Our office recently sat in on a webinar hosted by Terry Seaton and the FICPA on Social Security planning strategies. The rules relating to Social Security benefits are very complex, so our best advice is to consult with an experienced professional before making decisions related to retirement and/or applying for benefits.

Social Security may be available as “retirement benefits” or “survivor benefits” for employees themselves, their spouse, ex-spouse, dependent children, or dependent parents. Social Security is funded by employees and proprietors who pay tax on wages (applied to max wage of $110,100 in 2012). Employee rates of 6.2% are matched equally by the employer (6.2%) for a total of 12.4%. Additionally, Medicare taxes are 1.45% each (employee and employer). Note: For 2011 and 2012 the 6.2% taxed to the employee is reduced to 4.2%. Also, self-employed individuals are responsible for both the employee and employer portions.

To receive full benefits, workers born prior to 1938 must reach the age of 65. The retirement age is gradually increased for workers born between 1938 and 1959. Those born in 1960 and later must be 67 before reaching full retirement age. Retirement benefits may be received prior to reaching full retirement age, but doing so will reduce your monthly payments.

Also keep in mind that to be eligible under the work requirements, an employee must earn 40 “quarter credits” to be fully insured. The name, “quarter credits’ may be a bit misleading as it is not related to calendar year quarters. In 2011, one QC is earned with each $1,120 of wages earned at anytime during the year (a max of 4 credits may be earned each year). This requirement is very important to remember when considering retirement. You do not want to come up short on quarter credits; if you have 39 QC’s, you have not met the requirement and get nothing.

You may access your Social Security statement on-line at www.ssa.gov . Here, you can also receive an estimate of your benefits ( http://www.ssa.gov/estimator/ ). Keep in mind, this estimation is in today’s dollars. You may also access another calculator from the website that allows you to estimate your benefits after adjusting for inflation. It is a very good idea to review your statement each year and verify that your earnings are correct.

It is also important to remember that Social Security is meant to ASSIST those in their retirement years to serve as a SUPPLEMENT to their retirement income. In 2011, approximately $55 million people receive an average benefit of $12,984. While helpful to retirees, Social Security alone will hardly provide a means to luxury style retirement. Further retirement planning is a necessity.

Also up for debate is the question of whether or not the system we currently have in place is even financially sustainable. 2010 was the first year in which the Social Security taxes collected by the government were less than the benefits paid out. The “securities” held in the trust fund for SS are “Special Treasury Bonds”, only redeemable by the Federal Government (meaning they are not marketable). All of the SS taxes collected over the last few decades in excess of benefits paid have been spent by Congress. This means that all future benefit payments must come from taxes, government borrowing, and cutting other programs (not very likely). Future SS rules and benefits are entirely determined by the US Congress.

With 10,000 Baby Boomers turning 65 everyday for the next 18 years, expect debates over Social Security to heat up in the political arena. Find a trusted adviser to guide you in your planning for retirement and stick to it. And as always, feel free to give us a call if we can assist you in anyway.

Stephen Osborne
Accountant
sosborne@mo-cpa.com