social security Archives - Bankers Anonymous

November 14, 2022November 14, 2022

Social Security and the WEP

According to Social Security, about 2 million people are subject to something called the Windfall Elimination Provision (WEP) which reduces Social Security benefits in retirement. This affected 200,309 Texans receiving Social Security payments at the end of December 2021, more people affected than in any state except California.

The WEP usually hits when income over a lifetime is split partly between a public sector job with a pension and some years of contributing to Social Security.

So if you are a public sector employee with a pension – like a firefighter, police, or public school employee – you’ll want to pay attention to how the WEP may affect your Social Security payments in retirement.

In Texas, an estimated 95 percent of public school district employees do not pay into Social Security, according to the Teachers Retirement System, putting them in a relatively high likelihood of being affected by the WEP. Texas police and firefighters, as well as city or county officials may also be negatively affected if they do not participate in Social Security for most of their career.

The problem is the WEP is notoriously complicated to understand. I’ll explain who and why you might be affected, who shouldn’t worry, and what if anything you can do about it.

To further clarify, the WEP is notoriously unrelated to any song by Megan Thee Stallion. If you do not already know what I’m talking about then I implore you do not – under any circumstances – check YouTube right now to inform yourself.

The reason for the WEP

In order to understand the idea behind the WEP, you have to know a key thing about Social Security retirement benefits design. The main thing to know is that – as a welfare program – Social Security benefits nearly match earnings for the lowest paid people. Once you graduate to medium or higher pay, by contrast, your earnings only get somewhat matched by Social Security. If you make medium or high pay, you will receive a higher benefit from Social Security than a low-paid person, but only slightly higher, and not proportionate to your higher pay.

A couple of central scenarios make you subject to the WEP. The first would be if you are a salaried public employee contributing to a public pension rather than Social Security, but then you also earn some other modest amounts of money on a side hustle for which you do pay into Social Security. This could happen if you’re a teacher who takes a summer job that pays into Social Security. Or you are an owner or part owner of a business, and that business pays into Social Security. Or you work part of your career in a job that pays into Social Security, but then switch into a public pension job that does not pay into Social Security.

In each of these scenarios, the WEP is there because according to Social Security it would be unfair to accumulate a bunch of low-pay Social Security credits which then get highly matched with benefits. If you made $15,000 a year in a summer job as a teacher, but mostly make money throughout the year as a teacher with a pension, Social Security wants to more highly reward the person who actually only makes $15,000 a year total, rather than $15,000 as a side hustle. Essentially, that second person needs the welfare benefits of Social Security more than the public pensioneer teacher, according to the WEP theory.

So the WEP reduces the amount of Social Security the public pensioner receives in retirement, as a “fairness” provision relative to low-paid people who really depend on Social Security, rather than a pension.

Scale of Social Security reduction

Another key thing to know is that whatever amount you are owed by your pension, that part is safe. The WEP only reduces your Social Security benefits, not the pension benefits. But by how much?

Under the worst case scenario in 2022 the WEP can only reduce your Social Security payment by a maximum of $512 per month, according to Oscar Garcia, a former Social Security Administration employee and consultant now with Your Social Security Strategies.

That $512 maximum ceiling will shift to something higher in the future for future retirees.

Garcia used to write a regular newspaper column about Social Security and is deeply fluent in WEP.

Another limit to the WEP pain is a provision that protects people who only qualify for a small pension through their public sector career. Social Security will only reduce your benefit payment by one half the size of your pension. So if you only get $300 per month from your pension in retirement, your Social Security benefits will only be docked by $150 per month, because that’s half your pension.

What Can Be Done? Can the WEP Be Avoided?

For people who have only accumulated some Social Security benefits over a lifetime, and will receive a significant public pension, not a lot can be done.

Any public pension-eligible employee who manages to accumulate 30 full years paying into Social Security won’t be hit by the WEP. Anyone who accumulates between 21 and 30 years earning a substantial income subject to Social Security also is partially protected from the WEP, on a sliding scale as they approach 30 years. Of course, it’s hard to simultaneously work 20 to 30 years of paying into Social Security while also qualifying for a public pension, but it’s theoretically possible.

