Personal Finance: a Gospel Perspective

Retirement Planning 2: Social Security

Objectives

A. Understand Social Security in a Historical Context

B. Understand how Social Security Works

C. Understand the key questions relating to Social Security

D. Understand the likely future of Social Security

A. Social Security:A Historical Context

The time and events surrounding the passage of Social Security:• The Stock Market Crash of 1929

• GDP fell 48%, from $105bn in 1929 to 55bn in 1933

• Millions were out of work• Over 9,000 banks failed

• Depositors lost over $7 billion in assets• Personal and family devastation was

common• Because of this, Franklin D Roosevelt signed the

Social Security Act in 1935 to Aid the Displaced and Out of Work

B. Understand How Social Security Works

How much does an employee pay in Social Security and Medicare Taxes?

• FICA tax rates

• Social security tax 6.20%

• Medicare tax 1.45%

7.65%

• Maximum wage subject to SS tax is $90,000 in 2005

• No maximum for Medicare tax

How Social Security Works (continued)

What is the employer’s share of Social Security and Medicare Taxes?• Your employer matches dollar for dollar

If You Earn You Pay Employer Pays$10,000 $765 $765$20,000 $1,530 $1,530$30,000 $2,295 $2,295$40,000 $3,060 $3,060$50,000 $3,825 $3,825$60,000 $4,590 $4,590$70,000 $5,355 $5,355$80,000 $6,120 $6,120$80,400 $6,151 $6,151$90,000 $6,290 $6,290

Note: Medicare 1.45% past $84,900

How Social Security Works (continued)

Social Security Funding• Social Security is a pass-through account

• FICA taxes being paid by today’s workers are providing the money for benefit payments to today’s retirees

• There is no investment or savings component

• The assumption is that when you retire, there will be enough others paying into the system to pay for your benefits

• Interesting assumption!

How Social Security Works (continued)

Changes in Social Security Tax Rate

Social Security Tax Rates

1937 1.0%

1954 2.0%

1960 3.0%

1971 4.7%

1984 5.8%

1990 6.2%

How Social Security Works (continued)

How much Self-Employment tax must a self-employed person pay in 2005?• A self-employed person pays both parts

• 12.4% on first $90,000 of net earnings (SS tax)

• 2.9% on all taxable earnings (Medicare tax)

• Self-employed may deduct half of their SS taxes as an adjustment to taxable income

C. Key Questions about Social Security

If you have a job and a small business on the side, what do you pay?• No more than $90,000 of combined wages

are subject to FICA tax in 2005• Additional wages are subject to Medicare

tax

Questions about Social Security continued)

How does one qualify for benefits?• To qualify for full benefits

• Quarters-of -coverage requirement• The number of calendar quarters that you

earned required minimum amount

• For 2003 the quarter-of-coverage minimum is $890 in earnings

• Need 40 quarters to qualify for full benefits (10 years)

• Earning beyond 40 quarters will not increase benefits

Questions about Social Security (continued)

How much will one get?• Benefit amounts vary depending on:

• Number of years of earnings, average level of earnings, an adjustment for inflation, and age at retirement

• Nonworking spouses get benefits equal to 50% of their working spouses benefit

• If both spouses worked, each is eligible for benefits based on own earnings or based on 50% of spouse’s benefit, whichever is greater

• The formula goal is to replace 42% of your average earnings

Questions about Social Security (continued)

How do I get a copy of my benefits?• To get a copy of your Social Security Statement

benefits, go to www.ssa.gov/mystatement.

• Click on “Your Benefits” near the top, and then click on “Request a Social Security Statement” at the bottom of the page.

• Fill out your name, middle initial, last name, social security number, birthday, and other information that is requested.

• Click on “continue” to submit a request for your Statement. You will receive your Statement in 3-4 weeks.

Questions about Social Security (continued)

How about getting an estimate?• As a preliminary estimate of benefits, go to

www.ssa.gov/mystatement. • Click on “Need to Request a Social Security

Statement” in the top, and then click on “How can I calculate my own benefit estimates” in the middle of the page.

