How Can Social Security Be Out of Money If We Only Take Out What We Put In?

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I hear this question all the time.  We all put our own money into Social Security so how can it run out of money?


First, let me point out that Social Security is not out of money.  It’s estimated that it could run out of money by 2035 if changes are not made, but it is not out of money yet.  But, how could it run out of money if it only pays out what we pay in?  The problem is–and I hate to call this a problem, but we’re living too long.  (Like I said, hate to call that a problem.)


Let me use a real example of a real person.  I’ll call him Sam.  Over the years, Sam has paid $120,698 into Social Security.  His employers have paid $131,693.  So all together, $252,391 has been paid in.


According to Social Security, Sam will receive $2,611 a month in benefits.  At that rate,  Sam basically uses up all his money in just over 8 years.    ($252,391 divided by $2,611  =  96.66 months.  96 months divided by 12 months = 8 years)  So assuming that Sam retires at age 66, if he lives to age 75 then he’s used up all the money put in for him in the first place.


But you don’t quit getting social security when it runs out.  Social security payments go on until you die.


But what about interest?  Isn’t the money invested, shouldn’t it go farther?

Well yes, I did over simplify things.  The Social Security trust funds are invested in “special issue” securities of the US Treasury.  For 2012, the annual effective interest rate of return was 4.091%.  (But that’s because of some special circumstances, the actual rate right now is closer to 1.48%.)


There is no social security withholding on wages over $113,700.  Why can’t the wealthy just contribute more to social security?

I hear that all the time too–why not just have the higher income people keep contributing and eliminate the cap–but here’s a catch–if you are supposed to take out what you put in–then those higher wage earners are going to want to take out what they put in too.  Given that people are living longer than their benefits are holding out–do you really want people taking even higher benefits?  That would actually make the situation worse than it already is.


Let’s go back to Sam for our example.  If Sam lives to age 80, that’s 4 extra years of social security.  At his current rate of $31,332 a year, that’s an extra $125,328 more than what he originally paid in.    In reality, Sam earns well above the social security base wage.  Let’s say his contributions to social security are unlimited.   Based upon Sam’s “unlimited” contributions, when I run the numbers, I get Sam’s monthly payment to be close to $7,500 a month ($90,000 a year.)  Now if Sam lives an extra 4 years,   that’s $360,000 more than what he paid in.   So having the wealthy pay in more to social security actually costs more than keeping it capped like it is now.


So how do we “fix” social security? I wish I knew the answer to that one, but I don’t.

Why Social Security Wants You to Retire at 62

Social Security and early retirement

If you are going to life past that age of 83, then Social Security comes out ahead if you take your retirement benefits early.


Social Security would rather have you retire at age 62 than at your full retirement age.  That sounds a little backwards, but it’s all about money.  (Of course!)


When Social Security started back in 1935, the average person died before ever claiming any benefits.  Now, people are living longer than ever and Social Security payments continue through the end of your lifetime and even beyond for widow(er) benefits.


So, if the Social Security Administration is paying out so much money, why would they want you to retire early?   Let’s do the math.  (Don’t worry, I’ll keep it simple.)


Frank has worked all his life and he’s tired.  He doesn’t have to, but he’s thinking about retiring at 62 so he can spend more time with his wife, Delores.  If Frank retires at his full retirement age of 66, his monthly Social Security benefit would be $2,000 a month.  If he retires at age 62, he’ll get $1,500 a month.


So the first round of math is going to be–how much does Frank get before he ever turns 66?  He’s got 4 years of benefits, 12 months in a year, at $1500.  So he gets $72,000.


$1500 per month x 12 months =  $18,000 per year


$18,000 per year times 4 years = $72,000 per four years


So at first blush, it makes a whole lot of sense for Frank to take the money and run.


If Frank waits until he’s 66 to start claiming Social Security benefits, how long would it take for him to make up the $72,000 that he’s lost by waiting?  He’d catch up at age 77.   So if Frank’s family has a history of dying young–it might not make sense for him to wait until he’s 66 to retire.  You can do that math with different numbers, but generally it will take 12 years to catch up to your benefits.


But what if Frank comes from a family with an average life expectancy of 90 years?  What then?


