by Stephen Reed | Accounting News, News, Social Security
According to the Social Security Administration, the last 12 Trustees Reports, which report annually on the current and projected financial status of the Social Security program, indicated that reserves will be drained between 2033 and 2035. If that happens, scheduled tax revenues will be adequate to pay only about three-fourths of the scheduled benefits. Here are some of the legislative measures that policymakers have proposed to address the issue.
Raise the Retirement Age
One proposal is to gradually increase the retirement age. Currently, the retirement age is set at 67 for those born in 1960 or later. The proposal would increase the retirement age to 68 over the next decade, and eventually to 70 for people born in 1978 or later. Proponents of the increase claim that it would reflect longer life expectancies and help to ensure the program’s long-term sustainability. Critics of the increase argue that this would disproportionately affect low-income and blue-collar workers who have physically demanding jobs and may not be able to stay in the workforce as long.
Increase Payroll Tax Rate
The payroll tax rate funds Social Security. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $160,200 (the self-employed pay 12.4 percent). Under this proposal, the tax rate would gradually increase over the next decade, thereby garnering more revenue for the program. Advocates of this approach assert that it would be a fair way to fund the program, as it would require higher earners to pay more into the system. However, those against this move argue that it could discourage economic growth.
Invest in Private-Sector Stocks and Bonds
Social Security funds are invested in special-issue government bonds, and these bonds have a lower rate of return than stocks or other investments. Proponents of this move argue that investing Social Security funds in a diversified portfolio of stocks and bonds could potentially earn higher returns and increase the program’s financial sustainability. Critics point out the obvious risks and market volatility associated with investing in the stock market.
Change the Way Benefits Are Calculated
Social Security Benefits are based on a worker’s highest 35 years of earnings, adjusted for inflation. One proposal is to implement a formula that is less generous to higher earners. While this could address Social Security’s regressive aspects, where higher earners receive more benefits than lower earners, critics argue that this could disincentivize workers to increase their earnings and could dissuade entrepreneurship.
Invest in Private IRAs and Savings Accounts
Finally, some lawmakers have recommended creating individual retirement accounts (IRAs) or other private savings accounts as alternatives to Social Security, allowing individuals to invest a portion of their earnings in the stock market or other investments. While this would grant individuals more control over their retirement savings, and could potentially earn higher returns than the Social Security system, critics point out that private accounts expose individuals to market volatility, and that the Social Security program provides a safety net for individuals who may not have the means or knowledge to invest in private accounts.
by Pete McAllister | Accounting News, News, Retirement, Social Security
Retirees are feeling the effects of soaring inflation, and it’s stretching their budgets. More than 70 million retired Americans depend on a Social Security benefit program as a source of income, especially during economic downturns, so annual changes to payouts are always expected. Read on to learn what’s in the cards for Social Security benefits next year, including a higher payout.
COLA Boost
Get ready for a historic increase to 2023’s cost-of-living adjustment (COLA). 2022 saw an adjustment of 5.9%, which was already uncommonly high, but in 2023 monthly checks will increase by 8.7%. That’s approximately $146 per month ($1,752 per year) for the average retiree. This is the highest COLA increase since 1981. All retirees currently receiving Social Security benefits will see this increase in January of 2023.
Maximum Taxable Earnings Will Increase
Due to an increase in average wages, Americans will see more Social Security taxes taken from paychecks in 2023 because more of their income will be liable for the tax. Maximum earnings subjected to Social Security taxes will increase from $147,000 in 2022 to $160,000 in 2023. This means that workers paying into the system are taxed on wages up to this amount, typically at the 6.2 percent rate.
Maximum Social Security Benefit Also Set to Increase
The maximum benefit for retired workers who claim Social Security at full retirement age — which is 67 for anyone born after 1960 — will be $3,627 in 2023, up 8.4% from $3,345 in 2022. Take note that the maximum benefit will be different for those who claim benefits before the full retirement age, and the same can be said for those who claim benefits after the full retirement age. For instance, if you begin claiming benefits at age 62, your maximum monthly benefit in 2023 will be $2,572. On the other end of the spectrum, if you begin claiming benefits at age 70, your maximum monthly benefit in 2023 will be $4,555.
Work Credits Will Be Harder to Reach
In order to earn retirement benefits, workers must accumulate at least 40 work credits during the whole of their careers. The maximum number of credits eligible to be earned per year is four, and the value of each credit fluctuates from year to year. In 2023, a single credit will be worth $1,640, up from $1,510 in 2022. Thus, workers will need to earn more income in order to collect the credits they need to retirement benefits.
by Daniel Kittell | Accounting News, News, Retirement, Retirement Savings, Social Security
While Social Security typically plays a role in planning for retirement, it’s important to be clear on the specifics of this benefits program. It definitely can be a source of financial support, but there are a few realities to be aware of so you’re not caught off guard when the time comes to make use of these benefits.
Social Security Benefits Fall Far Short of Replacing Income
In fact, Social Security replaces only about 40% of pre-retirement income. When you retire it’s generally advised to have enough money coming in to replace at least 80% of pre-retirement income in order to avoid a major drop in quality of life. Income from sources such as a pension or savings will be needed to fill the gap.
Your Benefits Could Be Taxed
Approximately 50% of retirees pay some federal taxes on their Social Security benefits. This is because their combined income from Social Security and other sources bumps them above the thresholds for taxes to kick in. These thresholds—$25,000 for single people and $32,000 for married joint filers—aren’t indexed to inflation. Due to natural wage increase, more and more people are going to end up with provisional incomes above the stated thresholds, so the percentage of Americans who are required to pay some taxes on Social Security benefits is expected to increase over time.
