Social Security Secrets: 5 Ways to Increase
Your Future Benefits ... Plus Everything Else
You Need to Know About the System
By Nilus Mattive
Social Security is a program that affects just about every single American in myriad ways ...
yet many aspects of the system remain a mystery to most people.
For example, did you know there are some select groups that continue to opt out of the
program even right now?
Or that you can greatly increase your future benefits by taking one simple step that 95%
of Americans ignore?
I’ll tell you more about these things later in this report.
But first, I want to give you some background on Social Security and the financial problems it currently faces...
Let’s start with a little history: When Social Security was first instituted in 1935, it covered
about half of the population. Many teachers, nurses, librarians, and other workers were
excluded from coverage. What’s more, the average life expectancy was about 60.
Today, Social Security covers virtually everyone. The average American is living to age 76.
And although the initial 1937 payroll tax rate of 2% (split between employer and employee) has risen to a combined 15.3% (including Medicare taxes), the system still isn’t
bringing in enough money to cover everyone.
Remember, Social Security is a “Pay-As-You-Go” system ... meaning money comes in
and goes out fluidly.
It’s interesting — and very instructive — to look at the first person who ever received
a benefit from the program to understand what this actually means.
Social Security’s first payment reportedly went to a man named Ernest Ackerman.
He retired a day after the program began, and had contributed a whopping nickel. Yet
his lump sum payout was $0.17 — more than three times what he had put in.
Meanwhile, the first person to receive a monthly payment from Social Security was Ida
May Fuller.
During the late 1930s she contributed $24.75 into the system. Her initial monthly check
was $22.54, so by her second check she had more than recouped her entire investment!
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Social Security Secrets
And get this: She lived to be 100 years old, collecting $22,888.92 out of the system over
her lifetime!
Sure, it’s an extreme example. But it demonstrates the real problem with Social Security ...
the problem that has existed since day one ... and the problem that is only worsening as
more and more people live to Ida-May-Fuller-like ages:
Social Security’s pay-as-you-go structure means a never-ending game of catch up.
That poses a big problem, especially with a huge number of baby boomers getting set to
retire over the next decade.
A smaller pool of contributors paying for a larger and longer-living group of recipients
is a recipe for disaster!
I found this very clear warning right on the Social Security Administration’s website:
“Social Security is not sustainable over the long term at present benefit and tax
rates without large infusions of additional revenue. There will be a massive and
growing shortfall over the 75-year period.”
Forget the 75-year period, though ...
In 2010, for the first time since 1983, Social Security took in less money than it paid
out. And contrary to earlier forecasts from the program’s trustees, that situation has
now already become permanent!
Moreover, by 2033 Social Security will only be capable of paying out 77% of promised benefits.
It’s important to note that these estimates have gotten progressively worse, too! In 2008,
the Trustees were saying 2041.
What happened? The recession!
When unemployment surged to multi-decade highs, fewer worker contributions went
into the nation’s retirement kitty. And more people at the ends of their careers are leaving
the workforce permanently to begin collecting.
To make matters even worse, as part of the 2010 tax package, lawmakers actually decided
to have employees pay two percentage points LESS into the system in 2011 ... and they
extended this legislation for 2012, too!
As of right now the program’s Trustees say we can still expect the system to continue
paying out full benefits over the next couple decades. But that’s only because Social Security will tap its trust fund, a bunch of IOUs from various government agencies that borrowed money back when the program was running a surplus.
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And here’s the rub ... it’s not like these other government agencies actually have the
money on hand. So they’ll borrow to pay back the money they owe Social Security.
We’re talking about a $7 trillion shortfall!
Here’s another quote I got from the agency’s website:
“Social Security was never meant to be the sole source of income in retirement. It is
often said that a comfortable retirement is based on a ‘three-legged stool’ of Social Security, pensions and savings.”
You’ll get no argument from me — Social Security will definitely NOT be enough to
sustain you in retirement. The amount you’re going to receive will be a mere pittance,
especially once you factor in the ravages of inflation.
