The baby boomer generation includes Americans born between 1946 and 1964, or those that are between 52 and 70 years of age now. With this generation at or near Social Security age, there are some critical facts baby boomers should know about the financial state of Social Security, potential reforms, and recent changes to the rules.
1. Social Security isn't bankrupt
There has been no shortage of media coverage about Social Security's financial state, especially since it's a hot-button political issue right now. While Social Security isn't in the best financial shape, much of this coverage has overstated the problem, even referring to Social Security as bankrupt and "out of money."
Fortunately, it's not that much of an extreme situation...yet. There is still money in the Social Security trust fund, and while the system is projected to start operating at a deficit shortly, the trust fund isn't projected to run out of money until 2034.
I believe Congress will eventually step in and fix the problem, but even if the trust fund does run out, there is still payroll tax revenue coming in. In the worst-case scenario, Social Security will only be able to pay three-quarters of promised benefits after 2034. This wouldn't be a good situation by any means, but it's important to know the true extent of the funding problem.
2. Nobody wants to reduce your benefits
Now, as I said in the previous section, Social Security isn't sustainable in its current form and the trust fund is expected to be depleted by 2034. So, it's fair to assume that something will be done to either increase the amount of money flowing into Social Security or to reduce the benefits flowing out.
However, it's important to be aware that there has been no serious effort from either side of the political spectrum to reduce baby boomers' Social Security benefits. Even most Republicans generally want to preserve Social Security for current retirees and Americans close to retirement age, which is typically defined as 50 or older.
Not only that, but benefit reductions of any kind are extremely unpopular among Americans. In fact, 77% of Americans wouldn't mind a tax increase if it preserved Social Security, so this is the most likely type of Social Security reform that will ultimately gain political traction.
3. File-and-suspend is gone
One of the most popular Social Security strategies used by married couples is the file-and-suspend strategy, which, unfortunately for many, has been eliminated as of April 30, 2016.
Under this strategy, a worker could file for their own Social Security benefits at their normal retirement age, then immediately suspend them in order to let them continue to grow. Meanwhile, their spouse could collect a spousal benefit on the primary earner's work record -- since technically, the condition was that the primary worker filed for benefits.
The primary worker could then reinstate the suspended benefits at age 70 (or sooner) at a permanently higher rate, even though a spousal benefit had been paid all along.
Now, this is no longer an option. Benefit suspension is still available, but no benefits can be paid out on the work record of an individual who is not actively receiving benefits. There is an exception in the case of divorced spouses, but this loophole affects many couples' options.
4. Deemed filing may affect your strategy
Another major loophole that has been closed recently is known as deemed filing. In years past, an individual could choose to file for just a spousal benefit while allowing their own retirement benefit to keep growing.
Now, if you apply for one type of Social Security retirement benefit, you'll be deemed to have applied for both, and the higher of the two will be automatically paid out. For example, if you claim a spousal benefit at age 62, you'll also be filing for your own benefit at the same time, so be sure to take this into consideration so you don't inadvertently have your retirement benefit permanently reduced.
Unlike the file-and-suspend loophole closure, if you turned 62 on or before January 1, 2016, you are grandfathered in. You do have the ability to file for a spousal benefit while not simultaneously applying for your own retirement benefit.
5. Knowing how benefits are determined can help maximize yours
As a final point, it's important for baby boomers to know how their benefits are calculated, as it can help make the decision of when to retire a little easier.
Essentially, the Social Security Administration takes your highest 35 inflation-indexed years of Social Security taxable earnings to determine your lifetime monthly average. Then, this average is applied to a formula that determines your benefit:
- 90% of the first $856 in monthly earnings
- 32% of monthly earnings above $856 up to $5,157
- 15% of monthly earnings over $5,157
This determines your benefit at your full (normal) retirement age, and is reduced or increased if you file before or after this age.
The point is that if you're deciding whether to retire early or work another few years, it's important to realize that you get a double-bonus for waiting. As I mentioned already, your benefit increases if you wait longer to file. In addition to this, working another year or two could boost your 35-year average. In other words, since most people earn more later in their career, an extra year of work means that your lowest-earning year will no longer be counted when determining your benefit.
Now, if you want to file as early as possible, there's absolutely nothing wrong with doing so. However, it's important to be aware of the full and permanent effect of early or late Social Security on your retirement benefits.