1. “Long-term deficit? We can hardly afford our bills today.”
About a third of workers in their 50s expect Social Security benefits to be their primary source of income in retirement, according to the Transamerica Center for Retirement Studies. That reliance gives pre-retirees reason to worry about the future of the program. The Social Security Administration itself has said that unless something is done to reform the system, it will have to reduce benefit payments to retirees within the next few decades.
Less talked about, perhaps, is the concern that the program is having a hard time paying its bills today. In 2010, the Social Security Administration began collecting less revenue in taxes than it needs to cover benefit payments, forcing the agency to tap its $2.7 trillion trust fund sooner than some had expected. It was the first time since 1983 that expenditures had exceeded noninterest income, and the shortage is expected to continue. “It’s almost like a family running huge deficits throughout their budget,” says Eugene Steuerle, an economist with the Urban Institute, a nonpartisan think tank in Washington, D.C.
A Social Security spokeswoman points out that interest income from the Treasury bonds held in the trust fund will allow it to keep growing until 2020—even if the agency has to siphon off some money to offset shortages in tax revenue. The fund won’t be exhausted until 2033, around the time Gen Xers are expected to begin retiring. But that is already a few years earlier than previous projections. After that, the agency says, tax income under the current system will only cover about three-fourths of benefit payments through 2087.
2. “Disabled? A benefit cut is coming your way soon.”
The number of workers collecting disability benefits through Social Security has spiked in recent years, hitting 8.9 million in April, up 50% from 5.9 million in 2003, according to agency data. Some of that change can be attributed to demographic changes—as more women have entered the workforce over the past several decades, the number of people qualifying and collecting disability benefits overall has grown. As more baby boomers age, the population of people who might qualify for disability benefits is growing, economists say. And the expanded eligibility for people with psychiatric disorders has contributed to an increase in the number of younger people collecting benefits—a population that is also likely to stay in the system for a prolonged period of time, says David Stapleton, director for the Center for Studying Disability Policy at nonpartisan consulting firm Mathematica Policy Research. Other drivers include the slower economy: the number of people applying for and receiving disability benefits grew during the recession after some workers saw their jobs disappear or found that they qualified for fewer jobs after becoming disabled, says Stapleton. Plus, he says, some states are tightening eligibility for workers’ compensation and encouraging people to move onto the Social Security disability program, which is federally funded, to lower state costs for Medicaid and welfare programs.
It’s those added factors that are draining the Social Security Trust Fund for disability insurance at a faster pace than expected, he says. The trust fund could be depleted by 2016, according to agency estimates, and if Congress fails to act, people collecting disability payments will face a 20% cut to benefits, according to agency projections. “We’re getting to a point where they’re running out of money,” says Mary Johnson, a Social Security and Medicare policy analyst with the Senior Citizens League.
Some reform proposals call for limiting the cost of living adjustments issued to people receiving the benefits or for raising the maximum income that can be taxed to supplement the trust fund. Lawmakers could also decide to tighten eligibility, reduce benefits for some groups or tap the retirement fund to supplement disability payments, but that last option would erode the retirement trust fund sooner than expected, says Johnson. One option for longer term reform is to develop a program that helps people continue to work instead of claiming benefits after they become disabled, says Stapleton. The Social Security Administration says it projects that the number of disability beneficiaries will continue to grow, but only at the rate of increase in workers.
3. “This used to be a much better deal.”
Today’s workers—boomers, Gens X, and Gen Y—frequently carp about Social Security, but it isn’t all sour grapes or skepticism about paying into a system with an uncertain future. Employees today pay more in Social Security taxes than previous generations did. They’re also likely to get smaller benefits relative to the taxes they paid in when it is their turn to retire.
Over the years, as the Social Security Administration has come to grips with the cost of its benefit program and the ranks of eligible beneficiaries has swollen, taxes to fund the program have gone up and up, a trend that experts say is likely to continue over the coming years. Workers now pay 6.2% in payroll taxes (temporarily reduced to 4.2% in 2011 and 2012)—nearly double the 3.6% tax rate workers paid in 1965. Over the same time period, the maximum earnings eligible for taxation have also increased from $4,800 (equivalent to about $35,400 in 2013 dollars) to $113,700 in 2013.
For example, a single man who retired in 1980 at age 65 after earning an average wage of $44,600 (in 2012 dollars) would have paid about $98,000 in Social Security taxes, and probably received $207,000 in lifetime benefits, according to a study by the Urban Institute, a nonpartisan policy think tank in Washington, D.C. By contrast, a single man making the same average wage today and retiring in 2030 will likely pay $404,000 in lifetime taxes but receive just $339,000 in lifetime benefits—about 16% less than he paid in. “People who were first in the system got a great rate of return,” says Alan Gustman, an economics professor at Dartmouth College. “It’s the younger generation that is going to be in the most difficult position.” The Social Security Administration said in a statement that Social Security taxes have increased because the number of people collecting benefits is growing at a faster pace than the number of people working and paying taxes. The imbalance is also partly due to the fact that the earliest beneficiaries only paid taxes in the later stages of their careers.
