Part 1 discussed some of the historical events in connection with changes to the Social Security system that has resulted in a reduction of benefits received and ongoing questioning of the security of the system, itself. As discussed in Part 1, these changes include no cost of living adjustment, or COLA in 2009, potential taxation of up to 50% of benefits beginning in 1984, and an increase in potential taxation of benefits from up to 50% to up to 85% beginning in 1993. This post will discuss some additional changes that have reduced or delayed the commencement of receipt of one’s Social Security benefits.
Even though it would be 65 years (how ironic!) from the enactment of the Social Security Act in 1935 until the beginning of the reduction of the magical age of 65 for receipt of full retirement benefits, April 1983 Social Security reform gradually raised the retirement age. Beginning in 2000, unless you were born in 1937 or earlier, the commencement of a full retirement benefit has been delayed until a specified age after 65 depending upon your year of birth.
For each year of birth between 1938 and 1942, there is an increasing two-month delay in commencement of benefits from age 65. Individuals born between 1943 and 1954 must wait until age 66. For each year of birth between 1955 and 1959, there is a two-month delay in commencement of benefits from age 66. Finally, for those born in 1960 and later, 67 is the eligibility age for receipt of full retirement benefits.
Beginning in 1961, one could elect to receive a reduced benefit of 80% of the otherwise payable full retirement benefit beginning at age 62. With the 2000 initiation of the delay of the commencement of payment of full retirement benefits until after age 65 for those born in 1938 or later, the 20% reduction in benefits for those electing to begin receiving Social Security at age 62 also increased.
The 20% reduction for age 62 benefit commencement increases by approximately 0.8% for each year of birth between 1938 and 1942 until it reaches 25% for those born between 1943 and 1954. The reduction further increases by approximately 0.8% for each year of birth between 1955 and 1959 until it plateaus at 30% for those born in 1960 and later.
One other noteworthy item in the fraying of Social Security benefits is the affect of increasing Medicare Part B premiums on one’s Social Security check. While Social Security checks cannot decrease from one year to the next as a result of an increase in the Part B premium for “lower-income” individuals, this isn’t the case for “higher-income” recipients, i.e., those with modified adjusted gross income (“MAGI”) of $85,000 or more.
Beginning in 2007, “higher-income” individuals have been subject to higher Medicare Part B premiums that increase as MAGI exceeds specified thresholds (see the July 5, 2010 post, Will Your Medicare Premium Increase If You Do a Roth IRA Conversion – Part 1 for the 2010 Medicare Part B “higher-income” monthly premium table). As a result of a 14.7% decrease in Medicare Part B premiums and no cost of living adjustment (COLA) from 2009 to 2010, individuals with MAGI of $85,000 or more experienced a corresponding decrease in the amount of their monthly Social Security checks.
As is evident from the legislative history, the Social Security retirement income security blanket, while still intact, is inarguably frayed. With fewer employees paying into the system, increasing numbers of eligible recipients, and record budget deficits, a perfect storm is in place for further benefit reductions and a potential Social Security tax rate increase. Planning for alternative sources of retirement income has never been more important than it is today.