Don't make this Social Security mistake in 2017

Opinions run rampant when you start discussing Social Security. Some say you should take it as soon as possible, while others believe waiting until 70 is the savviest path. The pessimists believe it will go bankrupt in 15 years, while the trustees themselves point out that we can still pay out 75% of benefits in a worst-case scenario.

That's why this article is important: There's very little debate about the fact that no one wants to make this Social Security mistake in 2017.

That mistake -- simply put -- is not carefully planning out when you and your spouse will be claiming Social Security benefits. Here, ignorance is not always bliss: Making some missteps can leave your widowed partner in a financial pinch after you're gone.

Social Security loopholes close, simplifying choices

Because of a bipartisan budget deal that was enacted last year, the last of the loopholes that couples could use to "game" the Social Security system were closed. As a result, we are left with three key facts to consider.

Let's consider a married couple, Robin and Pat. Robin is the higher-earning partner, while Pat has a lower-earning work history.

  • Pat has the option to claim Social Security benefits from Pat's own working record, or receive spousal benefits based on Robin's earnings history.
  • Pat can only claim spousal benefits once Robin files for retirement benefits. Pat's spousal benefit will be 50% of what Robin receives -- up to Robin's full benefit.
  • When Robin passes away, Pat can start getting Robin's benefit as a survivor benefit, in place of the spousal benefit or retirement benefit Pat received before.

How these three factors will affect you and your spouse depend upon your financial situation once you hit age 62 and can claim Social Security, and what type of income you will have once the higher-earner -- passes away.

RELATED: 25 vital pieces of Social Security facts you need to see:

25 Social Security facts & figures you need to see
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25 Social Security facts & figures you need to see

1. 60.66 million

As of the September 2016 snapshot from the Social Security Administration (SSA), 60.66 million people were receiving monthly benefits, two-thirds of whom are retired workers. A little more than 6 million survivors of deceased workers and 10.6 million disabled persons were also receiving monthly benefits.

(Caroline Purser via Getty Images)

2. 5.44 million

Social Security's beneficiary base is increasing rapidly due to the ongoing retirement of baby boomers, which is expected to last until about 2030. As such, 5.44 million people were newly awarded Social Security benefits in 2015. 

(ImagesBazaar via Getty Images)

3. $1,300

It's important to understand that Social Security isn't an entitlement, though the requirements for a guaranteed benefit are not too high. You need 40 lifetime work credits to qualify for Social Security benefits, and a maximum of four credits can be earned annually. In 2017, one work credit is equal to $1,300 in wages. Simply earn $5,200 in 2017 and you'll have maxed out your work credits for the year. Do that 10 times and you'll be guaranteed benefits when you retire.

4. 96%

Based on statistics from the SSA, nearly all working Americans (96%) are covered by survivors insurance protection. Though Social Security is primarily designed to provide financial protection for retired workers, it does provide benefits for the spouses, children, and in rarer cases parents of deceased workers.

5. 90%

To add to the above statistic, the SSA also points out that 90% of the American workforce is covered in case of long-term disability. Since nearly 70% of all private sector workers have no long-term disability insurance, it's good knowing that Social Security has their back.

6. 55%

An interesting figure from the SSA is that 55% of beneficiaries are women. Social Security income is of particular importance to women since 1) they tend to live about five years longer than men, on average, and 2) they're often the caregivers that take care of the kids or sick family members, thus their lifetime earnings are often lower than their male counterparts'. Social Security income can be critical to ensuring a healthy financial foundation for women come retirement.

7. 32%

According to an analysis conducted by the Center on Budget and Policy Priorities (CBPP), Social Security income has reduced what would be a 40.5% poverty rate for seniors without this added income to just 8.5%. While the CBPP's analysis can't factor in external variables such as how much extra seniors would have saved prior to retiring if Social Security wasn't available, it's clear as day that Social Security is critical to keeping seniors on solid financial footing. 

