THE TAX ATTIC with Jerry Coon

Current Social Security rules reviewed

Jerry Coon

The topic of Social Security constantly comes up as part of the talk in Washington these days. It gets especially feisty when they start discussing how Social Security is impacted by whether or not the debt limit is increased. Politicians, bureaucrats and pundits in favor of increasing the debt limit state that if it isn’t raised, the Social Security checks will stop. Politicians, bureaucrats and pundits in favor of not increasing the debt limit state that that’s a bunch of hooey. No one who ever wants to be re-elected would do anything to stop the process of issuing Social Security checks. The checks will go out as normal.

I tend to agree with those who are not in favor of increasing the debt limit and no matter what happens, the checks will go out.

Our federal government takes in approximately 200 billion dollars every month in tax revenues. According to the Social Security Administration’s website, in June 2011 they paid out 4.326 billion dollars or an average of $499.40 to a little over eight million recipients. That’s 4.326 going out and 200 coming in. Hmmm. I don’t think they will take the risk of refusing to pay out that 4.326.

However, the debt-increasing merry-go-round does have to stop at some point in time and now may be as good of a time as any—14.3 trillion dollars of debt might just be good enough.

We Americans like to do things in a big way. Well, this is the one time that doing it large is going to hurt us. Budget or spending reform will take into account many facets such as tax reform.

Even though I don’t have any personal friends in Washington, it appears like Congress wants tax professionals like me to stay in business well into the future. I’m sure they will be providing plenty of material for future articles. If I’m not careful, I will be writing these articles until I’m as old as Roger Allen!

In the meantime, I believe it’s time to review the Social Security rules as they stand right now.

The 10,000-pound elephant has entered the room. I mean the baby boomers have begun applying for benefits en masse. Approximately 16,000 baby boomers per day are signing up for Social Security, and 9 out of 10 of them are beginning to draw before they reach full retirement age. Sixty percent of all recipients depend on that Social Security check for 50 percent of their retirement income.

Social Security is big business and quite important to the country. Since the age at which most baby boomers begin to draw benefits is age 62 and given the life expectancy of most baby boomers, is it a good strategy to begin drawing at age 62? To determine if it’s a good strategy, we need to know two items:

1. How long does the baby boomer have to wait to draw full benefits, commonly called reaching full retirement age?

2. What is the total penalty for beginning to draw at age 62 instead of waiting until full retirement age?

After we calculate the reduction, we can then calculate a break-even point. The break-even point will be the age at which it would have been beneficial to have waited until full retirement age to begin drawing benefits.

First, back in the 1990s, Congress instituted a sliding age scale for full retirement age. Those born in 1937 and earlier reach full retirement age at 65. Those born in 1938 through 1942 add two additional months for each year born after 1937. For example, a person born in 1938 would reach full retirement age at 65 years and two months of age. For those born in 1943 through 1954, full retirement age is reached at age 66. For those born in 1955 through 1959, it’s back to adding two additional months for each year born after 1954. A person born in 1955 would reach full retirement age at 66 and two months of age. For everyone born in 1960 and later, full retirement age starts at age 67.

The second part of the equation involves determining the penalty for signing up for benefits before full retirement age is reached. For taxpayers age 65, the maximum penalty for drawing at age 62 would be 20%. The potential benefit calculated if the taxpayer waits until age 65 is reduced by 20%. Actually, it works out to .556% per month for each month under the age of 65 the taxpayer begins drawing. For taxpayers age 66, the maximum penalty for drawing at age 62 would be 25%. Reduce the age 66 benefit by 25% if the taxpayer starts at age 62. The monthly reduction under age 66 is .521% per month.

For taxpayers age 67, the penalty is the most severe at 30% for those who begin to draw at age 62. The monthly reduction for drawing under age 67 is .5% per month.

The third part of this equation then is determining a break-even point. We will discuss the various aspects of that point in next week’s article. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service in Rockford.
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