Wednesday, January 6, 2016

40 Quarters

Is it worthwhile to collect Social Security?  Yes.

No, I am not talking about $10 in change.   Forty Quarters (ten years) is how long you have to work in order to collect Social Security.  It is also how long you have to be married, to collect a share of your spouse's Social Security when they die.  Unlike other "entitlement" programs, Social Security is based, in part, on how much you pay into the system.

Now some will be quick to point out that those that work the "minimum" 40 quarters at a very low wage, will take out, in proportion, far more than others who pay in longer and at a higher rate.   And there is a maximum amount you can get - and also a maximum amount you pay in.  So while it is based on people paying into the system, it isn't exactly a linearly pay-in, pay-out.

Oh, and by the way, it is funded by your contributions, not your income tax.  So cutting Social Security won't cut your income taxes one bit.   And it certainly won't cut the taxes of the Billionaire Republicans who keep proposing we cut it.   So why is it they want it cut?   Simple.  Desperately poor people are people you can easily manipulate.  Every dictator in history came into power when people became financially desperate.  And some made sure people became desperate, just to gain power.  But I digress.

For most folks, Social Security is part of their retirement planning.   They figure out how much they are going to get from their savings (or a pension, if they are dinosaurs) and also from Social Security.  People are planning on this, which is why it is especially cruel that folks in the GOP - who mostly don't even pay into the system - are convinced it needs to be cut or altered.

It is nice to have some sort of "bedrock" income that you can count on, even if Bain Capital robs you of your pension or Wall Street of your savings (or more likely, of course, you fail to save for retirement, you spend it all, or fail to pay off your debts - the three horsemen of the coming retirement apocalypse.)

As I noted in another posting, there are situations where ordinary folks - middle-class folks - can end up not collecting Social Security.   My friend David worked as an "independent contractor" and rather than pay the 18% self-employment tax, decided to pay himself in dividends (which may or may not be legal).  Too late in life, he regrets this decision, and is feverishly working those 40 quarters so he can get some benefits.  My friend Wendell, who worked under the table with local garage rock bands is in the same boat.   Suzi, the multi-millionaire, basically doesn't care, of course.   She has other assets.

And there are a lot of Suzies in the world.   Mitt Romney and Warren Buffet have one thing in common - they both pay taxes at the 15% Capital Gains rate.   For us ordinary mortals, we'd have to make less than $63,000 a year or so, in order to pay at that rate - as ordinary income.   And we'd still be socked with the 9% Social Security and Medicare taxes, or the 18% self-employment tax.

Warren Buffet thinks this is scandalous.  Mitt Romney thinks this is the American Dream - screw the little folks, and then avoid as much taxes as you legally can.   And to some extent, he is right.   Tax fraud is a crime.  However, legal tax avoidance is a patriotic duty - at least according to my tax law professor.

But it is kind of funny to me, anyway, that the loudest voices for "flat taxes" and abolishing or cutting back on Social Security are often not the very rich folks who, ironically, pay a flat 15% capital gains tax, and never pay into or take out of, the Social Security system.   Rather, the poor or middle-class are often the ones shouting the loudest for a "flat tax" that would benefit only the wealthy.   And I am not sure Mitt Romney was the guy whose voice we should listen to about things he only understands in theory.

As I noted in another posting, the amount the "average" person gets out of Social Security is indeed more than they pay in.   But it is also, in a manner of speaking, about what they paid in, and about 4% interest.  In other words, Uncle Sam is borrowing money from us, and paying us back at savings bond rates.

But there is another group of people who also might not collect Social Security - or not much of it - and that is spouses.  According to one source, a spouse has to be married for 40 quarters (10 years) to collect on her husband's Social Security (even if they later divorce).  Serial divorcees may be out of luck.

If a spouse doesn't work, they don't get Social Security on their own.   You might get it, of course, but when you die, your spouse may only get a pro-rata share of your monthly payment.  And this can vary wildly based on when you decide to take Social Security.   Often a spouse is shocked to discover, after the death of their husband, for example, that they now have to get by on less than 3/4 of what they were receiving before.  And yet their monthly expenses haven't dropped that much.

There are - or were - games one could play to maximize Social Security for married couples.  One game was called "file and suspend" which, like the drinking age laws, was changed just before I could take advantage of the situation:

"Here is an illustration. Suppose a married couple, Ken and Lois, have just turned 66. Lois wants to retire at 66, while Ken wants to work until 70. Ken's monthly Social Security retirement benefit would be $2000 if he claimed them at age 66. Lois' monthly retirement benefit at age 66 is $900. If she could claim spousal benefits, her monthly check would be $1000, one-half of her husband's age-66 benefit, but Lois cannot claim a spousal benefit unless Ken files for his own retirement benefits. Ken wants to let his Social Security benefits continue to grow until age 70, when his benefits will grow to $2640 per month (This increase comes from Ken's "delayed retirement credits.") 
Taking advantage of the file and suspend option, Ken can file for benefits at age 66 and then immediately suspend receipt of those benefits. His monthly benefits will, as a result, continue to grow, so that he can get the delayed retirement credits and receive at least $2640 a month when he claims benefits at age 70. With Ken "filing and suspending," Lois can now claim spousal benefits of $1,000 a month while letting her own retirement benefits grow until age 70. At age 70 her monthly retirement benefits, which will grow because of delayed retirement credits, will be $1188 (=$900×1.32). At age 70 she can claim the higher retirement benefits on her own record." 
 The odd thing is that these kinds of schemes were often recommended by the Social Security Administration, not some crafty lawyers.   But like all good things, it has largely come to an end, although the original purpose (suspending benefits because you go back to work) is still in place.

Sadly, these kinds of strategies illustrate how many in the middle-class end up taking more out of Social Security than perhaps they need.   Social Security is less of a "safety net" than an adjunct to regular retirement planning these days.

And many folks think that maybe Social Security should be made optional, or privatized.   And these arguments are compelling when you are 25 years old and 9% of your paycheck is being taken out in Social Security taxes - and you are told again and again by Republicans that "you will never collect Social Security", which likely isn't true.

The reality is, many people find ways to opt out of the system - and then later regret doing so.   Once you start getting close to retirement age, Social Security doesn't seem like such a bad thing.  If only someone else would pay for it!