Personal Finance: a Gospel Perspective

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Personal Finance a Gospel Perspective

• Retirement Planning 2 Social Security

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Objectives

• A. Understand Social Security in a Historical
  Context
• B. Understand how Social Security Works
• C. Understand the key questions relating to
  Social Security
• D. Understand the likely future of Social Security

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Social SecurityA Historical Context

• The time and events surrounding the passage of
  Social Security
• The Stock Market Crash of 1929
• GDP fell 48, from 105bn in 1929 to 55bn in 1933
• Millions were out of work
• Over 9,000 banks failed
• Depositors lost over 7 billion in assets
• Personal and family devastation was common
• Because of this, Franklin D Roosevelt signed the
  Social Security Act in 1935 to Aid the Displaced
  and Out of Work

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Understand How Social Security Works

• How much does an employee pay in Social Security
  and Medicare Taxes?
• FICA tax rates
• Social security tax 6.20
• Medicare tax 1.45
• 
  7.65
• Maximum wage subject to SS tax is 90,000 in 2005
• No maximum for Medicare tax

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How Social Security Works (continued)

• What is the employers share of Social Security
  and Medicare Taxes?
• Your employer matches dollar for dollar

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How Social Security Works (continued)

• Social Security Funding
• Social Security is a pass-through account
• FICA taxes being paid by todays workers are
  providing the money for benefit payments to
  todays retirees
• There is no investment or savings component
• The assumption is that when you retire, there
  will be enough others paying into the system to
  pay for your benefits
• Interesting assumption!

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How Social Security Works (continued)

• Changes in Social Security Tax Rate
• Social Security Tax Rates
• 1937 1.0
• 1954 2.0
• 1960 3.0
• 1971 4.7
• 1984 5.8
• 1990 6.2

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How Social Security Works (continued)

• How much Self-Employment tax must a self-employed
  person pay in 2005?
• A self-employed person pays both parts
• 12.4 on first 90,000 of net earnings (SS tax)
• 2.9 on all taxable earnings (Medicare tax)
• Self-employed may deduct half of their SS taxes
  as an adjustment to taxable income

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Key Questions about Social Security

• If you have a job and a small business on the
  side, what do you pay?
• No more than 90,000 of combined wages are
  subject to FICA tax in 2005
• Additional wages are subject to Medicare tax

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Questions about Social Security continued)

• How does one qualify for benefits?
• To qualify for full benefits
• Quarters-of -coverage requirement
• The number of calendar quarters that you earned
  required minimum amount
• For 2003 the quarter-of-coverage minimum is 890
  in earnings
• Need 40 quarters to qualify for full benefits (10
  years)
• Earning beyond 40 quarters will not increase
  benefits

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Questions about Social Security (continued)

• How much will one get?
• Benefit amounts vary depending on
• Number of years of earnings, average level of
  earnings, an adjustment for inflation, and age at
  retirement
• Nonworking spouses get benefits equal to 50 of
  their working spouses benefit
• If both spouses worked, each is eligible for
  benefits based on own earnings or based on 50 of
  spouses benefit, whichever is greater
• The formula goal is to replace 42 of your
  average earnings

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Questions about Social Security (continued)

• How do I get a copy of my benefits?
• To get a copy of your Social Security Statement
  benefits, go to www.ssa.gov/mystatement.
• Click on Your Benefits near the top, and then
  click on Request a Social Security Statement at
  the bottom of the page.
• Fill out your name, middle initial, last name,
  social security number, birthday, and other
  information that is requested.
• Click on continue to submit a request for your
  Statement. You will receive your Statement in
  3-4 weeks.

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Questions about Social Security (continued)

• How about getting an estimate?
• As a preliminary estimate of benefits, go to
  www.ssa.gov/mystatement.
• Click on Need to Request a Social Security
  Statement in the top, and then click on How can
  I calculate my own benefit estimates in the
  middle of the page.
• Then click on Benefits Planner and calculate
  your retirement benefits based on different
  retirement scenarios. You can either fill out
  the quick calculator Quick Calculator or the
  more detailed Online Calculator.
• Click on the calculator desired, and then fill in
  the information.