Other than that, the best defense is forewarning through knowledge, and people worried about the WEP can go to an online Social Security calculator.

To use this effectively, you would need to know all your past years of earnings, as that’s how Social Security calculates the WEP. If you haven’t previously signed up for a personalized benefits estimator through a website called MySocialSecurity, that’s also very worth doing and the best way to get your past earnings.

The WEP is generally quite unpopular with public pensioners who figure out the money they’ll not receive from Social Security, so attempts are made regularly to repeal it, so far unsuccessfully.

In July 2019, Texas Congressman Kevin Brady (now House Ways and Means Republican Leader, then Chairman) introduced the “Equal Treatment of Public Servants” bill to replace the WEP with a new proportional formula that would have raised Social Security payments for most but reduced them for others, based on average time in one’s career spent paying into Social Security. Texas Senator Ted Cruz introduced the companion bill to Brady’s bill in March 2020.

In 2021 Congressman Brady again introduced a WEP-elimination bill, with support from 15 other congress members from TX.

The Texas Lege also sent a resolution to Congress in April 2021 urging Congress to fix it.

Further attempts have been made in recent years to repeal or reform the WEP from both Republicans and Democrats, but so far the WEP lives on.

A frequently lumped-together and somewhat relatedly-hated problem, known as the Government Pension Offset (GPO to the cool kids) also can reduce Social Security spousal benefits. I’ll address that confusing story in a subsequent column.

A version of this post ran in the San Antonio Expresss-News and Houston Chronicle in September 2022.

Please see related posts

Social Security and the GPO

Post read (126) times.

August 25, 2022June 14, 2023

Social Security – The 50 Year View

In the beginning of June, Social Security issued its annual Summary Report noting that the primary trust fund for paying reserves will run out in 2034. Twelve years.

Also, I was reading this past week a book by Peter Ferrera published in 1980 called Social Security: The Inherent Contradiction.

In 1980, Ferrera forecast the trust fund would run out in 2030, to which I have two reactions. First – that’s some amazingly accurate forecasting of a complex actuarial system over the span of 50 years! Well done, actuaries. Second – you Boomers have had at least 42 years to fix this. Like, what the heck? I am first eligible for Social Security retirement payments in that same year, 2034. Coincidence? I’m a Gen X kid, I’m used to this kind of treatment by now. It’s fine. Really. I’m fine.

More seriously, the real thing we should understand about the trust fund is this: It’s a useful fiction.

The trust fund isn’t particularly important.

Benefits get paid from current Social Security payroll taxes. The government is not actually investing our dollars. Technically, yes, a partial and temporary surplus of payroll taxes gets parked in low-interest Treasurys, but by no means is this the real source of our Social Security payments. It’s a pay-as-you-go system. Current workers pay for past workers.

In fact, understanding this is a fiction is the key to remaining calm about Social Security. Rather than panic, we should take comfort. The trust fund has never particularly mattered.

As Ferrera wrote in 1980, the idea itself of a trust fund is “a carefully contrived deception meant to mislead the public.”

Ferrera continued, “the entire purpose of this deception is to hide the welfare elements in the social security system and attempt to create the impression that social security is simply insurance without any welfare elements.” I agree.

Whenever I write about Social Security I receive panicked (or conversely, overly certain) emails asking – or informing – me about the Ponzi scheme underlying our biggest government program. This is neither true nor helpful. Ponzi schemes are not backed by mandatory payroll taxes. Social Security is.

I 100 percent do not worry about Social Security running out of money. It’s never been a true trust fund. Rather, it has always been primarily “pay as you go,” transferring tax dollars from current workers to current retirees.

Ferrara’s big idea from 1980 was that Social Security has two functions, insurance and welfare. Most Americans focus on the insurance aspect, in which they think they pay into the system during their working years and they think they get a return on investment back in retirement years. That insurance function is the fakery, and the trust fund a symbolic misdirection to assist in the legerdemain. The true function of Social Security is a welfare transfer.