In 2012 the typical retired worker’s
benefit was just $1,200!
Oh sure, the government adjusts that check for inflation every year, and it has done so
since 1950. The current method, adopted in 1972, uses the change in the Consumer Price
Index (CPI) from July through September vs. the same period a year earlier.
But the CPI is about as accurate as a drunk guy throwing darts.
In fact, for two years straight (2010 and 2011), there were NO cost of living adjustments
because the CPI showed zero inflation!
And now, President Obama’s latest budget proposal calls for a switch to a new “chained
CPI” system, which would actually lead to even lower and lower cost of living adjustments
going forward.
So the meager cost-of-living adjustments are bad enough for anyone in — or very near
— retirement.
And the uncertain future of the entire program is worse.
How Might Washington
Repair Social Security?
It’s simple, really. There are only two ways to solve the Social Security crunch:
A. Pay out less benefits.
B. Get more money into the system.
So far, President Obama’s stated preference is “B” but other than the aforementioned
“chained CPI” proposal, he has yet to actually DO anything at all.
And the longer lawmakers procrastinate, the more aggressive their “fixes” will have to be.
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Social Security Secrets
More Surprising Facts
About Social Security,
Including Special Groups
That Have Opted Out!
“Fair” is never a word I would
use to describe Social Security. In
fact, I think the very way it was designed is fundamentally unfair to just
about everyone who participates.
But to make matters worse,
some favored groups of Americans get to opt out of Social Security altogether!
For starters, there are plenty of
Federal government workers who
don’t even participate in Social Security. If they were hired before 1984,
it’s quite likely that they use their own
separate plan called the Civil Service
Retirement System instead.
For most of the 20th Century,
in fact, even elected officials like the
President, Congressmen, and Supreme Court Justices participated
in that separate system instead of
contributing to Social Security like
everyone else.
Certain groups of state and municipal workers also have their own
retirement plans and do not have to
pay into Social Security at all.
And did you know that back in
1965 a special exemption was created for the Amish so that they
don’t have to participate in Social
Security ... even to this very day?
(Continued on next page)
The Social Security Administration has already said
the Social Security tax should go up to 15% a year ...
and plenty of politicians say it should apply to ALL
your earnings instead of the current cap around
$110,000.
Think about that — $15 or more of every hundred
you earn just for Social Security.
Before Medicare taxes. Before regular Federal
income taxes. Before state taxes. And on and on.
Most Americans don’t even realize just how much
they’re paying into the program because their employers cover half of the taxes.
But make no mistake: One way or another, all of
that money is coming out of our pockets.
Of course, rising taxes are just one of the things
that might be needed to support Social Security.
Here are three things that might happen:
#1. Raising the roof. Right now, the current age
to begin collecting is 66 and scheduled to rise to 67.
But I’d bet on continued increases going forward —
and the younger you are, the longer you better plan
on working!
#2. Fudging the numbers. Like any plan, there
are a whole bunch of calculations and assumptions
that determine benefits. These formulas could be
tweaked, especially the parts that figure growth in
benefit payments and annual cost-of-living adjustments.
#3. More fun with taxes. We could also see a lot
more Social Security benefits get subjected to income
tax — especially for people in higher tax brackets. In
other words, the government will give with one hand
and take away with the other. Nothing new there.
At this point, you’re probably getting the idea that
there isn’t anything you or I can do about a poorly
designed, ailing system. Nor is there much we can do
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More Surprising Facts
About Social Security
(continued ...)
Why isn’t this small religious
exemption extended to anyone who
has philosophical objections to the
program?
I think we all know the answer.
Oh, and get this — it is entirely
possible to collect Social Security
and unemployment at the same time!
Yes, really. According to the
Social Security Administration’s
own website:
“Unemployment insurance benefits are not counted under the Social Security annual earnings test
and therefore do not affect your
receipt of Social Security benefits.”
Am I the only person who finds
this absurd?
Social Security was essentially
designed to provide a baseline income for folks who were retired.
