The Social Security Merry-Go-Round Has Started. It Affects You No Matter What Your Marital Status.

If you followed the rhetoric that surfaced in the recent presidential campaign, you heard a fair amount of discussion about who was cutting social security payments and how. In addition, we also heard a commitment to eliminate taxes from payments of social security benefits. If you followed closely, you also heard rough estimates of how such policies would affect whether the Treasury Department will be able to pay the benefits promised in the long term. That’s concerning.

In almost every divorce and retirement setting, social security is the centerpiece of financial planning because it is a reliable monthly payment of a fixed amount that will typically continue to the death of the recipient. For most of us, our bills come monthly and require attention. In the days of defined benefit pensions, these also provided fixed benefits payable monthly. Currently, the average social security payment is $1,862 per month. Unless you have a defined benefit plan in addition, every retiree, whether married or single, has to figure out where to harvest other assets or savings to pay expenses that exceed the benefit. This leads into what we can call the 4% discussion; whether you can take 4% (+/-) of your nest egg each year to meet needs beyond your social security payment. That’s another topic for another day.

Currently, the Congress has before it a bill with major sponsorship (300+ of 435 members) to eliminate a provision which limits social security payments to employees of the federal government. That is the case because for many years federal employees were not part of the system and they did not contribute to the pool of funds from which benefits are paid. That changed during the Reagan Administration and federal employees hired after that time were blended into the Social Security world. The bill before Congress has vexed deficit hawks because the cost of the bill would add $196 billion dollars to the federal deficit over a decade if adopted. Again, the question never changes. Where will the money come from to pay all of these existing and prospective benefits? Some of it comes from taxes imposed on social security paid to seniors who work while collecting benefits before age 67. Motley Fool just published a short article about that and other changes coming into effect in 2025. Social Security Is Getting a Shakeup in 2025. Here’s What to Expect | The Motley Fool

The problem from a tax policy viewpoint is that the reach for these benefits exceeds the pool of assets and income expected such that by 2035 a variety of experts are estimating a 17% benefit cut to make the system balance (income=payments). That’s a harrowing prospect. We faced similar challenges in the 1980s and Congress stepped up with a “fix” that has kept the system financially sound. But life expectancy has continued to rise beyond what was anticipated, which means more payments for more years. Then there are changes like cost of living and fewer people paying into the system (because of birth rates) that make these estimates subject to challenge.

All well and good until you are retired such that return to the workforce is not in the cards. Now your life is managed by your social security and other monthly payments (if any) and what you can draw from what you have saved. Bear in mind if you have been saving and putting money in securities and not banks, the $110,000 you had in an S&P 500 Fund in 2010 is today almost $600,000. The historic average for these kinds of investments has been 8%  which means your funds would doubled every 9 years. So, in normal times (if such times exist) your $110,000 would have grown to about $400-450,000. The other “blessing” has been a housing deficit which has driven housing prices up 40% or more for those who owned in 2010. People tend to forget that asset’s value because they are occupying it.

Even without demographic and economic changes, social security is complicated with many rules. Most divorce lawyers know about the stepped payments beginning at age 62, or age 67 (normal retirement) and  age 70 deferred retirements. They also know that a spouse who has been married for 10 or more years can claim a derivative benefit based on their former spouse’s wage history. But few divorce lawyers get into the “weeds” of conduct that could adversely affect eligibility and the level of payments.

Because social security is, for most of us, the core payment around which we build the rest of our needs and expenses, it is worthwhile to visit your local Social Security Administration office and sit down to evaluate options when getting divorced or approaching eligibility (i.e., 62). There you can sit with someone who is trained to evaluate your options and equipped with the data from which you can evaluate what those options will pay. If that office is far, far, away, you can try the same thing through ssa.gov. or by calling the toll-free number. Having made the visit personally because of a glitch in my own plan in 2022, I was impressed with the person I met with and felt that you get better attention face to face than you might otherwise on the telephone. You can schedule a physical appointment using the phone.

To conclude; there are two vital aspects of this issue. The first is to make certain that your representatives in Washington are insuring that the system is addressed and repaired before we discuss additional benefits or reductions in social security taxes. The second is to take care of your own social security account (which you can access on line) to make certain that the payroll records conform to the income you are reporting on your W-2 and to assess what rights you have to your own benefits or those of a former spouse as retirement approaches. If you are getting divorced and have been married for less than 10 years, it may make sense to slow walk entry of the decree to assure that you are eligible to claim a former spouse’s benefit if it could exceed what your own contribution (wage) would justify.