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Questions about Social Security (continued)

• How does starting age affect benefits?
• You can start receiving benefits anytime after
  age 62, but benefits will be less than starting
  at your full retirement age of 67 (for those born
  after 1959).
• What is my full retirement age?
• Birth Year Full Retirement Age
• 1937 65
• 1943-1954 66
• 1960 67

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Questions about Social Security (continued)

• What if I want to retire at 62 and I was born in
  1960?
• Payments would be reduced by 5/9 percent for each
  month prior to age 67 for the first 36 months and
  5/12 percent for each month prior to that
• To retire at age 62 would be
• 5/9 percent x 36 months 20
• 5/12 percent x 24 months 10
• Total reduction in payments 30
• You may delay benefits after age 67 up to age 70
  and receive credits amounting to 8 percent per
  year for those born after 1943

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Questions about Social Security (continued)

• What is the annual Social Security statement and
  when does one get it?
• Must be 25 or older
• Statement arrives 3 months prior to birth date
• Statement shows
• Quarter coverage credit
• How much you have paid
• Estimated benefit data

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Questions about Social Security (continued)

• How can one apply for benefits?
• Application process
• Social Security offices
• Telephone
• Internet
• May need to show verification
• i.e.. Birth certificate, Social Security Card,
  etc.

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Questions about Social Security (continued)

• When will I receive my retirement benefits?
• Benefits are paid second, third, or fourth
  Wednesdays each month depending on your birth
  date
• May receive payment by check or direct deposit

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Questions about Social Security (continued)

• Can I earn income after I retire and still keep
  my retirement benefits?
• Taxpayers age 65 or over can earn any amount
  without having their Social Security benefits
  reduced. (Senior Citizens Freedom to Work Act of
  2001)
• An earnings test with partial benefits are
  possible for those retiring prior to age 65.

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Questions about Social Security (continued)

• Do I have to pay federal income tax on my
  retirement benefits?
• Possibly, if other income, including pension and
  wages, is substantial (see an accountant)
• About 20 of those who receive SS benefits have
  to pay some federal taxes on the benefit.

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Understand the Likely Future of Social Security

• Where is Social Security now?
• The Social Security program is currently taking
  in more than it is paying out
• It had income of 632bn in 2003 (627bn in 2002).
  and paid out 470bn in 2003 (454bn in 2002) in
  benefits to 47mn (46mn in 2002) people
• Reserves are in government bonds (SS Trust Fund)
• Today there are 3.4 workers per recipient

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From http//strengtheningsocialsecurity.gov/need_f
or_action.shtml, 21Mar05
From http//strengtheningsocialsecurity.gov/need_f
or_action.shtml, 21Mar05
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From http//strengtheningsocialsecurity.gov/need_f
or_action.shtml, 21Mar05
From http//strengtheningsocialsecurity.gov/need_f
or_action.shtml, 21Mar05
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Future of Social Security (continued)

• Until 2014
• Benefits can be paid solely from tax revenues
  until 2014
• Until 2025
• From 2015-2025 SS will have to use the interest
  on the bonds
• Beyond 2037
• From 2026-2037 the SS will have to redeem bonds
• At current projections social security funds will
  be exhausted in 2042
• By year 2075 there will be 1.9 workers per
  recipient

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Future of Social Security (continued)

• What about a worst-case scenario in 2042?
• Even if SS assets are exhausted in 2042, Social
  Security calculates that from the regular inflow
  of tax revenue alone it could pay about 73
  percent of benefits
• My recommendation?
• Dont plan for much, but if it still is
  available, be thankful

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President Bushs Plan

• Establish Personal Accounts (PA) which would be
  totally voluntary. This is similar to the
  existing Federal Employee Thrift Savings Plan
• PAs would be invested in a conservative mix of
  stock and bond funds
• Those who earned an average of 35,000 over their
  career would have 250,000 at retirement
• Savings would supplement the Social Security
  benefits, or be passed to children

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Review of Objectives

• A. Do you understand Social Security in a
  Historical Context?
• B. Do you know how Social Security Works?
• C. Can you answer key questions relating to
  Social Security?
• D. Are you aware of the likely future of Social
  Security?

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For more information

• Go to www.socialsecurity.gov for more information