8. 81%

Based on data from the SSA, 81% of all benefits paid out by the Old-Age, Survivors, and Disability Insurance Trust (OASDI) are heading to seniors ages 62 and up. Just 5% go to children under the age of 18, and another 14% to adults between the ages of 18 and 61.

9. 61%

Statistics from the SSA in 2016 show that 61% of seniors rely on Social Security to provide at least half of their monthly income. For elderly couples this figure was 48%, while 71% of unmarried elderly persons lean heavily on the program for at least half of their monthly income.

10. $920.2 billion

The SSA's data showed that $920.2 billion was collected from three revenue channels in 2015. A majority of this revenue came from payroll taxes (86.4%), while interest earned on the OASDI's spare cash (10.1%) and the taxation of benefits (3.4%) comprised the remainder.

11. 12.4%

Payroll taxes comprise the lion's share of revenue collection for Social Security. This tax totals 12.4% of wages (up to a certain point, which is discussed below) and it's typically split down the middle between you and your employer, with each paying 6.2%. If you happen to be self-employed, you're on the line for the entire 12.4% tax.

12. $127,200

There is, however, a cap on how much a person can be taxed by the SSA via the payroll tax. All earned income in 2017 between $1 and $127,200 is subject to the 12.4% payroll tax. Any wages beyond that point are free and clear of being taxed by the SSA.

13. $1,351.70

The September 2016 snapshot shows that the average retired worker is bringing home $1,351.70 per month, or $16,220 over the course of a year. Annual benefit increases are tied to the inflation rate as measured by the Consumer Price Index for Urban Wage Earners and Clericals Workers, or the CPI-W. 

14. 0.3%

Speaking of inflation, Social Security beneficiaries are getting a 0.3% cost-of-living adjustment (COLA) in 2017, the smallest increase on record. Social Security's COLA has been dragged down in recent years by weaker energy and food costs, which are sizable components of the CPI-W.

15. 33 out of 35 years

One of the more saddening facts and figures about Social Security is that its COLA has been lower than medical cost inflation in 33 of the past 35 years. The CPI-W factors in a number of varied expenses, but medical costs are a much smaller portion of workers' average expenditures. Seniors spend double what urban wage earners and clerical workers do on medical costs as a percentage of their annual expenditures.

16. $2,687

Social Security benefits are capped at $2,687 per month, which makes sense given that payroll taxes have an annual cap as well. The monthly benefit cap is usually adjusted year-to-year based on inflation. Only a small fraction of Americans have a shot at reaching this maximum payout, as you'll see in the next figure.

17. 60%

Based on data from 2013, as assembled by the Centers for Retirement Research at Boston College, 60% of retirees sign up for benefits before reaching their full retirement age (FRA). A person's FRA is when they become eligible to receive 100% of their FRA benefit. By signing up early, retirees are taking a cut in benefits from their FRA benefit of up to 25% to 30%.

19. 2.8-to-1

As of 2015, the worker-to-beneficiary ratio stood at 2.8 workers for every one beneficiary. In about two decades, this ratio is forecast to drop to 2.1-to-1. In simpler terms, baby boomers are retiring in increasing numbers, and there simply aren't enough new workers to take their place and maintain the worker-to-beneficiary ratio at its current level. This leads to the next point...

20. The year 2020

Based on the latest report from the Social Security Board of Trustees, by 2020 the cash inflow into the OASDI is slated to turn into a cash outflow. In other words, what's expected to be close to $2.9 trillion in spare cash will begin dwindling in 2020.

21. The year 2034

Perhaps the scariest finding of the Trustees' report is that Social Security's spare cash is expected to be exhausted by the year 2034. Assuming Congress passes no new laws affecting Social Security, the Trustees predict that an across-the-board benefits cut of up to 21% may be needed to sustain payouts through the year 2090.

