By Edward Leone Jr. DMD MBA RFC
Contact Information: leonee@vzw.blackberry.net
The month of May has nearly concluded. We have been informed by the US Secretary of the Treasury that on May 16th our government reached its debt limit of $14.294 trilion dollars. The Secretary informs us also that there is no immediate danger of default and that the federal government will curtail funding of employee retirement accounts to avoid such an event. This strategy will give the Congress and the Executive up into August to work out a solution to the debt issue. The history of the debt limit issue is long and interesting to observe. The first time a limit was set is in 1917 at a level of $11.5 billion dollars according to the Center for a Responsible Federal Budget. To gain a prospective on how government has been managing its business, one must note that since 1962, the government has raised its debt limit 74 times with 10 of those actions happening in the just ended decade. What is next? Who knows??
A part of that national debt is owed to the Social Security trust fund. The Social Security system in this country was established in 1935 with the institution of the FICA tax in 1937. Benefits were first issued beginning 1940. On inception, participation was voluntary. The tax was 1% of the first $1,400 of income and was tax-deductible. Today it is 6.2% of the first $106,800 of income with no tax deduction and participation is mandatory. In 1939, benefits were established for spouse and children of a participating worker in the event of a premature death. The concept of cost of living benefit enhancements was introduced in 1951 and became an automatic function without an act of the Congress in 1972. The addition of disability benefits occurred in 1954 and early retirement at age 62 was added in 1961. Originally, the trust fund was dedicated only to the Social Security program. Under the Johnson administration, in the 1960’s, the fund was placed in the general fund and replaced with government debt obligations which pay interest to the fund. We are told that the system can perform at the current level of benefits until 2036 since Social Security spends more than it takes in. This trend is continuing since due to the poor state of the economy with high unemployment, tax revenues are down. Along with this fact, the baby boomer generation is at retirement age. The trend toward fewer workers supporting the program for a growing number of retirees is evident. The system’s Board of Trustees reports that over the next 75 years, $6.5 trillion in additional revenue will be needed for it to meet projected obligations. It is clear that program adjustments will eventually have to be made to sustain operations.
So when should an individual begin to take Social Security benefits? The answer to this question is guided by many issues and personal factors from individual to individual. Approximately 40% of those eligible are taking benefits at age 62 due to unemployment, disability or a perceived lack of need to work. Those who chose this path and are claiming a benefit based on their own work record as opposed to that of a spouse, will see a 25% reduction in benefit as compared to the benefit available at full retirement age which currently is 66 or 67 depending on your birth year. For each year that the individual postpones retirement after full retirement age, the system adds 8% to the benefit level up to the age of 70. Along with COLAs, this could be a generous return for waiting to take a benefit. Many wonder what is the break even point (at what age am I ahead of the benefit game) regarding the decision over when to begin taking benefits. This depends on many factors including income levels during the working years and longevity. It is also important to consider what portion of your Social Security benefit may be taxable. If you have income of $25,000 or $34,000 if married and filing a 1040 jointly, 85% of your benefit is taxable.
The decision regarding Social Security benefit timing is important and should be examined in the context of the conditions exhibited above. It is a good idea to work with a financial planner on such issues.
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Suggested Reading:
“Contemporary Financial Management” By Moyer, McGuigan and Kretlow
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