Although I haven’t spoken with Ferrera, I’m certain we disagree on whether the welfare element is good. I think it is. He thinks it is not.

A not-sufficiently-understood aspect of Social Security benefits is that it deeply favors modest lifetime incomes over higher incomes, when it comes to benefits. This is partly accomplished through “bend points,” which mean Social Security pays based on 90 percent of an extremely modest lifetime salary, 32 percent of a medium lifetime salary, and only 15 percent of higher earnings. I’m simplifying the language around these “bend points,” but the idea is that the welfare benefit of Social Security favors the neediest. To match this focus on welfare, annual income above a certain amount ($147K in 2022) is not taxed for Social Security.

I am confident that in my own life, under reasonable assumptions, I would have achieved a greater net worth if I had never been taxed for Social Security and instead had invested those funds myself. The “welfare” part of Social Security will turn out to be a net loss for me, personally.

For most of my fellow citizens however, the welfare benefit of Social Security is a net gain. And that’s fine by me. This is socialism and should be understood as such.

I say that not as a diss of Social Security. In fact, ninety-six percent of adults polled consider Social Security an important government program. I mean to point out to a Texas readership with all of its preconceptions that a little bit of socialism can be pretty comfortable. Very popular and indeed, necessary. Not having elderly people die of starvation for example is a win in my book.

As for Social Security staying solvent, the real key is in understanding that this is solved with just a series of technocratic tax rule adjustments. The issue is not running out of money in the trust fund (again, the trust fund is largely irrelevant) but rather what small adjustments to delay and diminish benefits or boost taxes will be made to render the entire system solvent.

That was addressed in another 1980s throwback way this past week by former Senator Rudy Boschwitz (R-MN).

While serving in the Senate (1978 to 1990), Boschwitz had written a key memo in 1982 with proposals for shoring up the program. Yes, it is clear folks were worried back in the 80s about the issue.

Last week, in the Wall Street Journal, he listed the various ways to do it again.

Raise the “full” retirement age to beyond 67.

Raise the “early” retirement age to beyond 62.

Fiddle with the “bend points” so that payments are even less generous to higher earners.

Slow the rise in benefits by linking to a different, probably better, inflation index.

Slow the rise in benefits for higher earners.

Make inflation adjustments less frequently.

Tax Social Security income more heavily for higher earners.

Raise the payroll tax slightly to bring in more revenue.

This can all be phased in with many years’ lead time, in a boring, technocratic way. No need to panic. Which again is why I don’t worry about the so-called trust fund running out of money in 2034.

Big thanks to reader Steven Alexander who contributed data and analysis to Ferrera’s 1980 book, crunching numbers on computers back in the 1970s that accurately modeled things like return on investment and the end of the trust fund in the 2030s. I was reading his copy signed by the author.

A version of this ran in the San Antonio Express News and Houston Chronicle.

Please see related posts

My nerdy Social Security Spreadsheet, Part I

My nerdy Social Security Spreadsheet, Part 2

Post read (137) times.

September 16, 2020September 16, 2020

Social Security in COVID – Research and Ideas

Adding to a vast ocean of unrelenting bad news, let’s explore some troubling research into the fine print on Social Security benefits.

Andrew Biggs, a resident scholar of the American Enterprise Institute, has two papers out this Spring with interesting implications on our most important safety net for retirees.

One paper has bad news for a particular cohort of soon-to-be-retirees. The other explores an idea for helping with current financial distress. I personally think his proposal is wrong, but worth discussing.

Biggs wrote in a recent paper that for a group of soon-to-retire folks – specifically those born in the year 1960 – the COVID recession could be very hurtful to their benefits claimed in 2027, at full retirement age.

In his paper, Biggs assumes the 2020 US gross domestic product (GDP) shrinks by 15 percent in 2022, and that average wages also drop by a similar amount. The net effect of this drop in average wages – as a mathematical input into the Social Security benefits calculations for people born in 1960 in particular – will drop benefits by 13 percent overall. If that happens, for a medium-wage worker born in 1960 in particular, Biggs calculates an annual and ongoing hit of $3,900. For that same medium-wage worker, lifetime social security benefits drop by a present value of $70,193 due to the 2020 COVID effect.