22. 2.66%

Findings from the Board of Trustees report also showed that the actuarial deficit in 2016 was 2.66% for the program. In easier-to-understand terms, a 2.66% increase to the payroll tax would be expected to alleviate all funding concerns through the year 2090. This would mean an increase to 7.53% if you're employed by someone else, or 15.06% if you're self-employed.

23. 56%

It's a fact that gets overlooked by many seniors, but Social Security income may be taxable. Individuals earning more than $25,000 annually and joint filers with income over $32,000 could have a percentage of their Social Security benefits taxed. Not to mention 13 states also tax Social Security benefits.

24. 51%

According to Gallup, 51% of polled Americans in 2015 believed Social Security won't be there for them when they retire. Luckily, this is blatantly false. Social Security is essentially incapable of going bankrupt because it'll always be collecting payroll tax revenue from the workforce. Benefits may indeed need to be cut, but the program will be there for many generations to come.

25. 28%

Finally, a survey conducted by MassMutual Financial Group in 2015 found that just 28% of the more than 1,500 respondents who took its quiz received a passing grade and correctly answered at least 7 out of 10 multiple choice or true/false questions. Only 1 respondent out of more than 1,500 got all 10 questions correct. It's a stark reminder of just how little Americans know about Social Security.


While there are several ways this could play out over time, I'll discuss three examples for how couples can approach Social Security timing.

Option 1: Take the money and run

Obviously, if you both need the money from Social Security as soon as possible to help make ends meet, then you should file as soon as you turn 62. The same holds true if one or both of you is miserable in the line of work you're in, and would do just about anything to get out.

There's no reasonable benefit to put off happiness until tomorrow to endure misery today...especially when your days are numbered. Numerous studies have shown that once you enter retirement, positive feelings skyrocket, and negative ones plummet.

Here's what a study by Merrill Lynch and Age Wave found last year.

Social Security Mistake

Data source: Merrilly Lynch/Age Wave, "Leisure in Retirement."

The key here was that the study was representative of the American populace in every way -- including income in retirement. Simply put: If you can make ends meet, then many will experience more joy from the freedom of retirement than a little added income.

Option 2: Hold off...for a while

Again, let's turn to Robin and Pat. Say they did a decent job of saving for retirement, but they'll still rely on Social Security to make ends meet.

Social Security

Image source: Getty Images.

Because Pat stayed at home to raise the kids, Pat will be relying on her Robin's earnings record to claim spousal benefits. And because Robin actually enjoys work, Robin plans on working until reaching at least full retirement age.

That's because once Robin hits full retirement age -- which is between 66 and 67 for those born in 1943 or later -- Pat's spousal benefits max out. While Robin's potential benefit would continue to climb until age 70, spousal benefits stop increasing at full retirement age. This works out to be the best of both worlds for the couple -- Robin continues to work in a satisfying job for the time being, while the pair will together be getting enough for Social Security to make ends meet.

Option 3: An additional life insurance policy

Let's say that, for whatever reason, the couple knows that Pat is going to have a lot of expenses in retirement -- perhaps for a medical condition that isn't life-threatening, or charitable giving. Pat had a long career to establish an earnings record, though it wasn't as high as Robin's. Also, assume that Pat expects to live longer than Robin.

Given this situation, the couple might decide on a two-pronged approach:

  1. Pat will claim benefits immediately at age 62, giving the couple some cash to help keep them afloat, while not having to tap into the nest egg all at once.
  2. Robin will put off claiming Social Security until age 70 -- when benefits can be as much as 32% higher than at full retirement age. This means that when Robin passes away, Pat will be getting the maximum possible benefit from Social Security. That's why I refer to it as a life insurance policy.

You'll likely fall in the gray area between these examples

This article isn't meant to be an exhaustive guide for how you should coordinate your Social Security payments. Instead, it is meant to illustrate the variables at play, and the myriad of options you have in approaching this decision. The most important thing is that you understand your choices, consult your partner, and make your decision with eyes wide open.

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