement, to calculate your benefit
"credits." In 2006, to earn one credit, you must have
received $970 of wages or self-employment income
during the quarter. You can earn a maximum of four
credits per year. Generally speaking, in order to
qualify for Social Security benefits, you must have
earned a minimum of 40 credits. In other words, you
must have worked 40 quarters. In your lifetime, you
will probably earn far more credits than you need to
qualify. However, extra credits do not increase
benefits.
Whatever decisions you make regarding retirement,
don't plan to rely on Social Security alone. Even today,
the full benefit is only enough to provide a supplement
for most people, rather than the entire nest egg. And
given the changing nature of Social Security, there's no
way to know what will happen in the future.
Of
course, we all hope to see the money we paid into the
system. But while politicians debate how to overhaul
Social Security, the rest of us need to be feathering
our own nests with savings in private retirement
accounts. Consult with your financial or tax adviser on
ways to create a retirement plan for you to follow.
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