The math justification behind Biggs’ claim isn’t obvious unless you enjoy building your own Social Security benefits spreadsheet.¹

The math trick to know is that before calculating your first benefit check, Social Security indexes your annual earnings to a national wage index – rather than an inflation index, as you might expect.

If the wage index declines by 15 percent in 2020 (Biggs’ assumption), then this national wage indexing of 2020 earnings has a substantial negative impact on your benefit checks starting at age 67. Subsequent retiree benefit checks do increase according to inflation, known as the Cost of Living Adjustment. But if benefits start at a low base, for example, they will remain permanently lowered, even as they move upward with inflation over the years.

An economic recovery may mean later cohorts do not suffer this same temporary drop. Biggs recommends Congress consider interventions to protect this specific born-in-1960 cohort.

The COVID recession – depending on its duration and lasting effects on national wages – may also affect near-retirees born in 1961. So that’s your not-so-great news of the day on COVID.

Biggs also has written another paper in April 2020 which should be filed to the “interesting, but bad idea” pile. In the midst of our national discussions around stimulus payments, Biggs and his co-author Stanford Economist Joshua Rauh propose allowing pre-retirement individuals to take loans from their future Social Security benefits, which could be paid back at retirement age.

For context, private lenders do not make loans specifically collateralized by future social security payments. But Biggs and Rauh propose the federal government become that type of lender.

If a not-yet-retired individual decided to take a $5,000 check now, the authors suggest, the borrower could pay that loan back at retirement age by simply delaying owed benefits until the loan is repaid.

Part of the benefit to borrowers, Biggs and Rauh argue, is that the federal government could offer extremely low interest rates, knowing that it can recoup the money at the individual’s retirement date. This low interest rate helps the individual who could not otherwise borrow cheaply. In addition, warming the cockles of an economist’s heart, this cash infusion can be made budget neutral. Money paid out today during the crisis will be repaid, with low interest, by the worker at retirement.

In their scenario analysis, they show that most workers 45 or older who borrowed this way would likely only delay taking their social security benefits by three months, based on a $5,000 loan made today.

In simplest terms, Biggs proposes a mechanism for financially-strapped workers during the COVID recession to access their social security benefits early, with the obvious implication that they will have less later on, in retirement.

If enacted, (Narrator: this won’t be enacted) this form of pre-retirement loan would clearly impact the most vulnerable folks – people who have no other source of savings.

In general, I like considering any so-crazy-it’s-possibly-good wonky financial idea. But this is more like a so-crazy-its-possibly-terrible financial idea. I can’t endorse robbing future Peter to pay present Peter as a humane way to solve a short-term financial crisis.

When I am declared the National Personal Financial Benevolent Dictator (NPFBD) sometime in the future, I have a few different plans for Social Security. Different from both the current plan and Biggs’ suggestions.

My plan eliminates the need for complicated math and indexing as mentioned by the first Biggs paper. In my plan, basically, everyone gets the same amount of money. It doesn’t matter what your average 35 best earning years are, indexed for wages, then further adjusted for cost-of-living, then made progressive by counting different percentages of a specific workers’ earned wages. That’s a description of the current complicated math, simplified.

Instead, in my simple plan you get, say, $32,000 a year. Or whatever flat amount we choose. Everyone gets the same amount. No math. Congratulations, you’re 67. End of story.

If your lifestyle is above that cost, so be it. You should save some money now so you can maintain your lifestyle. If your lifestyle is below that cost, so be it. You’ll feel rich in retirement.

The complicated math we currently do for social security benefits is a very convoluted way to express a couple of wrong ideas. By wrong ideas, I specifically mean the ideas that:

1. We ‘earned’ our social benefits by a lifetime of working, and

2. If we worked more or harder or got paid more, then we should get a bigger chunk of cash in retirement.

I understand the implications of not doing any tailoring of benefits to individual workers and retirees. I understand why the current system feels “fair” to many. But I think the benefits of simplicity outweigh those implications, leading to a fairer outcome overall.

