Jill On Money: Social Security primer and update

Jill Schlesinger

By Jill Schlesinger

In honor of the 85th anniversary of the first time that the U.S. government collected taxes for Social Security — and, more importantly, made lump-sum payments to retirees (President Franklin D. Roosevelt signed the actual legislation on Aug. 14, 1935) — it’s a perfect time for a refresher on the popular benefit.

Social Security is a pay-as-you-go-system that is funded by payroll taxes. That’s the Federal Insurance Contributions Act or “FICA” line item you see on your pay stub.

When first conceived, the taxes that came in were immediately converted to outgoing benefits for retirees. The system changed in the ensuing decades in response to demographic shifts and economic conditions.

For many years, there was more money coming into the program than was going out, creating a surplus.

Those surpluses are shrinking as the massive baby boomer generation continues to retire. Alicia Munnell, the director of the Center for Retirement Research at Boston College, described this situation as “a rat being digested by a snake.”

Munnell recently noted that in addition to longer life expectancies, “the combined effects of the retirement of baby boomers and a slow-growing labor force due to the decline in fertility reduce the ratio of workers to retirees from about 3-to-1 to 2-to-1 and raise costs commensurately.”

Those additional expenses mean that the Social Security system is falling behind.

According to the 2022 Trustees Report, the Old-Age and Survivors Insurance Trust Fund, which pays retirement and survivor benefits, will be able to pay scheduled benefits on a timely basis until 2034. At that time, the fund’s reserves will become depleted, and continuing tax income will be sufficient to pay 77% of scheduled benefits.

The trustees note, “Lawmakers have many policy options that would reduce or eliminate the long-term financing shortfalls in Social Security and Medicare.”

The possible fixes could include some combination of: raising the level on which FICA taxes are levied (aka “the SS Wage Base,” which is currently $147,000); increasing the current FICA tax rate, which is set by statute at 6.2% for employees and employers each or 12.4% for self employed Americans; or raising the retirement age at which you can claim Social Security retirement benefits. In other words, a little tinkering here and there should help solve the problem.

Given that Social Security is not going away, here are a few important things to know about claiming retirement benefits:

  • You need to have worked at least 10 years.
  • The age at which you can draw benefits varies based on when you were born. Full retirement age (FRA) rises incrementally if you were born from 1938 to 1960 — after that, the age is 67.
  • You can claim as early as age 62, but it will be permanently reduced by as much as 25%, which also could affect a non-working spouse.
  • Claiming early negatively impacts any income (including wages, bonuses, commissions, and vacation pay – or net earnings if you’re self-employed, but not pensions, annuities, investment income, interest, veterans, or other government or military retirement benefits).
  • If you are still working and under full retirement age for the entire year, the government deducts $1 from your benefit payments for every $2 you earn above the annual limit ($19,560 for 2022).
  • If you delay retirement until after your full retirement age, you are entitled to “delayed retirement benefits,” or 8% a year more for
    each full year that you delay, until age 70.
  • When you’re ready to apply for retirement benefits, use the government’s online retirement application, the quickest, easiest, and most convenient way to apply.

Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes questions at [email protected]. Check her website at www.jillonmoney.com.