The idea that someone can be
both “unemployed” and “retired”
seems kind of silly ... especially
when you consider how long unemployment benefits can now be
extended!
Meanwhile, there are also plenty
of people who now collect money
out of the system even though they
never put one dollar into it.
Is Social Security fair? I don’t
think so.
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about the possible solutions, which look like benefit
cuts and/or future tax hikes.
So, if you or a family member is nearing retirement,
you really face only one major question ... how can you
milk the Social Security system for all its worth?
Now, Here Are 5 Ways to Maximize
Your Family’s Social Security Benefits ...
Benefit Booster #1: Delay taking benefits.
The universal debate rages over taking benefits as
soon as possible.
For most workers nearing that decision (born in
1943 or later), eligibility begins at age 62 for early
benefits. “Full” benefits kick in at 66 — though this is
really a misnomer. And benefits must start by age 70.
Why is there a decision at all? Why not just start
getting your money right at 62? Isn’t a bird in hand
worth two in the bush?
There are good arguments to be made on both sides.
But if you delay taking your benefits, the Social
Security Administration will raise your future payments for every month that you delay.
Important: Most people miss the fact that delaying benefits even by a few MONTHS will lead to
higher payments. The increase rate for postponing
benefits is 8% annually.
What this means: The earlier you take your payments, the less of a benefit you will get for the rest
of your life. Conversely, if you wait until age 70 to
begin collecting, your monthly benefit will be substantially bigger.
Now, if you need the money immediately, then
your decision is easy.
But if you don’t need the money, and you have no
real reason to believe you’ll die in short order,
I suggest you consider postponing your benefits.
Social Security Secrets
How can I say this when I’m so negative on the program’s long-term viability?
For starters, I do not believe Washington will alter benefits for anyone in the Baby
Boomer generation — i.e. anyone who is facing this decision over the next decade or so.
If anything, I think they will eventually update the program’s assumptions to make
delaying benefits LESS advantageous than it currently is.
Because make no mistake: If you believe you will live a reasonably long life, delaying
benefits under the current arrangement is a good move from an actuarial standpoint.
Let’s do the math and see why.
Here’s what Social Security is basically offering you (the numbers vary somewhat from
person to person, but this will give you the basic idea):
You’re age 66 and have the choice of collecting $2,000 a month for the next 12 months
or an additional $160 every month starting a year from now
(i.e. the 8% annual increase for delaying benefits).
I can see why the $24,000 upfront seems like the better option. Especially when you
hear that it will take you 12 ½ YEARS of payments to make up for that missed $24,000.
However, here’s the critical part: According to government statistics, the average American at age 66 will live another 17 ½ years.
In other words, you stand a very good chance of collecting another 5 years worth (or more)
of those extra $160-a-month payments. That comes out to another $9600 in your pocket!
Most Americans — 95% in fact — ignore this simple math and choose to elect benefits
by age 66. But if you can afford to wait, and you wouldn’t mind a couple thousand more
dollars, seriously consider deferring your benefits.
Retirees also fail to remember that the so-called cost of living adjustments (COLA) will
also apply to every dollar of the benefit. The compounding effect of these adjustments can
add up substantially over time.
Based on recent trends, the total boost (8% + the COLAs) to your payments would be
10% or 12% a year.
This is yet another reason to consider holding off in order to get a bigger benefit payment — all your future COLAs will apply to the bigger number, thus making for more
powerful compounding.
Benefit Booster #2: If you and your spouse have disparate incomes you can consider having the
lower-earning spouse collect benefits early.
Later, the higher-earning spouse can elect benefits at the higher amount (and enjoy the
increases afforded by postponement). Plus, should the higher-earning spouse die first, the
survivor would step up to the same much bigger benefit!
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Pursuing this strategy might entail having the higher-earning spouse “file and suspend”
benefits. That is now permitted under The Senior Citizen’s Freedom to Work Act of 2000.