• Then click on “Benefits Planner” and “calculate your retirement benefits based on different retirement scenarios.” You can either fill out the quick calculator “Quick Calculator” or the more detailed “Online Calculator.”

• Click on the calculator desired, and then fill in the information.

Questions about Social Security (continued)

How does starting age affect benefits?• You can start receiving benefits anytime

after age 62, but benefits will be less than starting at your full retirement age of 67 (for those born after 1959).

What is my full retirement age?• Birth Year Full Retirement Age

• 1937 65• 1943-1954 66• 1960 67

Questions about Social Security (continued)

What if I want to retire at 62 and I was born in 1960?

• Payments would be reduced by 5/9 percent for each month prior to age 67 for the first 36 months and 5/12 percent for each month prior to that

• To retire at age 62 would be: 5/9 percent x 36 months = 20%

5/12 percent x 24 months = 10%

Total reduction in payments = 30%

• You may delay benefits after age 67 up to age 70 and receive credits amounting to 8 percent per year for those born after 1943

Questions about Social Security (continued)

What is the annual Social Security statement and when does one get it?• Must be 25 or older• Statement arrives 3 months prior to birth

date• Statement shows:

• Quarter coverage credit• How much you have paid• Estimated benefit data

Questions about Social Security (continued)

How can one apply for benefits?• Application process

• Social Security offices• Telephone• Internet

• May need to show verification• i.e.. Birth certificate, Social Security

Card, etc.

Questions about Social Security (continued)

When will I receive my retirement benefits?• Benefits are paid second, third, or fourth

Wednesdays each month depending on your birth date

• May receive payment by check or direct deposit

Questions about Social Security (continued)

Can I earn income after I retire and still keep my retirement benefits?• Taxpayers age 65 or over can earn any

amount without having their Social Security benefits reduced. (Senior Citizens Freedom to Work Act of 2001)• An earnings test with partial benefits are

possible for those retiring prior to age 65.

Questions about Social Security (continued)

Do I have to pay federal income tax on my retirement benefits?• Possibly, if other income, including pension

and wages, is substantial (see an accountant)• About 20% of those who receive SS

benefits have to pay some federal taxes on the benefit.

D. Understand the Likely Future of Social Security

Where is Social Security now?• The Social Security program is currently

taking in more than it is paying out • It had income of $632bn in 2003

($627bn in 2002). and paid out $470bn in 2003 ($454bn in 2002) in benefits to 47mn (46mn in 2002) people

• Reserves are in government bonds (SS Trust Fund)• Today there are 3.4 workers per recipient

From http://strengtheningsocialsecurity.gov/need_for_action.shtml, 21Mar05

From http://strengtheningsocialsecurity.gov/need_for_action.shtml, 21Mar05

From http://strengtheningsocialsecurity.gov/need_for_action.shtml, 21Mar05

From http://strengtheningsocialsecurity.gov/need_for_action.shtml, 21Mar05

Future of Social Security (continued)

Until 2014

• Benefits can be paid solely from tax revenues until 2014

Until 2025

• From 2015-2025 SS will have to use the interest on the bonds

Beyond 2037

• From 2026-2037 the SS will have to redeem bonds

• At current projections social security funds will be exhausted in 2042

• By year 2075 there will be 1.9 workers per recipient

Future of Social Security (continued)

What about a worst-case scenario in 2042?• Even if SS assets are exhausted in 2042,

Social Security calculates that from the regular inflow of tax revenue alone it could pay about 73 percent of benefits

My recommendation?• Don’t plan for much, but if it still is

available, be thankful

President Bush’s Plan

Establish Personal Accounts (PA) which would be totally voluntary. This is similar to the existing Federal Employee Thrift Savings Plan• PA’s would be invested in a conservative

mix of stock and bond funds• Those who earned an average of $35,000

over their career would have $250,000 at retirement

• Savings would supplement the Social Security benefits, or be passed to children

Review of Objectives

A. Do you understand Social Security in a Historical Context?

B. Do you know how Social Security Works?

C. Can you answer key questions relating to Social Security?

D. Are you aware of the likely future of Social Security?

For more information

Go to www.socialsecurity.gov for more information