4. “Want a bigger check? Go back to work.”
Most people within 10 years of age 62, the earliest eligibility age for retirement benefits, have already started doing the Social Security math problem: How much do I get if I wait one year to take payments? How much if I wait two years? To get the biggest bump in benefits, workers have to delay their benefits beyond full retirement age—around 66 for people born before 1957, closer to 67 for people born after. (To find your exact date, see Social Security’s website) For every additional year you wait, you’ll get an increase in payments of up to 8% a year until you hit age 70. (Find your yearly rate of increase here.) A man who could receive a monthly benefit of $1,000 at his full retirement age of 66 would collect a smaller check of $750 a month if he started collecting benefits at age 62, but could get $1,320 a month if he waited until age 70 -- a 32% boost.
If you’ve already started collecting benefits and you’re under full retirement age, it isn’t too late to get a raise. One strategy: Go back to work. If you earn more than $15,120 annually through your employment, the Social Security Administration will dock $1 in benefits for every $2 you earn. But once you reach full retirement age, your benefits will be recalculated to account for the money you didn’t get while working. So, for example, someone who took their benefits at 62—at a 25% reduction compared with full benefits—but went back to work from ages 63 to 66 and earned enough to zero out his entire Social Security check could end up collecting close to full benefits at age 66.
5. “You can be unemployed and retired.”
A growing number of people in their 60s are collecting unemployment and Social Security benefits at the same time. Since 2002, 19 states have changed the rules to allow people to qualify for more unemployment benefits while they receive Social Security, according to the National Employment Law Project, which has advocated on behalf of allowing seniors to claim both. It’s perfectly legal; you just have to report the income to both agencies.
There is no clear data on how many people are drawing both. About 11% of people who collected unemployment benefits in 2012 were 60 or older, according to the Department of Labor; the minimum age to collect Social Security retirement benefits is age 62. For those who qualify, the option has obvious appeal for older Americans struggling to find work in today’s weak job market. “They’re unemployed and they’re still looking for work,” says George Wentworth, an attorney with the National Employment Law Project, adding that many of these seniors would be willing to give up their Social Security benefits if they landed a job.
Receiving unemployment benefits doesn’t affect your Social Security payments, but the reverse isn't always true: In some states, collecting Social Security can reduce your unemployment checks. In Illinois, Louisiana, South Dakota and Minnesota, your unemployment benefits can be reduced by half of your monthly Social Security benefit.
6. “Your Social Security number is no state secret.”
Don’t carry your Social Security card in your wallet. Don’t give your number over the phone. Don’t use it as a password. For all the precautions workers are told to take to protect that nine-digit number, a Social Security number is still surprisingly vulnerable. So far this year, more than 6.4 million names, along with Social Security numbers, driver’s license numbers and other pieces of sensitive personal information have been exposed to potential theft as a result of more than 301 data breaches at employers, government agencies and elsewhere, according to the Identity Theft Resource Center, a nonprofit that helps victims of identity theft.
But a Social Security number need not even be stolen to be compromised. A 2009 study from Carnegie Mellon University found that it is possible—and not too difficult—to guess a Social Security number using details easily gleaned from a Facebook profile, such as date of birth and hometown. Researchers were able to accurately guess the first five digits of 44% of Social Security numbers issued after 1988 on the first try, just by using the date and the state the number was issued in; they were able to guess the complete numbers almost 9% of the time. The authors used a list of known Social Security numbers from the Social Security Death Master File, an index of deaths that have been reported to the agency, to find patterns on how the last four digits are assigned—the first five digits are based on the state the number was issued in—and they found that they are largely assigned in order, based on when the number was issued.
In 2011, the Social Security Administration implemented a more randomized process for assigning Social Security numbers, making more combinations available in every state. Anyone with a number issued before then might want to guard their birth date and place of birth as carefully as they do their Social Security number -- or at least tighten their Facebook privacy settings.
7. “If you make too much, we’ll tax your benefits.”
Your Social Security benefits come from paying taxes while you were working, so surely they can’t be taxed, right? Wrong. You may be taxed on your Social Security benefits if you have substantial taxable income from other sources, such as dividends, self-employment, investment interest and pensions, or IRA and 401(k) distributions. And studies find many Americans aren’t aware of the fact: Some 42% of pre-retirees surveyed by the Financial Literacy Center didn't know that benefits could be taxed if their income in retirement exceeded a certain amount.
