It's More Important Than You Thought

The first Social Security check was mailed in January, 1940 to Ida May Fuller of Ludlow, Vermont. She received a monthly benefit of $22.54. Times have changed and Social Security is now an even bigger part of everyone’s life. It is estimated that a married couple who have earned at or above the payroll tax ceiling their entire lives would need to have $1.6 million in invested assets to equal the amount of benefits they expect to receive from Social Security over their lifetimes.

But, Social Security is a complicated beast. There are over 500 different ways to file for benefits. Many people take the easy way out (see chart below) and simply file for whatever they are qualified for at age 62. In fact two thirds of all men and women do not wait for full retirement benefits. A new book by Kotlikoff, Moeller & Solman, Get What’s Yours, A Primer on How and When to File For Social Security is a good introduction to the benefits and also, the complexities of Social Security.

The authors emphasize there are three general rules that everyone should be aware of:

1.)         Be patient – wait as long as possible to collect. Social Security benefits go up a guaranteed 8% per year from ages 62 to 70, if you wait. This is a nearly 70% increase in your monthly benefit, and of course  benefits go on for your lifetime.

2.)         Get all of what’s yours. This requires digging. There are special rules for spousal benefits and rules for divorcees, widow benefits and benefits for the disabled. Do your homework here.

3.)         Get the right benefit at the right time. If you qualify for two benefits you can only collect one at a time. Get the timing right so you claim one benefit now and let the other grow.

Where do you go for information? Start with the Social Security office but remember this is complicated stuff, the agency is over worked and like the IRS, you might get different answers with different calls. You can also try the many software packages, including four run by Social Security and the free services of AARP, T. Rowe Price and others. One of the authors has his own website (www.maximizemysocialsecurity.com).

We read stories that Social Security is running out of money and within twenty years it will be able to pay only 80% of what it promises now. This is true but long-term fixes do not seem that dramatic (at least to me). Modestly increasing the payroll tax on employees and employers, increasing the amount of income subject to Social Security tax, increasing the amount of benefits taxed and/or changing the indexing formula for benefits, would fix the system for many decades. But this runs counter to Washington’s mantra - NO NEW TAXES. Guess we will always have death, taxes...and politics.