Saturday, June 09, 2018

Can You and Your Clients Count on Social Security?

“Today more people believe in UFOs than believe that Social Security will take care of their retirement.” -- Scott Cook, billionaire cofounder of Intuit.

“Before Social Security existed, about half of America's senior citizens lived in poverty.”Senator, Bernie Sanders

Depending on your point of view, Social Security is either one of the Big Government’s greatest social achievements, or it’s just another heavy-handing tax on the first $128K of your income and a well-intended social safety net that’s poised to collapse on itself.

A Gallup poll found that half of working Americans don't think they'll receive any benefits when they retire. In fact, a new report this week from the trustees of Social Security said the program's costs are expected to exceed its income this year for the first time since 1982. That shortfall will force the U.S. government to dip into the retirement system's trust fund to pay benefits to participants. How serious a problem is that?

Well, if the program’s reserves are depleted as expected by 2034, the system won’t be able to pay all the benefits retired workers are entitled to. Experts say the program could still honor three-fourths of benefit claims if its reserves are depleted post-2034. But even at 100-percent, payouts won’t be enough to meet the needs of most retired Americans.

This much is clear. Over 10,000 Boomers a day are filing for Social Security benefits for the first time. Confusion over the program’s future is causing many retirees and near-retirees to make ill-advised filing decisions.

To help separate Social Security fact from fiction, a number of our clients have been fielding media inquiries lately about some of the biggest myths about the program. Here are some excerpts:

Spousal Benefits

According to Blake Christian, CPA, a partner of Long Beach, California-based HCVT, “Many taxpayers are confused about how Social Security benefits vests with respect to surviving spouses of a decedent or a former spouse.  Generally a spouse, or former spouse (‘requesting spouse’), who was married for at least 10 years is entitled to receive up to 50 percent of the Social Security benefits of their spouse or former spouse. In order to claim spousal benefits, the spouse requesting benefits must meet the following three tests:
a) The requesting spouse must generally be 62 years or older, and
b) The related spouse must have reached Social Security eligibility and
c) Have filed to receive their benefits.
Christian added that if the spouse has deferred claiming Social Security benefits in order to increase future pay-outs, the requesting spouse must also wait for their share. “Divorced spouses who have not re-married, are likewise eligible to claim up to 50 percent of their former spouse's Social Security benefits once the requesting spouse and ex-spouse reach 62; however, the requesting spouse is not required to wait until their ex-spouse files for benefits. If newly divorced, there is also a two-year waiting period before benefits are available to the requesting ex-spouse. It is worth noting that these spousal benefits do not reduce amounts payable to the ex-spouse or the new spouse (if the ex re-married),” added Christian.

More solvent than you think

Matt Topley
, chief investment officer of Fortis Wealth in Valley Forge, PA thinks that predictions of Social Security’s demise are greatly exaggerated. “If we increased the retirement age by two years and slightly increased contributions for high wage earners, Social Security would be solvent for another 100 years.  Since the death of pensions in the U.S., Social Security has become vital for retirement--not just for the working class, but middle class as well.” According to Topley, the meager balances in the average American’s 401(k) account “tell a dismal story on the economic future for retirees,” added Topley.

Taxability of Social Security benefits

HCVT’s Christian said many retirees to continue part-time work into their 60s and 70s. Understanding how part-time work impacts the taxability of their Social Security benefits is critically important. “Knowing these rules will allow retirees to better time their Social Security elections as well as other income and expense items,” noted Christian.
Even though most taxpayers never received any tax benefit when they paid into the Social Security system, Congress still subjects up to 85-percent of the related Social Security benefits to potential taxation in retirement years. “This taxability concept runs counter to most tax rules and is seldom discussed,” said Christian. “From a state tax perspective, the rules get even more complex. 36 states either have no state income tax or exclude Social Security benefits from taxation. However, at least four states, including: Minnesota, North Dakota, Vermont and West Virginia follow federal rules and tax up to 85-percent of Social Security benefits. Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico and Utah also tax all or a portion of such benefits, depending on specific demographics of the recipients.  While state taxation may not dictate where to retire, it should be factored into retirement planning,” Christian added.
From a federal standpoint, it gets fairly complicated, too. Just know the following thresholds, said Christian:

Single Filers: with 2017 MAGI between $25,000 to $34,000 retirees were required to include 50% of their Social Security Benefits in taxable income on page 1. Taxpayers with MAGI in excess of $34,000 must include 85 percent of Social Security benefit in taxable income.

Joint Filers:
with MAGI between $32,000 and $44,000 in 2017 were required to include 85% of their Social Security benefits in taxable income. MAGI over $44,000 would have triggered an 85% inclusion.”


Just as you need a well-diversified portfolio of investments during your wealth accumulation years, you need a well-diversified portfolio of income streams during your retirement (i.e. wealth drawdown) years. Our friends at Independence Advisors in Wayne, PA have more great resources about Social Security planning.

Best, HB

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TAGS:  Matt Topley, Fortis Wealth, Blake Christian, HCVT, social security insolvent, social security myths

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