The rule is that if your combined income—a measure that includes other sources of income and half of your Social Security benefits—exceeds $25,000 for an individual or $32,000 for a married couple filing a joint return, you may be taxed on up to 85% of your benefits. People who find themselves in this group can make quarterly estimated payments or choose to have federal taxes withheld from their benefits. The Social Security Administration began taxing benefits in 1983 as part of a law intended to increase income for the Social Security program and Medicare.
8. “Your cost-of-living adjustments come up short.”
Every year, Social Security recipients get a cost-of-living adjustment, a little bump based on the current rate of inflation and designed to cover the rising cost of everything from toothpaste to airline tickets. But some critics say the current measurement of inflation doesn’t reflect the higher costs that seniors truly face. For example, many people in retirement may spend a large share of their budgets on health care, and the adjustments might not cover the steep rise in housing costs that can occur when seniors need to move into assisted housing, says Catherine Collinson, president of the Transamerica Center for Retirement Studies. “In many parts of the country, a monthly Social Security benefit isn't enough to cover basic living expenses,” she says.
The pricing pressure means some retirees could find themselves struggling to cover essentials like gas, medicine and housing, says Collinson, meaning they will have to cut spending in other areas. For pre-retirees, it means ramping up your savings today so that you can struggle less in your golden years, she adds. The Social Security Administration says it has been using the Consumer Price Index to measure inflation for the cost-of-living adjustments since legislation instituting automatic cost-of-living increases was enacted in 1972, and changing the benchmark would take an act of Congress.
9. “Good luck reaching us.”
Nearly 182,000 people stop by one of the Social Security Administration’s local offices daily, and more than 445,000 people a day call the agency for help filing claims, to update their information and other guidance, according to a 2012 report by the Office of the Inspector General. But the administration’s shrinking budget (the agency’s budget for fiscal year 2013 is $11 billion, nearly $1 billion less than it was in 2010) and smaller staff (the agency lost about 10,000 employees since the start of 2011) are making it harder for employees to handle the growing workload. The average call wait time grew to nearly 5 minutes last year from three minutes in 2011, the report found. And the agency merged 20 field offices last year. The obstacles could grow as more employees retire—the administration estimates 45% of its employees will be able to retire by 2020—leaving fewer experienced workers on staff, the report found.
The Social Security Administration is trying to improve its customer service by increasing the range of services offered online and launched a new mobile-friendly site for smartphone users. Last year, the agency rolled out an online Spanish application and improved the online appeals application. It also made it possible for people applying for disability benefits to electronically submit medical information, which could speed up the claims process. “Given our significantly reduced funding over the last three years, we have had to find innovative ways to meet the needs of the American people,” says a Social Security spokeswoman. Collinson says people should take advantage of online services and set up appointments with their local offices to be sure someone can help them when they go.
10. “We punish dual-earning households.”
The Social Security program, in a way, rewards marriage by providing spouses with retirement and survivor benefits to husbands and wives, even if one spouse never worked. But those perks all but disappear for couples where both spouses are working and earning roughly the same amount, says Alan Gustman, an economics professor at Dartmouth College
It comes down to the way spousal benefits are awarded. If a person at full retirement age has never worked or paid Social Security taxes but is married to someone who did, that person is still entitled to receive benefits of up to 50% of the payments being awarded to their spouse and 100% if their spouse passes away. If both spouses worked but one person earned much more, the benefits of the lower-earning spouse would be topped off to equal at least half of the payments being given to the higher earning spouse. (Say the husband earned benefits equal to $20,000: The wife is entitled to receive $10,000 in benefits even if she would only receive $5,000 based on her own work record.)
But in households where both spouses earn roughly the same income, each person only receives the benefits they earned through their own work history and the taxes they paid—getting no boost from their spouses, says Gustman. “Two-earner households are at a big disadvantage,” he says.
To be sure, households where both spouses worked could receive more in Social Security benefits overall in retirement, even if they did pay more in taxes. (Picture two people collecting $20,000 a year as opposed to a home where one spouse gets $20,000 and the other gets $10,000). And fewer women overall are expected to collect spousal benefits, as more women enter the workforce and earn as much as or more than their partners, says Gustman.
But for now, it appears high-earning couples are getting more out of Social Security spousal and survivor benefits, says Gustman, who co-wrote a report with Thomas Steinmeier and Nahid Tabatabai funded by the Social Security Administration through the Michigan Retirement Research Center that found women in higher income households are less likely to work when compared with lower income households, where both spouses are more likely to work. The Social Security Administration says it projects that the number of women collecting benefits based on their work records will double to 36.4 million by the end of 2037, from 18.2 million at the end of 2012. The number of women collecting spousal benefits alone will decline slightly over that same time period to 2.1 million from 2.2 million.