I have recently taken a lot of interest in our annual Social Security Estimated Benefits statements we receive around our birthdays each year. For one, it’s exciting to keep a rolling tally of how much I have earned, and to (hopefully) see my earnings to continue to increase. Also, it’s nice to see a tangible, monthly benefit estimate for all of the taxes I have paid into Social Security and Medicare. But I have also taken an interest lately because of some interesting information contained on this statement and in the cover letter that is sent with it.
No More Statements in the Mail
If you do not know where your last Social Security statement is, you can use the retirement estimator [1] provided by the Social Security Administration to follow along. In addition, since the SSA is no longer mailing the benefits statements [2], you’ll have to use the estimator going forward to track the details below.
What is Your Estimated Benefits Statement?
This is an annual statement from the Social Security Administration that details what you have paid into the Social Security and Medicare programs throughout your working career, what your taxed Social Security and Medicare earnings [3] were for every year that you paid into these systems, and an estimate of your Social Security benefits. You will receive this automatically if you are 25 years of age or older, you are working, and you do not currently receive benefits. The estimate includes a breakdown for retirement (you must have earned a total of 40 credits of work [4] in order to qualify for retirement benefits; your credits will be disclosed in this statement), disability, family, survivors, and Medicare. When you review your estimated benefits, don’t forget that you may need to pay tax on Social Security benefits [5].
Windfall Elimination Provision (WEP)
I work for the state government and have one of those rare breeds of retirement plans: the pension. I will be vested after 5 years, and am currently about to start my 3rd year of service. While reviewing my last Social Security Statement, I noticed a paragraph talking about this provision. This provision applies [6] to people who work in jobs where social security taxes are not paid on their pension plan, and they have enough work credits to qualify for social security income. The reason for this reduction is because a worker in this situation would benefit above others by getting both a pension and a social security income even though social security taxes were not paid on the pension income. According to my SS Statement, the maximum monthly reduction in 2010 was $381. It should be noted that if you receive a small pension, than it will likely not reduce your social security benefits.
Government Pension Offset (GPO)
Since I have a pension (though not vested in it yet) this regulation could apply to my spouse [7]. If this applies to him as my spouse (also applies to widows/widowers), his Social Security benefits will be reduced by two-thirds of our government pension whether he takes it in one lump sum or in monthly payments.
Social Security Benefits are Running Out
There is so much speculation about the state of our Social Security system, particularly for those in their 40s and younger. Even though it appears that we will be continuing to pay into the system, we are fearful (and rightfully so) that we will not be able to get any benefits out of it. Then there is the other camp of thought that states so long as we collect benefits from taxpayers there will always be benefits to pay out to people.
How about we stop speculating and look at the source for some answers: our Social Security Benefit Statements. On the cover letter, the SSA states:
…The Social Security Board of Trustees now estimates that based on current law, in 2037, the Trust Funds will be depleted. Because people are living longer and the birth rate is low, the ratio of workers to beneficiaries is failing. Therefore, the taxes that are paid by workers will not be enough to pay the full benefit amounts scheduled.
So by how much will the SSA be short by? Apparently there is enough in the trust fund to cover 76% of their obligations in the year 2037.
The SSA goes on to give us guidance on what we should do. They state that:
Financial planners generally agree retirees will need about 70-80 percent of preretirement earnings to enjoy a comfortable retirement. For an average worker, Social Security replaces about 40 percent of annual preretirement earnings.
So there you have it, from the horse’s mouth: you will likely receive only partial benefits if you are 40 or younger, and you should be saving enough in your own retirement [8] accounts [9] to cover 30-40% of preretirement income because even at full benefits Social Security income will only replace 40% of it.
Will you be receiving a pension? Assuming you receive Social Security benefits, will they be reduced because of your pension?