A spokesperson for the Dallas office of Social Security Katrina Bledsoe said they do not comment on projections or proposed policies, so declined to respond to my query about Biggs’ ideas.

Biggs responded to my query that he is very confident about the math behind his warning about the cohort of near-retirees born in 1960. His biggest doubt is whether the national wage index will actually fall by the estimated 15 percent – a sharp decline – or whether that’s too steep an assumption. At this point – not yet halfway through 2020 – we just don’t know yet.

A version of this post ran in the San Antonio Express News.

Please see related post:

Running for Personal Financial Benevolent Dictator

Building Your Own Social Security Spreadsheet

Building Your Own Social Security Spreadsheet, Part 2

Post read (118) times.

Whoops, guilty as charged! ↩

September 24, 2019September 24, 2019

Running for Benevolent Dictator

Following the Democratic presidential debates, I feel like I could have qualified for a spot among the 20 or even 10-person debate stages, if I’d only rolled out my platform sooner.

I know we can do better on the personal financial policy side. Here are my three big ideas on retirement.

Oh and by the way I’m not running as a Democratic Presidential candidate per se. Rather, I’m declaring my candidacy for National Personal Financial Benevolent Dictator – or NPFBD, which just rolls off the tongue nicely – a position that happens to also include extraordinary legislative power needed to pass my most important ideas.

My first three policy ideas deal with the crisis of retirement.

This is the crisis: About half of American households have zero net worth, and 29% of older Americans have virtually no retirement savings. The returns on Social Security savings are low, the enrollment in workplace retirement accounts is weak, and the costs of investing are too high. As NPFBD, I will solve all this.

I’m not a member of a party. Rather, as NPFBD I’m embracing “Paternalistic Capitalism” as my ideological mantle. For you fervent capitalists, very little will change under my dictatorship – you can continue to save and invest as you always have, and the program is revenue neutral. Read my lips: No new taxes. For you budding socialists, I think you will find my benevolent dictatorship addresses the problem of poverty and financial insecurity at retirement through important government interventions.

Policy #1 – Automatic enrollment in workplace retirement accounts.

About once a day I remember that not every single person with a job is enrolled in a their workplace tax-advantaged retirement account – like a 401(k) or 403(b) – and then I get heart palpitations and red in the face. Gah! Why is this still allowed?

As benevolent dictator, my fellow Americans won’t be able to make that mistake. The day you start your job is the day the HR department at work directs a portion of your paycheck to a retirement account. No ifs, ands, or buts. You’re also automatically invested in an age-appropriate investment fund. You can improve upon that fund choice later by taking charge of your investments, but the default fund will be thoughtfully chosen (by me, your NPFBD, according to your age, and adjusted annually).

Policy #2 – Private market investing of federal payroll deductions

In addition to automatic enrollment in a workplace tax-advantaged defined contribution plan, I’m going to reform the nation’s primary defined-benefit plan for retirees.

So part of every paycheck you receive will be withheld by the federal government, and you get the money back at retirement, but more. Through the decades of your working life this money will be invested by the federal government in private high-return assets, like diversified stock mutual funds.

Now, you’re probably thinking, “So, let me see here…the feds take part of every paycheck throughout my working life, and then I get my money back in retirement…Well um, that’s…that’s Social Security!…This blogger thinks he’s just invented Social Security.”

And fine, yes, there’s a resemblance. But the improvement I’m highlighting as NPFBD is that the money taken throughout our working life is actually invested, under my plan. Like, invested in stocks and mutual funds and stuff that grows in value over time.

Currently, our Social Security taxes are not invested over decades. Rather, our money is either transferred to retirees or loaned to the federal government and earns a very low rate of return. Actually investing our money over decades would, under many scenarios, grow tremendously over forty years of compounding returns. My own calculation recently was that I would have a monthly income about 2.7 times larger if my specific Social Security taxes in my lifetime had been invested, rather than simply earned a low government loan interest rate.

Ok so yeah, it’s a partial privatization of Social Security. Deal with it. You elected me to be NPFBD for a reason.

Also, In order to make this partial privatization the best deal possible, we have to roll out policy #3 at the same time.

