Are You Counting on Social Security?

My inspiration for this week’s column came from two sources. The first was Lester Austin, an enthusiastic and personable public affairs specialist for the Social Security Administration, who was this week’s guest on “For Your Benefit,” the weekly radio program that I co-host on Federal News Radio. The second was a midcareer retirement planning class I taught this week. I polled the class of federal employees -- all of whom were covered by Social Security under the Federal Employees Retirement System -- to find out how many of them were counting on the program to provide part of their retirement income. A majority of the class said they weren’t planning to rely on Social Security. Were they being realistic or pessimistic?

Here are some things that are important to understand about Social Security to have a realistic view of the role it will play in your retirement:

Social Security is a tilted system. This means it provides a higher replacement of preretirement income for those who have lower wages during their working years and a lower replacement for those who have earned higher wages. The assumption is people with higher wages should have been able to save for their retirement. Even without any future changes to the system, higher salaried workers likely will replace only 15 percent to 20 percent of their preretirement wages. Lower-salaried workers can count on replacing 30 percent to 50 percent. Here’s a fact sheet with more information.

Protection for people near retirement. Warren Buffet once said, “If past history is all there was to the game, the richest people would be librarians.” Since Social Security was created in 1935, Congress has protected Americans who were near retirement by grandfathering changes that would reduce future benefits or delay the receipt of full Social Security retirement benefits. Now, lawmakers are contemplating changes to Social Security. But they’re likely to protect people who are near retirement and counting on Social Security to provide a portion of their income. President Obama said in his 2011 State of the Union address: “To put us on solid ground, we should also find a bipartisan solution to strengthen Social Security for future generations. We must do it without putting at risk current retirees, the most vulnerable, or people with disabilities; without slashing benefits for future generations; and without subjecting Americans’ guaranteed retirement income to the whims of the stock market." Six years earlier, President Bush said in his State of the Union address that proposed changes in Social Security should not affect the benefits of anyone age 55 or older.

Many older Americans rely on Social Security for more than half their retirement income. According to a Social Security fact sheet:

• Nine of 10 individuals age 65 and older receive Social Security benefits.
• Social Security benefits represent about 41 percent of the income of the elderly.
• Among elderly Social Security beneficiaries, 54 percent of married couples and 73 percent of unmarried persons receive half or more of their income from Social Security.
• Among elderly Social Security beneficiaries, 22 percent of married couples and 43 percent of unmarried people rely on Social Security for 90 percent or more of their income.

The other sources of retirement income are pensions and savings. For federal employees that would be your Civil Service Retirement System or FERS retirement benefit and your investments in the Thrift Savings Plan. CSRS employees with 30 years of service receive a benefit equal to 56.25 percent of their high-three average salary. FERS employees with 30 years of service receive a benefit equal to 30 percent of their high-three average salary (33 percent if they are older than 62). Here are a couple of additional facts that might surprise you: 50 percent of the workforce in the United States has no private pension coverage, and 31 percent of workers have no savings set aside specifically for retirement.

About 70 percent of people who receive Social Security benefits get them tax-free. But that probably won’t include you. If you have other taxable income, you may find that you will be subject to federal income tax on 50 percent to 85 percent of your Social Security benefit. Keep in mind that additional income such as TSP withdrawals can cause your Social Security benefit to be taxed if the withdrawal causes your combined income to exceed established thresholds. On the plus side, 36 states do not tax Social Security benefits.

You may not get a statement in the mail. Beginning in October 1999, Social Security mailed annual individualized Social Security statements to 125 million workers age 25 and older who were not receiving Social Security benefits. In light of the current budget situation, Social Security suspended mailing the statements in 2011. Since 1999, the number of statements mailed each year had increased to 150 million at an annual cost of approximately $70 million. Later this year (hopefully by November, according to Lester Austin) the statements will be available at the Social Security website. Social Security will continue to mail statements to people who are 60 and older who are not yet receiving benefits. And one-time mailings to 25-year-old workers introducing them to the entitlement program and their potential benefits will be sent by the end of the year. But anyone still can get a benefits estimate using Social Security’s online estimator.

Remember, if you’re under CSRS, you’ve been exempt from Social Security during your federal career. The only way to qualify for any Social Security benefit is to have earned 40 credits of coverage from work where you were subject to paying the Social Security tax.

For those under FERS, it’s important to have a realistic expectation of the role that Social Security will play in your future retirement. That way, you can set savings goals that will compensate for the amount of replacement income you will need to finance a comfortable retirement. Also, you have to consider the important role the FERS basic annuity benefit will play in your retirement. If you plan early and understand the balance of your benefits, you can plan for a financially secure retirement.