Medicare Premiums Are Deducted from Your Social Security
If you receive Social Security benefits and you are enrolled in Medicare Part B (the portion of Medicare that provides standard health insurance), the premiums for Medicare are typically automatically deducted from Social Security payments.
Claiming Benefits Early Could Result in Smaller Monthly Checks
If you opt to begin receiving Social Security before your full retirement age, you will not get your standard benefit amount. Full retirement age differs by birth year, but it ranges between 66 and 2 months and 67 years old. Depending on how far you are from your full retirement age when you start claiming benefits, you could fall short of your benefit rate by as much as 30%.
by Jean Miller | Accounting News, News, Retirement, Tax, Tax Planning - Individual
Beginning next year, for the first time in 39 years, Social Security is projected to dispense more money than it takes in, which means that the money being collected by the program will soon not be enough to cover the benefits being paid out. Does this mean that Social Security is going bankrupt?
How the Program Came to Be and How it Works
In 1935, after decades of American workers advocated for a social insurance program that could help support retired workers, President Franklin D. Roosevelt signed the Social Security Act into law. Social Security taxes were first collected in 1937 with payments to retired workers beginning in 1940.
A dedicated tax on earnings funds the Social Security program, and the collected money is disbursed as retirement benefits for retirees in the form of a monthly check. How much money a retired worker gets from the program is measured in “work credits”, which are based on total income earned during their career. The program also supplies survivor benefits in many cases to widowed spouses.
What Went Wrong?
Social Security was signed into law over 80 years ago, and there have been significant shifts in demographics since then. The baby-boom generation is retiring, tipping the scale on the worker-to-beneficiary ratio, but other contributing factors include:
- growing income inequality
- sizable decline in birth rates
- legal immigration, which has been cut in half over the last two decades
- Longer life expectancy as a result of modern medicine, which means people are collecting checks for more years than earlier generations
Is Bankruptcy in the Future for Social Security?
Rumors of the program’s impending bankruptcy have been circulating for years, and some people believe that Social Security funds are going to run out, leaving the workers who are paying into the system now without benefits. This is unlikely to be the case, but lawmakers rightfully continue to discuss proposals to Social Security legislation that would protect the program in coming years. While GOP lawmakers have expressed a desire to raise the minimum age at which you can begin to receive payments, Democrat lawmakers have proposed increasing the payroll tax that pays for Social Security. Neither plan is perfect. The GOP proposal would take years before any savings are realized, and the democrats’ plan to tax the rich would only put the program on borrowed time until it’s back in the same position. A bipartisan plan is needed for the future of Social Security, but how long it will take lawmakers to get there remains to be seen.
by Stephen Reed | Estate Planning - Individual, IRS, News, Retirement, Tax, Tax Preparation - Individual
The Social Security Administration sends survivor benefits to about 6 million Americans every month, directed to widows, widowers, and children who have experienced the loss of someone who has paid into the social security program. Read on to find out who is eligible to receive survivor benefits and how to collect them.
Who is Eligible to Receive Survivor Benefits?
If you were married to your spouse for at least nine months before their death, you are eligible for social security survivor benefits. (The one exception to this length-of-marriage stipulation is if you are caring for a child of the deceased who is under 16 years old). Children of the deceased who are under 18 years old may also receive survivor benefits, as can disabled children under the age of 22. Finally, parents, stepparents, or adoptive parents who are at least age 62 and were dependent upon the deceased could potentially qualify for survivor benefits.
When Can You Begin Social Security Survivor Benefits?
Surviving spouses can begin collecting survivor benefits as early as age 60, but this will result in only about 70% of the amount the survivor could get if they wait until their survivor full retirement age, which is 66 for people born between 1945-1956 and gradually increases to age 67 for those born in 1962 or later. There are some exceptions to this as well: if you are disabled, you may begin collecting survivor benefits at age 50; any surviving spouse can collect a one-time death benefit payment of $255 at any age; and as noted above, survivors who are caring for a child of the deceased who is under age 16 can collect at any age.
How to Claim Social Security Widow and Widower Benefits
First, the death needs to be reported, which is a task that most funeral homes include as part of their service as long as the social security number of the deceased is provided. Documents needed to apply for Social Security survivor benefits include:
- Proof of death for the deceased in the form of a death certificate
- Social Security number of the deceased
- Social Security numbers of the survivor and any dependent children
- Your birth certificate
- Your marriage certificate
- Most current W-2 forms of the deceased
- Bank information for direct deposit
Once everything is submitted, you’ll be notified of your eligibility to receive survivor benefits.
How Much Will You Receive?
The amount you receive is determined by the deceased’s earnings and whether or not the deceased was collecting benefits (either full or reduced) at the time of death. The basic breakdown looks like this:
- For couples who hadn’t started receiving benefits: it’s recommended for the highest earner of the two to wait until age 70 to begin Social Security benefits. This generates a larger monthly benefit amount that becomes the survivor benefit if and when the first spouse passes away.
- If both spouses had already started claiming: the higher benefit amount becomes the survivor benefit while the lesser of the two benefit amounts will stop.
- If the deceased spouse had already begun benefits, but the survivor had not:
The surviving spouse will need to decide when they will claim survivor benefits in a way that is likely to give them more lifetime income.
In addition to whether or not either spouse was already receiving Social Security benefits at the time of death, the actual dollar amount a survivor receives will depend on how much money the deceased spouse paid into Social Security over their lifetime.