Policy #3 – Universal access to the Thrift Savings Plan (TSP), currently only open to federal employees

Even as you read my third policy, the investment management industry (aka Wall Street) is already typing up its response to me. Something along the lines of “Shhh…Shut Up!”

Now, I sense your instinctual suspicion about expanding government-managed retirement funds like TSP. Something like “Gub’mint git yer gosh-darned hands off my mutual funds,” or whatever.

But firstly, private sector managers actually run most of the money, subcontracted by the TSP. Currently, BlackRock is the manager for the TSP stock funds. The federal government just did the important work of simplifying and driving down costs, a major part of successful investing.

Anyone who is a federal worker with access to TSP retirement accounts already knows that these funds are amazing. Amazing – not because they employ brilliant managers of money, as brilliance in money management is over-rated – but because they offer some of the lowest cost funds in the world. All I can tell you – if you haven’t experienced it – is that the TSP is a delightful program, and we should all be so lucky as to have access to it.

As my campaign for NPFBD continues to gather momentum, I will release further plans in the future. In the meantime you are welcome to send me your own crazy-but-good ideas for me to roll out, as your benevolent dictator.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related posts:

Post read (234) times.

February 27, 2019

More Nerdy Social Security Stuff I Found With My Spreadsheet

I went to my happy place this past week, which faithful readers (both of you!) will understand means I got to build myself a really neat-o spreadsheet.

I built it so that I could see “under the hood” of Social Security benefits calculations. This isn’t something I’d necessarily recommend to people who grew up in a loving household and who know how to relate to real live humans. But everybody has his or her hobbies. Don’t judge.

Generally, if you want to know what you should know about Social Security, I strongly recommend creating a My Social Security Account and I also strongly recommend going online to your Social Security benefits estimator. These online sources are easy to use, full of insights personalized to your own situation, and they could save you the hassle of a phone or in-person visit with a Social Security office.

garage_tinker — I don’t tinker with cars in my garage

But for the small percentage of you who’d like to talk nerdy with me, I thought I’d add a few more insights into what I found as a result of my custom-built spreadsheet and by pulling my own reports.

These insights include the effect of low earnings, the effect of entrepreneurship, and a benefit of working deep into one’s retirement years.

My Own Report

In the example of my own Social Security report, since I graduated from college, between 1996 and 2017 I have twenty-two years in which I have reported taxes. (2018 taxes, obviously, are not yet filed.) Of those twenty two, eight years represent high earnings. Three years represent virtually no income (I’ll explain that a little later on). In the other eleven years my income was “meh.”

I mentioned in the last post on Social Security that having a high income for a short amount of time is not as valuable – for the purpose of maximizing Social Security benefits – as having a moderate income for a long period of time. That’s because every year out of 35 years of earning income and paying taxes matters. Miss out on one year of earnings, and your benefits go down, at least a little bit.

As a soon-to-be forty-seven year-old, I have twenty more years in which to earn income, pay Social Security taxes, and therefore maximize my benefits. “Full retirement” age for me, by the time I get there, is scheduled to be 67 years old.

Incidentally, for current Social Security retirees today, the “full retirement” age is 66 and a half, but that age keeps creeping upward. And it ought to creep upward because we live way longer on average than people used to, so it only makes sense for the solvency of the Social Security program to increase the retirement age. But that’s a controversial topic for another day.

The point is that I’ve got a mere twenty more years to maximize my eventual benefits. And yes, one way to increase benefits is to delay starting your monthly payments. But that’s a well-known fact, and also not the topic for today. The topic today is getting the best thirty-five years of earnings possible.

Racking up thirty-five steady years can be difficult, for example, if you start or run your own business.

Entrepreneurial income varies tremendously year to year, which will have an effect on your final Social Security Benefits. I noticed from my own Social Security report that in the first three years of founding my investment business in the mid-2000s that I earned essentially zero income. The losses incurred in my startup years zeroed out my taxes – which was delightful at the time – but it also meant I did not pay into the Social Security system. Since all thirty-five years of earnings count toward building up Social Security benefits, entrepreneurs with volatile earnings may accrue far fewer benefits over a lifetime than will long-time employees with steady earnings. Even very successful businesses have years of losses, at least from the owner’s tax perspective, so that could lower Social Security contributions and therefore eventually benefits.