Remember, by retiring early, Frank loses 25% of his payment every month.  In this case, that amounts to $6,000 a year ($500 a month x 12 months). So if Frank catches up at age 77, then he’s got 13 more years with $6,000 a year extra, now Frank is ahead by $78,000.


According to Social Security Statistics, the average person today lives to be 83 years old.  Going by the numbers, Social Security saves money on people claiming their benefits at age 62.


This is a very simplified example.  Frank has many things to think about–his wife’s benefits, what if he waits until age 70, how long does he expect to live?  What other benefits might he be entitled to?  Social Security won’t tell you all of your options.  If you call them to file for benefits, they take your application and you’re done.


At Roberg Tax Solutions, we’ll sit down with you and chart out your benefits so that you know all of your options.   At the end of the day, the decision is yours, but you deserve to know what all your options are before you have to make that decision.

How to Check Your Social Security Annual Statement (And Why You Want To, Even if You’re Only 18)

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“Social Security, that’s for old people.  Social Security won’t even be around when I retire.”


Let’s look at that second statement first.  Social Security won’t be around when you retire.  That’s what I was told back in college thirty years ago.  “There will be no more Social Security by the time you retire, you’re just paying in and you’ll get none of it back.”  That was Gospel when I was 20 but Social Security is still here.  We’re still being told doom and gloom stories and granted Social Security is not perfect.  I wouldn’t plan on it being my only source of retirement income—but I suspect that it’s going to be around for a long time so you need to make sure your Social Security records are right.


Now I agree that Social Security is mostly for old people, but it also affects your payments should you become disabled and your spouse’s and children’s survivor benefits should you die.  We don’t want those things to happen, but Social Security is there for those situations.


The reason you want to check your Social Security statement every year is to make sure that the wages you earned are listed correctly.  Most of the time they’re right but not always.    Usually if there’s a mistake, it happens in a year when you received two or more W2s.  Sometimes they’ll report one or the other but not add them together.  Other mistakes are possible, but that’s the most common one.


Here’s why it’s important—Did you know that Social Security uses your top 35 years of wages and self employment to figure your Social Security benefits?  Thirty-five years!  That’s fine if you graduated from college, got a good job, and worked steadily until you retired.  That will give you 35 years and then some, easy.


For the rest of us, life happens.  We get laid off, we have babies, and maybe we start our own businesses and have negative income for awhile.  We get some zeroes on our Social Security statement.   Never in a million years would I have dreamed that the $2.50 an hour job I had back in 1976 would affect how much money I’d get for my Social Security retirement benefit.  But it will—because that $2.50 an hour job is better than some of the zeroes that will be affecting my Social Security statement.


So how do you go about checking your Social Security statement?  First you’ll need to set up an account with the Social Security Administration.  Go to the website: .  On the left hand side of the screen, you’ll see a picture of a lock and it will say “My Social Security”.  That’s where you’ll create your account, or log in if you already have an account.


When you set up your account you’ll need your name (as it appears on your social security card), your social security number, and mailing address.  You have to have a valid email address to set up the account.  You also have to be at least 18 years old, so if you’re only 16 and working, you won’t be able to verify your employment yet.


One thing the Social Security website is really good at is security.  They’re going to ask you questions to identify yourself.  Be prepared to freak out a little by how much they know.   The SSA gets the information off of your credit report to generate the questions.


Once you’ve got your account set up, you can go in and look at your Social Security Statement.  Here’s a sample one that you can see:


Page 2 shows how much your payments would be at retirement, assuming that you continue working at your current income.  It also shows what your disability payments would be if you became disabled today and benefits your spouse or children could receive if you die.  If you haven’t worked long enough to qualify for benefits yet (generally 10 years) it will tell you that too.


Page 3 will give you a breakdown of the wages that have been reported over the years.  2012 wages should be posted now.  It’s a slow process; the annual wages that you report on your tax return in April don’t show up on the Social Security Statement until September.  So now’s a good time to check.  If you find a mistake, you’ll need to contact the SSA and notify them.  Usually you’ll need to prove the error by providing them with copies of your W2s.


See why it’s a good idea to do this once a year?  Who keeps W2s for 35 years?  (No, I don’t.  You were thinking geeky accountants weren’t you?)


