Retire Early, Get More SS

T

TromboneAl

Guest
I know it's silly to speculate about the effects of changes to SS when things are still so up in the air, but I'm guessing that one likely outcome will be that people who have made more money will be getting significantly less SS than under the current system.

So let's say your benefits are tied to your income, such that they just add up how much you've made over your lifetime, and the bigger the number, the lower the relative benefit.

If so, this would be another reason to retire early, yes? It would put you in lower bracket, so to speak. If you made $100,000 per year for 25 years then 0 for 20 years, you're in the same bracket as someone who averaged 55,000 for 45 years.

Just thinking out loud here.
 
Until now I had been considering the Social Security reform debate as just background noise - politicians doing what they do best - flapping their lips.

After last night it sounds like the Bushies are beginning to solidify a plan. The way I get it, it's this: responsible folks who worked hard for years to save up extra money for early retirement, or ANY retirement for that matter, will now be considered "wealthy" while people who may have made the same amount for years but saved none of it, will be "poor" and given a greater share of the pie.

I guess it all depends on whether they define "low income" as people who have never made much throughout their lives, or as people who at the time of retirement have no assets or income.

I've never counted on getting anything from Social Security, but I've always assumed that if I didn't then no one would. I am really resentful of the fact that I may be punished for working my butt off and saving every penny, and benefits will instead given to those who never bothered working or saving. :mad: :mad: :mad:
 
The President's new plan seems to be to stick the knife squarely into the middle class's back.

http://insider.washingtontimes.com/articles/normal.php?StoryID=20050429-124423-7410r
Click to expand...

You're suprised? :confused:

Luckily, the more he talks about this, the less support he has. So far, not 1 Democrat has broken ranks. And even a few GOP Senators have started putting distance between themselves and the Lame Duck President. After all some will be facing the electorate in about a year and a half.
 
Well, the question is, how will they decide who is "better off?" From

1. how much you have,

or

2. how much you've made?

Method 2 seems fairer (fairness probably doesn't play a role), and simpler for the government. With method 1, the SSA is going to have to be figuring out things like "How much is that guy's baseball card collection worth?"
 
I thought it was going to simply be, "If your taxable income from other sources exceeds x amount, watch your SS begin to fade away" So in theory, if Roth's were exempt, only interest on taxable acounts credited towards that number, possible deductions get thrown in, there will be plenty of ways to keep your SS benefits shored up. My worry is it sounds like the sliding scale starts hitting you at 20k and starts really biting at 30k (something like a 1/3 benefit cut). It's going to be hard to keep that much of my income unrealized!
 
You're suprised?
Click to expand...

I figured he was out to get the middle class when he talked about revenue neutral tax cuts for the rich. The poor didn't have enough money to make up the difference, so there was only one group left. I do like the lower dividend rates, but his treatment of retirees, especially union retirees, is appalling.
 
The current SS payment is a percent of a weighted (inflation adjusted) sum of that part of your lifetime earnings that had SS taken out of it. The proposed solution uses the same approach. Therefore, your SS payment will depend on your employment-related earnings, not on investment income or savings levels.

For the future, the administration plan is to hold the same SS payment as currently given to those who retire earning $16,000/yr or less of SS-eligible earnings... but reduce the SS payment levels significantly for those who retire when earning over $16,000/yr.

Ouch!

Just wait! It gets better. Those Personal Accounts will be treated as a loan from your SS 'account' and subject to a 3% yearly interest charge. This personal account will be adjudicated when you die or retire and you may walk away with the interest and dividends from your account growth less the 3% and the principle loaned to you from SS. Better make sure that you have a real investment growth above 3% or you could be under water.

Yet again, the devil is in the details - but, it doesn't look to me as if there is a pony in this pile.

JohnP
 
...the administration plan is to hold the same SS payment as currently given to those who retire earning $16,000/yr or less of SS-eligible earnings... but reduce the SS payment levels significantly for those who retire when earning over $16,000/yr.
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Thanks very much for the explanation, but, being as I'm from the slow class, I'm not quite sure I get it.

Do I understand that if I earn $100K during my working life, but earn only $16K or less for the last year, then I don't take the hit? That cannot be right. Do I have to earn $16K on AVERAGE to avoid this reaming?

I guess what I really need to ask is whether there's someplace I can go to read the plan. Having avoided the president's address in favor of retaining my dinner, I am doubly ignorant...

