Social Security

Plan for the Frays in Your Social Security Blanket – Part 1 of 2

Until recent years, most of us thought of Social Security as our retirement income security blanket. Even if they had other sources of retirement income that were greater in amount, retirees knew that, come hell or high water, they would receive a monthly check or electronic deposit from the Social Security Administration. This feeling of comfort was based on a long-standing history of benefits being paid to workers when they retired at age 65 beginning with the enactment of the Social Security Act of 1935 by President Franklin D. Roosevelt and the first payment of monthly benefits in 1940.

Although there were periodic cost of living adjustment, or COLA, increases as early as 1950, beginning in 1975 and until 2009, retirees also knew that they could depend on them with the enactment of statutory annual increases based on annual Consumer Price Index, or CPI, changes. The annual COLA, was never less than 1.3% (1986 and 1998) and was as much as 14.3% (1980), averaging 4.4% over 34 years and 2.8% over the last 20 years. 2009 was the first year since 1975 that there was no COLA with the possibility of a repeat looming for 2010.

Nine years after the beginning of statutory COLA’s in 1975, an indirect reduction of benefits for many Social Security recipients was enacted beginning in 1984. The basic rule put into place in that year was that up to 50% of Social Security benefits is taxable if one’s income exceeded certain thresholds. With the highest marginal income tax rate at 50%, this equated to a maximum 25% (50% x 50%) tax on Social Security.

Nine years later in 1993, legislation was passed that increased the percentage of taxable Social Security benefits from 50% to up to 85% for “higher income” beneficiaries. With a top marginal income tax rate of 39.6%, this equated to a 33.7% (85% x 39.6%) maximum tax rate on Social Security benefits. Although the current highest marginal income tax rate is 35%, resulting in a 29.8% (85% x 35%) maximum tax rate on Social Security benefits, the top marginal income tax rateĀ is currently expected to increase from 35% to 39.6% in 2011.

Part 2 will discuss additional changes that have reduced or delayed the commencement of receipt of one’s Social Security benefits.