Make sure you keep your Social Security user name and password in a safe place.  You’re going to want to access the account once a year and just check the information to make sure it’s accurate.  Labor Day is a good time to check—it’s a celebration of workers, and your Social Security statement is your documentation of your years of working.  (Okay, it’s because the information gets posted in September, but that’s not as easy to remember.)


For Labor Day, check your wage history at

What Every Divorced Woman Needs to Know About Retirement: Social Security

social security benefits

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This may come as a surprise to you, but your ex-husband could turn out to be good for something after all. If you were married for at least 10 years, you may be entitled to Social Security benefits based upon your ex’s income—that is, if he’s entitled to Social Security benefits.


Here’s how it works: let’s say you’re thinking about retiring. You go to the Social Security website and find out what your benefits would be if you retire at 62, if you retire at your full benefit age, and if you retire at age 70. Then you call Social Security to find out what your benefits would be if you used your ex’s Social Security benefits. The number is (800) 772-1213. If you retire at 62, you can get 35% of his benefit; at full retirement age, you can get 50% of his benefit.


Let me show you with an example: Jane is 60 years old and she’s contemplating what she wants to do about retiring, whether to start taking benefits at 62 or hold out until later. She runs the numbers on the Social Security website ( )  and gets the following information:


  • Retire at 62, monthly benefit: $ 585
  • Retire at 66, monthly benefit: $ 820
  • Retire at 70, monthly benefit: $1,040


Those aren’t great numbers. Jane didn’t always work because she was raising a family, and when she did work, well, she didn’t make all that much money. But Jane’s ex-husband, Tom, made plenty of money. Using the Quick Retirement Calculator at


Jane estimates Tom’s Social Security earnings will be $2,586 per month at retirement. Now she’s going to want to actually talk to the Social Security folks to get the real numbers, but the calculator will give her a rough idea.


So, if Jane retires at 62, she can qualify for 35% of Tom’s money which would be $905 per month. If she waits until her full retirement age, she can qualify for 50% of Tom’s money which would be $1,293. For Jane, she can make more money retiring using Tom’s benefits than she can make on her own.


This is really important to know:

  • Your ex-husband will not lose his Social Security benefits if you use them
  • You cannot be currently remarried and qualify for your ex’s benefits
  • If you have had more than one marriage that lasted for over 10 years; you may use the spouse that gives you the greater benefit


Now here’s the really sweet deal: Let’s say Jane has a job she really likes and is able to keep working past full retirement age. Jane keeps working but she claims Tom’s social security benefits when she hits her retirement age. Then, let’s say because of her working, her benefits at 70 actually go up to $1500 a month instead of the $1040 that she had calculated back when she was 60. Jane can switch back and take her own, higher, retirement benefits now. That’s so awesome!


This is also important: If you claim Social Security based upon your ex-husband’s benefits before you reach full retirement age you will not be able to switch back to your full benefit at age 70. You really want to think long and hard about those numbers before you retire early.


What you’re eligible to receive from Social Security is very personal. It’s all based upon your individual contributions, you can’t make any assumptions based upon what your friends or neighbors get. You can learn what you’re eligible for by creating your own account at the Social Security website. It only takes about 10 minutes. Finding out about benefits from an ex-spouse will take a bit longer because it involves a phone call and the hold times can be pretty long. Isn’t it worth finding out?

A 1% Tax on Social Security Checks? — The Unholy Resurrection of HR 4646

9/11 Tenth Anniversary Commemoration (201109130005)

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There’s an email going around saying that President Obama’s finance team wants to tax direct deposited Social Security checks at 1% and that’s why everyone will be required to direct deposit their check starting in 2013. The bottom line with this is—it’s a bunch of horse hockey. (I like to keep my blog at a G rating.)


Let’s start with some background on the issue. It’s actually a recirculation of an old email from 2010 when the bill was originally introduced by a congressman named Chaka Fattah of Pennsylvania. He originally proposed this legislation with the name “Debt Free America Act” which was his plan to eliminate the national debt. (Back then the national debt was around $10 trillion as compared with today’s almost $16 trillion.) Here’s a link to his post about the bill which is dated April 15, 2010:


There are two really important things to know about this bill:


1. This is not an Obama Administration bill. It wasn’t a Bush bill either. Now, I’m making a guess but I think I’m pretty safe in saying that Romney would never support this bill either.


2. The bill already died a quiet death in committee. There was never even a floor vote. Nobody supported this bill except for Mr. Fattah.