Any direction most appreciated,
Caroline
 
Just wait! It gets better. Those Personal Accounts will be treated as a loan from your SS 'account' and subject to a 3% yearly interest charge. This personal account will be adjudicated when you die or retire and you may walk away with the interest and dividends from your account growth less the 3% and the principle loaned to you from SS. Better make sure that you have a real investment growth above 3% or you could be under water.


JohnP
Click to expand...

Oh, this is rich: are you saying they are going to take a '3% annual fee" right off the top of the personal account, money you are presumably saving for retirement and getting to invest yourself instead of having the govt do it for you? So it isn't your retirment money after all, but their money they are lending to you to try to get some retirement earnings out of?

Oh, boy, I never thought I'd see that one. Take your secure benefits away, give you this great personal account with unknown returns, but still charge you as if the money were theirs.

Sad thing is, some people might just go for it. Could you imagine trying to ER if you had to give away the first 3% of yield, then cover inflation, then investment fees, and only after that live on the balance? We'd be in the realm of a half percent SWR

And whatever happended to the original notion that this was savings the poor could finally pass on to their heirs? Looks like that idea hit the big trash bin early on.

Maybe I am missing something.
 
Caroline - SS looks complicated but is relatively simple - SS takes your entire work history and adjusts each year on an inflation basis so when you retire they have a weighted average value. Therefore, one cannot game the system by choosing your last years income level and maximizing SS; your SS basis is 10 or 25 or 40, etc years worth of your SS contribution lifetime. So, you are correct that you have to earn $16K of inflation-adjusted AVERAGE to avoid the reaming; note that each year all of your earnings are adjusted and next year the 16K will become $16.xK in inflation adjusted terms.

ESRBob - I don't think you are missing anything here. The devil is in the details. The accounts are quite a con game! Worse yet, when you retire some accountant will look at your finances and determine whether you can afford to walk away with that personal account balance; if your retirement finances look shaky, the SS will take the account balance and buy you a commercial immediate annuity to help you out. Just keeping the government out of your business.

I think that it is all smoke and mirrors.

JohnP
 
Almost forgot - here is a website about setting the levels of the SS benefit - this doesn't cover the personal accounts, just the SS benefits

http://www.cbpp.org/3-21-05socsec.htm

The details of the personal accounts were presented in early Jan 2005 by Greg Mankiw - I'll have to dig up that pitch in a later post

JohnP
 
JohnP is absolutely correct in his description of how SS benefits are calculated (except that there are a few additional complexities). I think it is very difficult to offer any intelligent criticism of anyone's SS suggestions without understanding at least the basic concepts of how it works today (PIA = Primary Insurance Amounts, Wage Indexed Earnings, AIME = Average Indexed Monthly Earnings, etc.)

It is also helpful to understand how the current formula for determining benefits (Primary Insurance Amount) is heavily weighted to low income workers. The first few dollars you put into SS have a significant impact on the amount of your benefit (currently 90%) but the last few dollars you put into SS (each year) have very little impact on your benefit (currently 15% weighting).

I think people may also be missing one of the primary benefits (IMHO) of private accounts. Today, a retired couple, where only one has contributed to SS, receive a full benefit for the contributing spouse and a 50% benefit for the spouse who didn't contribute. When either dies, the other gets the full benefit (they lose the 50% part). If both spouses had contributed to SS, both receive a full benefit based on their contributions. However, when one dies, the other only gets the larger of the two previous benefits. They lose all of the benefit of the contributions made to SS by one of the spouses. This would not be so for a private account option.

The TIAA-CREF web site has a good overview of SS.
 
...Today, a retired couple, where only one has contributed to SS, receive a full benefit for the contributing spouse and a 50% benefit for the spouse who didn't contribute. When either dies, the other gets the full benefit (they lose the 50% part). If both spouses had contributed to SS, both receive a full benefit based on their contributions....
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Is it not also true that if both contribute to SS and one spouse's benefit is less that 50% of the other spouse, the lower benefit is increased to 50% level?

REW
 
Here is "more than you ever wanted to know" about SS and Accounts

http://www.factcheck.org/UploadedFiles/Social-Security-Briefing-2-Feb.pdf

SS Briefing by White House Office of the Press Secretary - Feb 2, 2005 - see bottom of pg 15 for comments on 3% real rate of return - This is a briefing to the Washington press on the day of the 2005 Presidential State of the Union speech.

"...Now, the way that election is structured, the person comes out ahead if their personal acount exceeds a 3 percent real rate of return, which is the rate of return that the trust fund bonds receive. So basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent real rate of return. To the extent that his personal account gets a higher rate of return, his net benefit would increase as a consequence of making that decision."

