The Baby Boomer's Guide to Social Security

The toughest questions. The best calculators. The coolest strategies. And a lot more.

Starting in January, the first of an estimated 78 million baby boomers turn 62 years old and become eligible for Social Security.

Now in its eighth decade, Social Security is arguably more important -- and certainly more complicated -- than ever before. Boomers, for the most part, are on their own when it comes to planning for later life; pensions and related safety nets are disappearing from the workplace. Thus, Social Security checks -- the closest thing to a sure bet in most retirement budgets -- are expected to play an ever-larger role in older Americans' financial security.

The process of getting that check, however, is sure to cause headaches for boomers and bureaucrats alike. The Social Security Administration's 1,300 offices nationwide already see 850,000 visitors each week and field about 68 million telephone calls a year. Would-be retirees, meanwhile, are about to discover that many factors -- taxes, a spouse's earnings history, life spans -- can muddy decisions about how and when to file for benefits.

You can, of course, keep things simple and take the plunge on your 62nd birthday. (About half of workers do.) Even if that's your plan, you owe it to yourself -- and your spouse -- to learn about Social Security and how to get the most out of the system.

"Don't let Social Security just 'happen,' " says Joseph Matthews, a lawyer in San Francisco and author of a guide to the program. "There really are a number of variables that people should consider before they start."

The basics are available from the Social Security Administration. (More about that in a moment.) But to supplement your education, consider the following -- some of the most interesting, obscure, misunderstood and surprising parts of the 72-year-old program:

"How much can I earn and still receive Social Security benefits?" Based on a survey of visits to the agency's Web site, more people -- 315,847 in the first six months of this year -- wanted the answer to that question than any other.

The question refers to the agency's "earnings test" and the apparent penalty for collecting a salary and Social Security at the same time. It works this way: If you are under your "full retirement age" (the age at which you qualify for full benefits) when you first receive Social Security payments, and if you have earned income, $1 in benefits will be deducted for each $2 you earn above the annual limit. In 2008, the limit is $13,560.

In the year you reach your full retirement age, the "penalty" shrinks: $1 in benefits is deducted for each $3 you earn above a higher limit, $36,120 in 2008. Then, starting with the month you reach your full retirement age, the deductions end.

What most people don't realize, says Andrew Biggs, deputy commissioner for Social Security, is that once they reach full retirement age, the agency recalculates their future benefits to compensate for any benefits lost due to the earnings test. For most people, Mr. Biggs adds, "the earnings test isn't a 'tax' so much as a delay in benefits, and so they shouldn't stop working or limit their earnings in order to avoid it."

The most frequently asked question about Social Security in financial advisers' offices

"When should I file for benefits?" Invariably, that's the question planners hear first.

When it comes to the answer, the conventional wisdom is changing. Where many advisers once recommended grabbing benefits at age 62 (at which point your monthly check is reduced permanently by as much as 25%), experts today say extended life spans and the demise of traditional pensions argue for waiting until your full retirement age, or later, to collect a paycheck. (You get your largest possible benefit at 70.)

Even "foolproof" strategies are no longer looked upon as foolproof. "Let's say your doctor tells you that you have six months to live," says Bruce Schobel, a New York actuary who worked in the Social Security Administration in the 1980s. "So, it's obvious: You take benefits at 62, right?" Maybe not. Because of Social Security rules involving spousal benefits, Mr. Schobel says, "taking a reduced benefit at 62 could serve as a cap on the surviving spouse's payout, reducing that person's future benefits by tens of thousands of dollars."

Calculators, of course, can help. (We discuss some of the better ones below.) But first, take a few minutes to read a new report: "Rethinking Social Security Claiming in a 401(k) World," written by James Mahaney and Peter Carlson, retirement specialists at Prudential Financial Inc. It's the best discussion we've seen about filing for benefits and possible strategies for doing so. (Note to the give-me-my-money-at-62 crowd: The authors conclude that changes in Social Security in recent years "make the value of delaying the receipt of...benefits greater than in the past.")

The report, published in August, can be found at the Pension Research Council, part of the Wharton School at the University of Pennsylvania. (Go to pensionresearchcouncil.org and click on "Working Papers" and 2007. Registration is free.)

One way many couples can maximize Social Security benefits over their lifetimes is for wives to claim benefits at age 62, and for husbands to delay filing until almost 70, says Alicia Munnell, director of the Center for Retirement Research at Boston College. (That's based on a number of factors, including income levels, life spans and survivor benefits.) You can find Dr. Munnell's research in the June issue of the Journal of Financial Planning. (See fpanet.org/journal and click on "Past Issues and Articles.")

Of course, 70 is a long time to wait for Social Security. So, here's a way -- courtesy of Steve Potter, a retired public-affairs specialist at Social Security -- to avoid the wait and still get a sizable benefit at age 70.

