Lost amid the political rhetoric swirling around Social Security are many of the other benefits the system provides. For example, the right to choose when to start drawing benefits can be as important as the benefits themselves. Often overlooked are the benefits Social Security provides the families of retired workers, or the benefits that are available to families of deceased workers.
The right to choose a retirement date impacts the payments a worker receives. To test the value of this right, use the projected benefits for a worker age 62, who has earned the maximum amounts during his lifetime. To calculate this, use the Social Security Cost of Living Allowance (COLA) from the Social Security web site, www.ssa.gov, and a 3% discount factor.
Using the Social Security Quick Benefits Calculator for inflated dollars, our worker would receive $1,434 per month if retiring today, $2,163 a month if retiring at the normal retirement age of 66, and $3,314 a month if retiring at age 70.
To determine which is better financially, using the above assumptions, our worker is ahead using a Net Present Value calculation if he waits to draw benefits at full retirement age and lives to age 83. Benefits at age 66 are slightly better than waiting to age 70.
The longer the life expectancy of the worker, the more advantageous it is to wait to age 70. This advantage is even more pronounced if the worker’s spouse is considerably younger and expected to outlive the worker. In the latter case the surviving spouse’s lifetime income would be based on the worker’s higher payout.
Drawing benefits at age 62 are more advantageous if the worker’s life expectancy is shorter. Using my model, our worker is better off to draw at 62 if he/she dies by 69. For anything beyond that point, waiting to draw at full retirement or even delaying to age 70 is financially a better choice.
A worker would not opt for the early retirement if still working. Earnings above $12,000 in 2005 will reduce his benefit by $1 for every $2 he earns until normal retirement age. For the year of full retirement age, our worker would have $1 deducted for every $3 earned above $31,800 before the month he reaches full retirement age. The government does not count pensions, annuities, investment income and interest, veterans or other government or military retirement benefits as earnings.
If our worker became disabled today, he/she would draw $1,912 a month while his children would be entitled to $1,434 per month and his spouse caring for children under 16 would draw $1,434. The maximum spouse plus children could draw would be $3,347 a month.
If our worker married late in life and retires with minor children the system pays each of those children one half of his retirement benefit until they are 18, or 19 if still in a secondary school. His spouse will also receive a comparable benefit if at least one child is under 16. Again this family benefit is subject to a maximum of 1.5 times the worker’s retirement benefit.
Finally, Social Security provides a healthy life insurance benefit for families. The surviving spouse of a worker may begin drawing benefits based upon the worker’s earnings at age 60, albeit reduced. This same benefit is available to the divorced surviving spouse who was married ten years or more to the worker and who has not remarried.
Finally, for a family of a worker age 35 who dies today, and has earned the maximum Social Security wage ($90,000 in 2005) would receive a life insurance benefit of $1,470 per month per child under 18, and $1,470 a month for a spouse caring for a child under 16.
Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.