Pages 7-8 and 17-18 hint about the accounting determination of whether any of the personal account proceeds is to be used to fund a commercial annuity.

Lots of details. Read it all for yourself.

JohnP
 
CONCORD COALITION SAYS THAT PRESIDENT BUSH’S BENEFIT PROPOSAL IS A POSITIVE STEP IN THE SOCIAL SECURITY DEBATE

WASHINGTON -- The Concord Coalition said today that President Bush’s suggestion to reduce Social Security’s long-term cost by modifying the benefit formula is a positive step in the debate over how to shore up the system’s finances.

“Cost saving measures are an essential part of any Social Security reform plan -- with or without personal accounts. The President deserves credit for recognizing this fact by proposing a change in the benefit formula that would substantially improve the system's fiscal sustainability while preserving all promised benefits for those who rely on them most. This change alone would not be enough to close the system’s financing gap but Congress should give it serious consideration as part of an overall reform plan,” said Concord Coalition executive director Robert L. Bixby.

“The idea deserves consideration because Social Security currently promises far more than it can afford to pay. One of the main reasons for this is that future benefit levels are automatically scheduled to rise not only nominally, but in real value. In other words, they will be worth more because they will rise faster than inflation. Benefits can therefore be reduced from projected levels and still grow relative to the value of today’s benefits. Some will insist, however, that this would result in deep ‘benefit cuts’ when compared to the current system. But it is fundamentally unfair to judge any reform plan against the false hypothetical that the current system is solvent and can deliver everything it promises. It can’t. The relevant comparison for any reform plan is with what current law can deliver, not what it promises,” Bixby said.

“There are only two options for addressing the gap in Social Security’s finances: reduce promised benefits or raise taxes to pay for them. It is easy to demagogue either option because they require everyone to accept the notion that there is no free lunch. However, if current efforts to restructure Social Security are to be effective, these hard choices must be part of the solution. While there is plenty of room for discussion about the proper mix of any reform package, the President’s proposal for changing the benefit formula should help shift the debate toward these fundamental questions. It is a positive step,” said Bixby.
 
Related question: If one obtains an "official" $ benefit from ths SS admin. (based on zero earnings after age 50) does this figure use 2005 dollars which are then inflation adjusted upward until age 62 or, Is this number "fixed" until 62 and only then adjusted for inflation thereafter?
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Under the current formula, it is adjusted upwards for wage increases until you collect, and for CPI inflation thereafter. Wage increases have historically grown faster than inflation. Under the new system, they are still working out the details, but early retirees will lose under the plans currently under discussion.
 
Thank you JohnP for the clarification. Sounds like your interpretation is similar to TromboneAl:

If so, this would be another reason to retire early, yes? It would put you in lower bracket, so to speak. If you made $100,000 per year for 25 years then 0 for 20 years, you're in the same bracket as someone who averaged 55,000 for 45 years.
Click to expand...

Phooey.

I'm hoping this thing doesn't fly and it's all pretty murky right now, but as an INTJ I've just gotta ruminate about it far in advance.

One other question, this time philosophical. If this scheme is supposed to aid low income earners at the expense of those of us in the middle class... then isn't it essentially another form of taxation? Putting the same in and getting less back doesn't seem much different than putting in more and getting the same...

I repeat, Phooey.

Caroline
 
Be careful about assuming that early retirement will reduce your overall earnings and will be to your benefit from a SS calculation perspective. That is probably not true for anyone.

All SS calculations use 35 years of earnings ($0 for any years with no earnings). Oversimplifying somewhat, all that is being proposed is a different way of adjusting your earliest annual earnings. Currently wage index factors are being used and the proposal is to use inflation index factors, or a blend of the two. The difference between the factors for your most recent earnings are miniscule. The biggest hit is on your earliest earnings. So -- working 1 more year is most certainly to your advantage if you don't yet have 35 years of SS earnings and will most definitely not reduce what you would have otherwise received.
 
oldbykur - glad you are here with the specific skinny on SS. 

Just for Info - The administration's approaches have been worked out for many years by the Cato Institute near DC.  The latest stuff out is based on Robert Pozen's thinking which you can find detailed at CBSMarketWatch  - click the line below

http://www.marketwatch.com/news/features/socialsecurity.asp?siteid=mktw

Glad the ERForum is back up - Many thanks to Dory36 and BigMoneyJim I understand!

JohnP
 
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