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  • Financial Planning: Article

    By Paul S. Franklin, EJD CPA, Academic Department Chair 
    Published February 2014

     

    Two of the most frequently asked questions concerning Social Security benefits are: “Will Social Security be available when I reach retirement age?” and “When should I apply for my benefits?” Let’s address these questions one at a time.

     

    “Will Social Security be available when I reach retirement age?”

    I am not sure if anyone truly has an answer to that question, but my bet is that Social Security will not be going away anytime in the foreseeable future. Let’s look at its history. The Social Security Administration began collecting taxes in 1937; the maximum taxable earnings were $3,000. This threshold has been increased by Congress over the years, and in 2014 the threshold amount is $117,000. The Social Security Administration suggests that the laws governing Social Security will be changed; based on current legislation the payroll taxes collected will only pay approximately 77 percent of the scheduled benefits by the year 2033. Since 1937 the threshold or maximum taxable earnings have been raised many times through legislative action. The threshold has been increased on a yearly basis since 1971. The percentage increase from 2013 to 2014 was 2.9 percent and benefits increased only 1.5 percent. Should this trend continue, it is likely that funding will continue to be available to eligible recipients for many years beyond 2033.

    “When should I apply for my benefits?”

    Now, let’s look at the second question. Under current law a worker is first eligible for Social Security benefits at age 62 but their benefit will be reduced by a certain percentage. As an example, if you were born in 1952 and opted to begin receiving benefits in 2014, your benefit would be 75 percent of your full retirement benefit. If you should delay receiving benefits beyond age 66, your benefit will increase 8 percent per year until you reach age 70. Another important consideration is your desire to continue to work. If you wait until age 70 to begin receiving your benefits, your Social Security will not be exempt from income taxes. If you decide to begin receiving benefits and continue to have employment income, and the income exceeds a certain threshold, your benefit payments are taxable. If you are in a 25 percent tax bracket and your benefit is $1,500 monthly or $18,000 per year, your federal income tax on those benefits will be approximately $3,825. The taxing of your benefit can substantially reduce your overall income stream.

    Finally, you should remember that Social Security is designed to supplement your retirement income, not replace your salary or wages. You should request a Social Security Statement by going to www.socialsecurity.gov and track your estimated benefits and plan accordingly.

    Paul S. Franklin is a full-time Department Chair at Kaplan University. The views expressed in this article are solely those of the author and do not represent the view of Kaplan University. 

     

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