This is Part 1 of 3 of the final post in Retirement Income Visions™ series about Social Security. Since its inception on September 27, 2010, the series has focused on Social Security retirement income planning strategies. What most people don’t realize is that Social Security is more than an income stream. It’s an asset – perhaps your most important retirement asset.
A contract between an insurance company and an individual, or insured, whereby the insurance company, in exchange for a receipt of a lump sum payment, or premium, or series of payments, or premiums, that is invested by the insurance company in one or more tax-deferred investment vehicles, agrees to pay the insured a lump sum, distributions of the contract balance, or the option to elect an irrevocable structured payout with a specified payment beginning at a specified date, paid at specified intervals over a stated period of months or years or for the duration of the insured’s and potentially his/her spouse’s and/or other individuals’ lifetime(s) depending upon the payout option selected.
While it isn’t in strict compliance with the definition, Social Security comes pretty close. Let’s dissect the definition of an annuity as it pertains to Social Security retirement benefits. Social Security:
- Is a contract between an insurance company, i.e., the United States government and an individual, or insured, i.e., the Social Security benefit recipient.
- In exchange for a receipt of a series of payments, or premiums, i.e., Social Security withholding in the case of an employee and the Social Security portion of self-employment tax in the case of a self-employed individual.
- That is invested by the insurance company in one or more tax-deferred investment vehicles. Although it isn’t fully funded like an insurance company is required to do and although it’s currently projected to be depleted in about 2037, there’s a Social Security Trust Fund that provides a means by which the federal government accounts for excess paid-in contributions from workers and employers in the Social Security system that aren’t required to fund current benefit payments to retirees.
- Agrees to provide the insured with the option to elect an irrevocable structured payout. Although it’s ostensibly an irrevocable structured payout, there currently exists the ability to repay cumulative benefits received in exchange for a higher payout using a “do-over” strategy (See the November 22, November 29, and December 6, 2010 three-part Pay-to-Play Social Security series).
- With a specified payment beginning at a specified date. While it isn’t an option since it’s the only payout mode available, Social Security payments begin at a specified date chosen by the recipient, whether it be at Full Retirement Age (“FRA”), beginning from age 62 until FRA, or beginning after FRA until age 70.
- Paid at specified intervals over a stated period of months or years or for the duration of the insured’s lifetime. Social Security is paid monthly for the duration of the recipient’s lifetime.
- And potentially his/her spouse’s lifetime. If an individual is married, Social Security retirement benefits don’t cease upon the individual’s death. Instead, the identical benefit continues to be paid to the surviving spouse unless the survivor’s benefit is greater than the deceased spouse’s benefit, in which case the surviving spouse will continue to receive his/her benefit based on his/her employment record.
So, besides the fact that Social Security is an annuity, what else is important about the fact that Social Security is an asset? This will be addressed in Part 2 next week.