It’s Not Fair

How many of you remember when kids were growing up and they had hissy fit or yell session with you or their sibling and the statement was made “it’s not fair!” Well guess what – Life is not fair!  How can we as a country or as individuals have true fairness when none of us are perfect, nor will we ever be!  It’s an acceptance that we are all flawed and will always be so, while we’re on this earth, that is the price of being human.  I’ve come to accept 3 basic truth’s in life that I wrote about in my April 2019 Newsletter the 1st if The Only Certainty in Life is Uncertainty, Truth #2 Life is Not Fair and Truth #3 You Have to Play the Hand Your Dealt!  As we deal with the Coronavirus and Rioting, I thought I’d write about the unfairness of Social Security.

Who gets the most for their money?

  • Those that live the longest! Here is where it gets tricky, white women tend to live the longest and black men tend to die the earliest and everyone else is between these two extremes.  When advising an individual or couple on when to claim benefits, I tend to look at their current health, but my main marker is family history.  If longevity runs in the family, I’m more likely to advise the higher earning spouse to delay claiming on their own record until age 70 in order to maximize benefits for both spouses.  It’s also my belief that those individuals who continue to work or have PURPOSE in their lives live longer than those who retire to the couch.
  • Stay at home women, married to a high earning spouse (this is true if the rolls are reversed). Since the spouse never paid in or had very few quarters meaning very small benefits, they qualify for spousal benefits at FRA of 50% of their spouse benefits, if the spouse dies first they would receive 100% of what they were receiving at the time of death.  Example individual born in 1958 maximum benefits at FRA (66 & 8 months) is $3,142 per month.  If they are the same age, she will receive $1,571 per month for a joint household income of $4,713.  If he dies first she will receive his check and hers if gone.  Should he decide to wait until age 70 before claiming, she cannot receive benefits until he files on his own record and she only gets 50% of his PIA (66 & 8 month) not 50% of his 70 check.
  • Low earning individuals. Surprisingly, the Social Security benefit is an extremely PROGRESSIVE formula, so those who earn the least get a bigger return on their dollars paid into the system.  Since Social Security takes the highest 35 years of earnings to calculate benefits, indexes it to inflation to determine benefits at FRA.  Thus an individual who earns $1,000 per month during their lifetime would receive approximately 90% or $900 per month in retirement income.  In the above bullet a high earner who averaged $10,683 per month of income would only receive $3,142 in benefits.  Also note that a high earner will probably also have to pay income taxes on 85% of their Social Security income.  Remember Social Security came out in the depths of the depression to help those who needed the greatest assistance which is good.
  • Individuals born before 1954 who might be able to take advantage of the Restricted Claiming Provision. In my case I was able to claim spousal benefits when I turned 66 while postponing my own benefits until age 70.  Now my younger brother who turns 66 tomorrow and was born in 1954 cannot claim spousal benefits while postponing his own benefits until age 70 his only decision is when to claim on his own record.
  • Individuals who are subject to the WEP (Windfall Elimination Provision). I’ve had several debates / disagreements in this regard, but I’ll stick to my guns.  If an individual worked at a job where they did not pay FICA taxes and receive a pension from that job (school teachers, police, fire fighters), but also had a job where they did pay FICA taxes and qualify for benefits they are subject to the WEP adjustment.  In a nutshell if they had 20 years or less of significant earnings instead of getting 90% on their 1st $10,000 of annual earnings they would get 50%.  So in the example above instead of getting $900 in monthly benefits they would get $450.  Remember however that they are receiving a pension from TRS or the Municipality in addition to their Social Security benefits.

Who gets the least for their money?

  • Those who die the earliest or even before they reach age 62. This is especially true where there is not spouse who might benefit from their earnings history.
  • Very similar to the 1st bullet, but this would be for 2 high earning spouses where one dies and the other lives. What we want to explore here is the ability to claim survivorship benefits while postponing their own benefits until age 70 and not having to waste the other benefit.
  • Where the surviving spouse has a pension from a job where they did not pay FICA taxes (see above WEP scenario). This is called the GPO (Government Pension Offset), it is for the spouse where we have to reduce spousal benefits and / or  survivorship benefits based upon the current income from the pension that they receive.  Example:  Spouse has a pension that pays them $3,000 / mo. we have to take 2/3 of that pension $2,000 / mo. and reduce the spousal or survivorship benefit by that amount.
  • Folks who are divorced, were married 10 years or longer and not currently married and born after 1/1/1954. Since they were born after that date they are ineligible to claim spousal benefits at FRA while postponing their own benefits until age 70.  Should they decide to claim they must take the greater of their own benefits or spousal!  If the ex is deceased we can take advantage of the Restricted Claiming Provision, so don’t hesitate reaching out as to your options.

As you can see LIFE IS NOT FAIR, it never has been and never will be all we can do is accept what life throws at us and live within the rules and explore options available to us!!!!!

Keep Cool, have a great summer and never hesitate reaching out if you think I can be of assistance.  100% of all the analysis I prepare are referrals from folks like yourselves and satisfied clients.  I appreciate the referrals and I think the people you refer me to appreciate it as well!

Dave Zander, CFP®