Work Past Retirement Age

So how does somebody improve his or her benefits, even with some low-earning years?

My mother, age 76, presents an interesting data point on Social Security benefits, which she has been collecting for the last six years. After raising us kids, she racked up some low-paying years during her career as a private school teacher. She continues to work as a consultant now, however, making decent income well past her full retirement age. Because Social Security benefits depend on calculating your highest 35 working years, her recent income years – in her mid-70s – have been slowly replacing lower earning years from her 40s. As a result, her monthly Social Security check has adjusted upward by a little bit each year.

Katrina Bledsoe, Management Analyst at the Dallas region Public Affairs Office of Social Security, confirms that this upward adjustment should happen automatically every year, if you continue working. If you don’t see the automatic adjustment, Bledsoe says beneficiaries may contact their Social Security office. Don’t do so until the 2^nd quarter of the year, however, because Social Security will need to see your official IRS tax data to recalculate benefits, and that generally doesn’t happen before April 15^th.

Two final Social Security thoughts. Monthly benefits generally are not enough to live on, comfortably, in retirement. Social Security payments should be thought of as a living supplement, not a sufficiency.

On the other hand, as much as 40 percent of American households do not have appreciable retirement savings. The median net worth of Americans between ages 65 and 74 is $224,000. With that statistic, we can see that Social Security constitutes the single most important source of funds retirees have to live on.

To do some simple math ¹ for which I don’t even need my cool spreadsheet, I would divide annual benefits by 5% to get a rough value of Social Security for an individual, as if it were the equivalent of a lump sum in the bank. That would make $2,500 in monthly Social Security benefits worth $600,000. That rough estimate shows us that Social Security is the largest safety net that a majority of Americans have.

Please see related post:

Social Security Nerdy Spreadsheet Part I – The Rabbit and the Hare

Post read (822) times.

And please don’t @ me to quibble about this last math assumption. Chill. I’m creating a quick and rough estimate for comparisons’ sake. Thank you. ↩

February 25, 2019September 16, 2020

Social Security Spreadsheet Fun

Some dads whittle wooden cars for the soapbox derby. Others spend hours with the hood up in the garage tearing apart an old engine and putting it back together, just to see how it all works.

Me? I like to do the same thing, except with retirement income in a spreadsheet.

We think about Social Security as a cool benefit we collect at retirement age, but have you ever wondered exactly how it is calculated? I wondered too, so I built a Social Security benefits calculator. Now I get to explain it to you.

What you can find online easily

Before we begin this journey together, I have a few public service announcements to make. You don’t really need to talk nerdy to me like this if you don’t want to. Two places on the Social Security website will tell you all you probably want to know about your own benefits. Sure, its like cheating on the test compared to all the cool tinkering I did on my own spreadsheet, but fine, you might prefer quick answers.

For quick personalized answers, you should definitely sign up to access your own personal “My Social Security” report online. My own report, which I signed up to receive at the tender age of 46, is quite fascinating. It lists all of my own earnings since 1986 (when I was 14 years old!), and how much I’ve paid in to the Social Security system until now. The report also shows an estimate – in my case, twenty years early – of how much I should expect to receive in benefits at my full retirement age.

You can also access a super-easy estimated-benefits calculator – specifically based on your own income data – on the Social Security Website.

This benefits estimator takes all your data, assumes you make an inputted income between now and time you retire, and then tells you what monthly benefit you can expect. It’s pretty cool.

Katrina Bledsoe, Management Analyst at the Dallas region Public Affairs Office of Social Security, wants people to know about these two online tools. Knowing about the personalized online calculators can save you time on the phone or in a Social Security office. I walked in to my nearest Social Security office in downtown San Antonio recently, and so I can testify that, yes indeed, you don’t really want to spend more time there than you have to. There’s the TSA-type screening to enter, the DMV-style vibe you get in the waiting room, and the nearly 2-hour wait I faced after I got a ticket with my number. So, yeah, you’re going to want to do as much stuff online as possible.

Bledsoe also mentions that signing up for the “My Social Security” report can reduce the possibility of identity fraud. If anyone tries to go online on Social Security, request a Social Security card, or go into a Social Security office using your identity, you would get an alert, so that’s nice too.

Cool SS stuff from my model

Ok, but most importantly, what cool stuff did I find in custom-built Social Security model?

Social Security benefits are determined by both your level of income and your years of earning income. More earning years and higher income translate to higher benefits.

Social Security benefits depend on calculating your average monthly income for your thirty-five highest earning years. You need a minimum of ten years to qualify for benefits. You increase your benefits for every year, up to thirty-five, in which you have income. For each of those qualifying years, Social Security caps the income you pay Social Security taxes on, and that cap serves as a “maximum income” for the purpose of benefits calculations.

Only earn income and pay taxes for thirty-four years? You can’t get the maximum benefit. Don’t hit the maximum income in every single year? You can’t get the maximum benefit.

I calculated the absolute maximum in my model of monthly Social Security benefits, assuming you qualified for full retirement in 2019, and had a max income in each of the previous thirty-five years: It’s $3,188.

I ran that number by Bledsoe, as a reality check. She said she’d never heard of any individual getting that much at “full retirement age,” probably because hardly anyone has a max income for all thirty-five of their earning years. Also, Social Security adjusts max income amounts every year, so the maximum possible benefits will go up slightly each year.

Early vs. Late Earnings

I asked my spreadsheet model to tell me the difference between earning retirement benefits early in one’s earning years versus late.

I was curious about this because one of the classic and true clichés of retirement planning is that putting away money in one’s twenties or thirties is far more valuable than putting away money in one’s fifties or sixties – due to the astonishing magic of compound interest math.

But Social Security doesn’t work that way.

I compared the effect of earning a max salary for ten years early in life – years one through ten – to earning a max salary late in life – years 26 through 35. To my surprise, the late earner would qualify for $1,503 per month as compared to the early earner qualifying for a little less, or $1,458.

The difference in benefits is not huge, but points out the dramatic difference between a Social Security benefit and self-directed retirement investing such as through a 401(k) or IRA. With self-directed retirement, the early years totally overwhelm the later years.

Turtle vs. Hare Earnings

Next, I wanted to know from my model whether the “turtle” or the “hare” gets better benefits under Social Security. I defined the hare as someone who earned a maximum income for ten years and then never worked again. I defined the turtle as someone who earned a solid but not massive salary over a full thirty-five years. I made the turtle salary $60,000, just under the current Texas median household income. My answer: The turtle would qualify in 2019 for $2,825 in monthly benefits, whereas the hare would qualify in that range that I mentioned above – between $1,458 and $1,503 – depending on whether that income was earned in the recent or distant past.

Within the Social Security rules, it’s better to be a turtle than a hare. Again, that’s possibly different from a professional career, especially an entrepreneurial one, in which ten good years of earnings can sometimes add up to more money than 35 years of median income.

Are these things interesting? I don’t know. They are to me. I’ll pass on a few more insights I got from my Social Security calculator in a subsequent post.

NOTE: A number of folks have asked to get a copy of my spreadsheet. I originally sent it around in the months following this post, but then stopped sending it. One reason: The Social Security factors that adjust annual earnings change every year, so my spreadsheet built in 2018 would be out of date by 2019. I don’t want to keep updating it, or send out wrong information. Second, its easy enough to build your own, if you follow the suggested steps of these two posts. Third – You can always hire me to do some personal financial consulting work for you…but I don’t think an out-of-date spreadsheet built for me is exactly going to serve anybody else’s individual purpose. Each person’s calculation needs to be individualized! The best way to do that and understand what you have is to build it yourself. Or, like I said, have me build it with you.

See Related post:

Social Security Calculations Part II – The Effects of Entrepreneurship

Post read (7406) times.

Stay in Touch

Copyright 2025 © All rights Reserved. Design by Sweb Development