Benefit Booster #3: If you and your spouse have similar incomes you can delay the start of
your own benefits and just opt for spousal benefits once you reach regular retirement age.
Example: You want to keep working while your spouse retires. You can claim your
spousal benefit and defer your own benefits based on your work history until age 70.
Then, you’ll be able to step up to a much higher benefit!
Benefit Booster #4: If you have minor children when you reach retirement age, use their benefits wisely.
Remember, they will also qualify for as much as half your benefit. As many as 500,000
kids currently receive benefits from a parent’s retirement.
The payments will come automatically. But what you do with them can make a huge
difference. For example, you might consider socking them into a tax-sheltered education
plan like a Coverdell or 529 Plan.
Not only will you rapidly increase the value of your child’s savings, but you may also
get additional tax breaks for doing so!
Benefit Booster #5: Continue to Work!
Every dollar you earn can help boost your social security benefits. It doesn’t matter how
old you are. As a corollary, you do not get to stop paying into the system just because
you’ve reached full retirement age.
For example, let’s say you begin taking your full retirement benefits at age 66. And you
have one of your best earnings years at age 67. That number will be used (along with your
other 34 best years) to factor your future benefit payments.
As long as you keep paying FICA taxes, you can boost your benefits (up to the maximum monthly benefit amount, obviously). Social Security does not punish someone for
continuing to work after they begin receiving payments.
One important note though: You will not receive any additional help from annual wage
indexing, which is calculated after your 60th year.
One question you might have: “If I keep working after I start taking benefits early,
will I permanently lose my benefits?”
Here’s the deal ... if you were younger than full retirement age during all of 2012 and
earned more than $14,640 a year, Social Security would have reduced your benefit by $1 for
every $2 above the limit. And it would continue to do so until the start of the year in
which you reach your full retirement age (66 for most).
However, here’s what most people miss: The system is merely deferring those benefits
until you reach full retirement age, and will credit the money to you at that time.
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Social Security Secrets
In other words, there’s no real reason you should fear taking benefits early while working.
However, based on what I said above, there are other reasons to consider waiting to collect.
Bottom Line: Use These Ideas to Your Advantage, But Also Brace for Potential
Changes in the Future ...
To be sure, given Social Security’s fragile state much of the system’s structure could
end up changing. And I have no doubt that some of the strategies I mention in this report
will end up becoming less attractive if not downright impossible.
At the same time, if you’re nearing retirement right now I highly recommend using the
current rules to your best advantage.
And no matter what, I also strongly recommend continuing to build your own private
nest egg that can provide additional income throughout your golden years no matter what
ultimately happens to our nation’s Social Security program.
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Social Security Secrets
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Social Security Secrets
About The Author
Nilus Mattive has been obsessed with dividend-paying stocks since the
sixth grade. He’s not sure exactly what inspired him — it could have been
the movie Wall Street or the popular T.V. show character Alex P. Keaton
(played by Michael J. Fox) — but one day Nilus came home from school and
said he wanted to buy five shares of IBM with his savings. Although the
family had never owned stock before, his parents were happy to help him
set up an account.
Nilus continued investing all the way through college, where he triple-majored in philosophy, theology, and English. “Everyone kept telling me philosophers end up flipping
burgers … so I figured I better become a really good investor,” Nilus jokes. “And as a side
note, Bill Miller, the only fund manager to beat the S&P 500 15 years in a row, studied
philosophy!”
Upon graduation, Nilus moved to New York City and began working for Jono
Steinberg’s Individual Investor Group, where he wrote a regular investment column. Later,
Nilus spent five years at Standard & Poor’s editing the company’s flagship investment
newsletter, The Outlook. During that time,
Nilus also penned his first finance book, The Standard & Poor’s Guide for the New Investor.
It was published by McGraw-Hill in 2003, and translated into Chinese a year later. These
days, Nilus loves telling investors about dividend-paying stocks in his monthly newsletter,
Income Superstars. Nilus, his wife Disha, and his daughter, Vela live in Pennsylvania.
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Publication Date: August 2015
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