So why am I writing a blog in 2012 about a phony email that started in 2010? Because the email is still going around! I just got it last week. And when somebody sends me an email about taxes I check it out.


So what else do I know about this bill? Well, Mr. Fattah re-proposed his bill in March of 2011 as HR1125. Once again, it went to committee the same day and nothing has happened since. There are no cosponsors to this bill. Not Tom Harkin, not Peter Defazio, not Nancy Pelosi; nobody.


If you still want more information, check out the article debunking it:


So folks, your Social Security checks are safe. If you get this in your email box, just delete it because it’s not true.

Is My Social Security Income Taxable?

Do I have to pay tax on Social Security?

Photo by Jan Roberg.

People often ask me if their Social Security income is taxable.  No, sorry, I just lied.  When I finish preparing  a tax return for someone on Social Security I’ll often hear, “What do you mean my Social Security is taxable? ”  People who say that are usually angry when they say it too.  But, for many people, Social Security is taxable.

So how do you tell if your Social Security is going to be taxed?  Here’s the quick and dirty way to figure it out.  First, take half of all of the Social Security income you get and add that to all of the other income you get.  If you’re single and the amount is over $25,000 you’ll start getting hit with tax.  If you’re married filing jointly—then you’ll start getting hit at $32,000.  If you’re married-filing separately and don’t live apart—then it’s all taxable.

So this can totally mess up your tax rates.  For example—let’s say you ‘re currently in the 15% tax bracket and you haven’t crossed into “Taxable Social Security Land” yet, but you’re right on the border.  You want to take a really nice vacation and it’s going to cost you $10,000.  How much money do you need to take out of your IRA to go on vacation and pay the income tax?

Well, you know you need 15% more for the tax so let’s say you take out $12,000.

$12,000 X 15% = 1800

That means that you’ll have $10,200 for your vacation, right?  (12,000 IRA – 1,800 income tax = 10,200 vacation money)

Looks good, except it’s wrong.  See, if you’re on that border, then half of the $12,000 is going to go into the taxable Social Security pile.  So instead of paying 15% on $12,000 you’re paying 15% on $18,000; that’s another $900 in taxes.  ($18,000 X 15% = $2,700    and    $2,700 – $1,800 = $900) 

Now you don’t have enough money to pay for your vacation.  You’ll need to be taking more out of your IRA and then even more of your Social Security will be taxed.

Because taking that distribution makes your Social Security Taxable—your real tax rate is 22.5% instead of 15%.

$2,700 tax divided by $12,000 distribution = 22.5% tax rate

For lots of people, there really isn’t much you can do.   If your income is high enough, you’re stuck with your Social Security being taxed and there’s no way out.   But for some folks—you can plan ahead to avoid this bumped up tax—or at least try to reduce it.  You’ve got to know about the tax though if you’re going to plan ahead for it.  If you want help figuring out if your Social Security is taxable, give us a call.

Social Security is Changing How They Issue the Numbers

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One of the quirky things I enjoy about doing taxes is that when I get someone’s Social Security number, I can tell where the person is from. The first three digits of your Social Security number are tied to a geographic area. The second two digits are a group number and the last four digits are a serial number. Social security numbers that were issued since 1972 can be tied directly to a state and is determined by the zip code on the address of the application. I can tell you 012 is Boston and the numbers go higher as you head west. (I can tell you a lot more, but it’s kind of embarrassing to admit that I know what the social security number codes mean.)
That’s all going to change now. On June 25, 2011, the Social Security Administration (SSA) adopted a new randomization program. It’s going to eliminate assigning the numbers based on geography. Part of this is due to the lack of new numbers available for use. Currently, there are approximately 420 million numbers available to be issued, but because the numbers are restricted by state, the numbers available were greatly limited. Randomizing the Social Security numbers opens up all of the available numbers for use, and keeps the SSN at nine digits instead of changing it to a larger number.
Another benefit to the randomization process is privacy. It will be more difficult for an identity thief to reconstruct someone’s Social Security number based on public information once the numbers are randomized.
Some numbers that still won’t be in use are 000, 666, or anything from 900-999. Only new social security numbers will be under the randomization process. You do not have to do anything about your Social Security Number if you already have one.
For more information about the Social Security randomization program, you can click this link: