Mary Katherine Glassman:

Hello everyone, and welcome to today’s episode of From the Desk Of, our podcast about markets, life, and all things financial. My name is Mary Katherine Glassman, and today I’m joined by my colleague, Cassidy Murphy. We are both financial planners for FinTrust, and today we will be wrapping up our three-part discussion on Social Security, with the ins and outs of some of the more complicated rules of the program—things like taxation of your benefits, benefits for survivors, and divorcees, and different kinds of penalties or potential negatives to be aware of.

Cassidy Murphy:

So, let’s start out with everyone’s least favorite subject, which is taxes. And yes, Social Security is in itself a tax to workers paying into the program, but also that income benefit that you receive is usually also taxed. Now, how much of your benefit is taxable depends on how much other income you have coming in through retirement. It uses a special formula, but for most of our clients, I tell them to expect to be taxed on about 85% of their Social Security benefits.

Mary Katherine Glassman:

And since we’re leading off with taxes, let’s get a little more bad news out of the way first in terms of penalties to watch out for. If you file for Social Security before your full retirement age and you’re still working, your benefit can be reduced by even further—as much as $1 for every $2 that you earn over a pretty low threshold; for 2023, that’s $21,000. So, this only applies to income from wages or self-employment. So, it doesn’t count passive income or pensions or annuities. The penalty also goes away once you reach full retirement age. So, once you hit that magic number, even though you’re still working, your benefits won’t be reduced because of your earnings.

Cassidy Murphy:

Now, another potential reduction is called the Windfall Elimination Provision, or there’s also the Government Pension Offset, and those can come into play if you or your spouse have a pension from years of employment where you didn’t pay into Social Security. Only about 3% of beneficiaries are impacted by the Windfall Provision, which can reduce your Social Security benefit by as much as half of that non-covered pension amount. And then another 1% or so are impacted by that Government Pension Offset. That one really only applies to spouses and widowers, but it can completely eliminate any Social Security benefit if there is a separate, non-covered pension coming in. Teachers are the most commonly impacted by these provisions, and that depends on the state or the county where you worked. It can vary even within states as to whether you’re paying Social Security taxes. But these provisions also affect a variety of public sector workers like firefighters, police officers, and also some government and municipal employees as well.

Mary Katherine Glassman:

So, let’s change course a little bit and talk about a few situations where you might be entitled to additional Social Security benefits. So, there are a few special scenarios that apply to divorcees, widows, widowers, and surviving minor children, and retirees with minor children. So, in the first case, for divorcees, you may be eligible for benefits of an ex-spouse’s earning record if you were married for at least ten years, you have not remarried, and you’re both at least 62 years old. You can claim your benefit even if your ex-spouse hasn’t filed yet, so long as you meet these requirements and you’ve been divorced for at least two years. And if you qualify, you’re entitled to the higher of your benefit on your own record or half of your ex-spouse’s full retirement age benefit. The reductions still apply if you file before your full retirement age. And if you were the divorced spouse of a worker who passes away, you can also qualify for the same survivor benefits as a surviving spouse.

Cassidy Murphy:

And actually, I want to point out one more thing too that I’ve gotten questions on and that’s if your ex-spouse files on your record, it doesn’t impact anything as far as your benefits or what your current spouse or family is entitled to. So just another kind of weird thing that comes up sometimes. But that’s also a good segue for us to discuss survivor benefits, which get even more complicated, but they can be such an important financial resource for widows, widowers, young children, and other dependents. And the first thing to understand is that when one spouse passes away, the surviving spouse is entitled to continue whichever benefit was higher. So, if they each had their own benefit, only one of those continues, but it will be the higher of the two. Surviving spouses, if your spouse passes away before filing for their own benefit, they also still have the ability to file and suspend, which was eliminated for most married couples back in 2015. And that means that a surviving spouse can file on their own record as early as 62 while allowing their survivor benefit to accrue those delayed credits that we’ve talked about. Or they can file for the survivor benefit as early as 60 and still allow their own benefit to accrue delayed credits until 70.

Mary Katherine Glassman:

Right. And for those surviving spouses who are under the age of 60, they may also be eligible for a Social Security benefit while caring for children under the age of 16. And any surviving children may be eligible for their own benefit until they turn 18. Minor children may also be entitled to a Social Security benefit if their parent or parents had kids later in life. So, for parents who are entitled to Social Security benefits, their children can also collect benefits until age 18 once the parent files, which can end up being one of those unique scenarios where it ends up being beneficial overall to file a little bit earlier than we might otherwise suggest.

Cassidy Murphy:

So, we’ve covered quite a few special scenarios and some of the lesser-known rules of the program, but I want to close also with just a few remarks about the future of Social Security as a program since that’s really what we tend to get asked about the most. Now it’s one of those “third rail” issues that neither side really wants to touch, and nobody wants the finger pointed at them for cutting benefits. So, with that said, I think most people understand by now that some major changes will have to be made to keep the system afloat and operating as intended. Now, if Congress does absolutely nothing over the next 10 years, the latest Trustee’s report estimates that benefits would have to be cut across the board by about 23%. That’s how much can be sustained by revenues coming into the program. So broadly speaking, for now that’s the worst-case scenario. However, there are a lot of options that could be implemented to help shore things up, and many of them have already been proposed in bills that are currently circulating in Congress. Some of the simplest and most likely changes to come first would be to increase the amount of wages that are subject to Social Security taxes or to increase the tax rate itself. We may also eventually see a reworking of the formula to reduce benefits for higher earners, and I would be very surprised if there wasn’t another gradual pushing out of the full retirement age. But remember that the last time that happened, it went into effect in 1983 but happened over a 22-year time period.

Mary Katherine Glassman:

Thanks, Cassidy; that’s some really good insight into the future of Social Security. So, with so many limits, loopholes, and special considerations, we hope that this miniseries has helped to highlight some of the lesser-known details about the Social Security program. But there’s so much more that we just don’t have time to dive into. So, if you have any questions about how Social Security works specifically in your plan, please give us a call, and we are happy to discuss. Thank you all for listening!

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