It is super hard to believe that anyone born in 1960 will now qualify to claim Social Security benefits since they’ll be 62 this year! When I began my Social Security Consulting practice, I was running analysis for folks born in the late 1940’s and 50’s, now I’m running reports for folks born in the 60’s, 70’s and recently in the 80’s! Damn seems like only yesterday I was in college…..
Claiming Early – Just because you can claim at age 62 doesn’t mean you should. Keep in mind that if you were born in 1960 your Full Retirement Age (FRA) is 67, if you claim benefits at age 62 you will incur a 30% lifetime penalty. NOTE: If you are married and your benefits are greater than your spouses and you predecease them, they will inherit your 62 claiming decision! Also, if you continue working, you are subject to the Earnings Test (lose $1 of benefits for every $2 you earn above $19,560). So not only are you subject to as much as a 30% lifetime penalty, they’ll reduce your check even more.
Payroll Taxes – In 2022 you will be subject to FICA taxes up to $147,000 of earned income, that is up from $142,800 in 2021. Historical perspective, in 2000 it was $76,200 and in 1990 it was $51,300. The tax rates stays the same 15.3% total ( ½ paid by employer – ½ paid by employee). Maximum payroll taxes $22,491 in 2022. I’m seeing more and more small business owners and doctors wanting to put spouse on payroll, in order to qualify for Social Security benefits on their own record. Remember Social Security takes the highest 35 years of earning to calculate one’s benefits at FRA. Thus, if your attempting to get the spouse to 40 quarters there would still be 25 years of zeros in calculating one’s benefits. REMEBER, the spouse gets the greater of their own benefits or 50% of their spouses benefits! Bottom line – why pay Payroll taxes if the spouse will be receiving spousal benefits?
Maximum Benefits – If you reach your FRA in 2022 and claim the maximum check is $3,345, if you claim at age 62 your maximum check is $2,364 and if you wait until 70 your check would be $4,194 (does not include any Cost of Living Adjustments last year was 5.9%). 70 million American’s are receiving Social Security benefits, the average check is $1,657 per month, average checks for a couple $2,753. Almost 40% of people still claim benefits at age 62 and less than 5% wait until age 70. RULE OF THUMB – whatever your check is at age 62 it is DOUBLE at age 70! You worked 40 years to get $x does it make sense to wait 8 more years to get $x times 2?
Social Security is Going Broker – I’ve seen an increase in the number of articles and reports talking about the demise of Social Security. Yes, without changes Social Security benefits are projected to be cut by 2034 by 21% and in 2090 by 26%. Prognostication – Benefits will not be reduced for Americans currently receiving benefits (70 million) or folks over age 55. WHY? Politicians #1 objective in office it to get reelected! What are the odds of them being reelected if they allow benefits to be reduced.
Reform Proposals to restore continued solvency;
- Increase maximum earnings subject to FICA taxes (currently $147,000)
- Stop earnings subject to FICA taxes at $147,000, but start if again on incomes that exceed $400,000 (tax the rich)
- Increase the FRA (Full Retirement Age) from 67 and gradually increase it to age 70 (but not to affect those people currently over age 55) Reagan did this in 1983 when they increased FRA from 65 to 66 up to 67 for those born in 1960 or later.
- Increase the payroll tax from 6.2% to 7.4% over the next 20 years (Employee & Employer)
- Change the COLA from Wage Based to actual CPI
- ANY COMBINATION OF THE ABOVE
The bottom line is I see No Risk of current or soon to be retired individuals having their benefits cut or changed in this current political environment. Will they continue to delay addressing the situation? ABSOLUTELY, but within the next several years they will be forced to come to a compromised solution that will allow them to stay in office!
The biggest risk continues to be the INDIVIDUAL themselves! It’s making BAD DECISIONS due to LACK OF KNOWLEDGE and understanding the impact of those decisions. It’s looking at ALTERNATIVES to be claiming, be it continued work, using other assets to create a bridge to age 70 or having the lower earning spouse claim early or a COMBINATION of all the above.
I’ve got my work cut out for me, but I appreciate the confidence you’ve placed in me over the years, and I promise to do my best to assist you and your clients in make informed and educated decisions!