The scenario: George, at his full retirement age of 66, expects a benefit of $2,000 a month. His wife, Martha, at her full retirement age of 66, expects a benefit of $1,000 a month.

The strategy: Martha files for a reduced benefit on her own at age 63, or $800 a month. George, at age 66, files for just a spousal benefit, based on Martha's earnings. He would get $500 a month as Martha's spouse. (Yes, Social Security allows George to get half of what Martha was projected to receive at her full retirement age.) Then, at age 70, George applies for benefits based on his earnings history. With the "delayed retirement credit" (the additional dollars one receives for waiting until age 70 to claim Social Security), George's benefit would be 32% higher, or $2,640 a month.

Social Security would stop George's spousal benefit of $500 a month because he's entitled to the $2,640, based on his own earnings, at age 70. Again, for this to work, George must wait until his full retirement age or later to file for a spousal benefit.

The nice part about this strategy is that George -- if he's trying to maximize his and Martha's combined benefits -- doesn't have to wait three or four years beyond his full retirement age for a paycheck; he can start collecting benefits at 66 based on Martha's earnings history -- and jump to a considerably bigger benefit at age 70. As far as the "break-even" point goes -- the age at which the accumulated value of benefits from this strategy will start to exceed the accumulated value from both spouses filing for full benefits at age 66 -- it's 79. Beyond that age, the 63-66 strategy yields a larger total return. (This example assumes George and Martha are the same age.)

Note: Some Social Security representatives we spoke with weren't aware of this strategy. If you try this at your local Social Security office -- and if the staff balks -- ask them to confirm the strategy with Social Security headquarters in Baltimore, which confirmed it for us.

They Said It: Thompson Social Security Plan Applauded as ‘Courageous,’ ‘Honest,’ and ‘Substantive’

Courage & Honesty

Republican presidential contender Fred Thompson’s plan to save Social Security and protect seniors, which he introduced Friday afternoon in a Washington, D.C., hotel, differs starkly from standard election year pablum on the subject in one key way: He’s actually treating voters like adults. (ABC, 11/9)

Thompson...is seeking to show he is willing to take on tough issues if elected in November 2008, telling a news conference in Washington he was the only candidate to offer an extensive Social Security plan. (Reuters, 11/10)

“You certainly have to admire his courage for putting this out,” said Alan Viard with the American Enterprise Institute. (Tennessean, 11/10)

Supporters contend that Thompson’s willingness to take on the so-called third rail of politics will impress voters. (Bloomberg, 11/10)

Conservative economic experts applauded Thompson for offering specifics on an issue considered to be politically dangerous. (Tennessean, 11/10)

“He’s not afraid to be brutally honest with the American people about the challenges that lie ahead,” said Representative Zach Wamp, a Tennessee Republican who is working to recruit supporters for Thompson. “People can tell the difference between a strong leader telling the truth and a weak leader talking politics.” (Bloomberg, 11/10)

Substance

[Thompson is] the first candidate of either party to offer a detailed proposal to fix the nation’s retirement system. (WP, 11/10)

The Republican candidate laid out a detailed, four-page proposal (WSJ, 11/10)

Mr. Thompson’s plan...was more specific than what the Bush White House put on the table when it sought to overhaul the system. It also varied substantially from the traditional conservative approach of focusing primarily on personal investment accounts. (NYT, 11/10)

Economist Jason Furman said Thompson deserves credit for offering a detailed plan to address the projected Social Security shortfall...(Bloomberg, 11/10)

In discussing policy, Thompson was in his element. (Politico, 11/9)

He’d prefer to talk about substance. (Politico, 11/9)

Thompson’s plan draws on ideas favored by conservatives: a reduction in benefits, rather than an increase in payroll taxes; and a shift toward private accounts, rather than government-provided payments. (WP, 11/10)

Rivals

[Thompson] ventured Friday into an area few rivals have tread: advocacy of a fundamental overhaul of Social Security. (WSJ, 11/10)

Although all of the presidential candidates have spoken, when asked, about the need to fix the Social Security system, none has offered such a detailed plan nor talked so eagerly and often about the issue. (WSJ, 11/10)

Among Republicans, former New York mayor Rudolph W. Giuliani, Arizona Sen. John McCain and former Massachusetts governor Mitt Romney have talked in general terms ... but none has offered a specific plan. (WP, 11/10)

Mr. Thompson is the only one of the Republicans running for the White House who has made Social Security a central theme of his campaign. (NYT, 11/10)

He is the only presidential candidate so far to make Social Security an anchor of his campaign. (WSJ, 11/10)

But with less than two months before the 2008 voting begins, candidates have generally been reluctant to confront the Social Security issue. (WP, 11/10)

Saving and Protecting Social Security
A Plan to Ensure Retirement Security for All Americans
http://www.fred08.com/virtual/socialsecurity.aspx

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