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Social Security

Healthcare Costs Consuming SSI Benefits

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Health Costs May Gobble Up Social Security Benefits

Healthcare for the average woman means they could spend an estimated 70 percent of her retirement check on health care costs, according to a recent study by the Nationwide Retirement Institute. The average man fares better, but still uses nearly half of his benefits to cover medical expenses.

Here’s how the Nationwide analysis reached its disturbing healthcare estimates: It assumed a woman with a life expectancy of 88 married a man who would live to 85 and they both claimed Social Security at 62, which is the earliest and most popular age to file for retirement benefits, regardless of gender. More than half of elderly married couples and nearly 75 percent single retirees depend on Social Security for the majority of their income in retirement. “Women disproportionately rely on Social Security in retirement,” said Nancy Altman, co-director of Social Security Works, which advocates for the expansion of the program. In fact, roughly two-thirds of Social Security beneficiaries age 85 and older are women. In the Nationwide’s bleak scenario, the man collects a monthly benefit of $1,543 and the woman collects $1,171 per month. (The average monthly benefit for a retired worker is $1,350, according to the Social Security Administration.)healthcare-costs

Nationwide projects hefty health costs for the hypothetical couple. The man would pay $214,278 in medical costs in retirement and the woman would pay more than $289,682, because of her longer lifespan. The forecast includes what the couple would have to spend on long-term care at a nursing home or in an assisted living center.


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By Uncategorized

Recent changes to the complex Social Security rules provide important planning opportunities for seniors.


SIDNEY KESS, JD, LLM, CPA, is of counsel to Kostelanetz & Fink and a senior consultant at Citrin Cooperman & Company, New York, N.Y. He is a member of the NYSSCPA Hall of Fame and was awarded the Society’s Outstanding CPA in Education Award in May 2015. He is also a member of The CPA Journal Editorial Board. JAMES R. GRIMALDI, JD, CPA, and JAMES A. J. REVELS, CPA, MST, are partners at Citrin Cooperman & Company.

After working for decades—while paying into the Social Security system—many people look forward to collecting benefits in retirement. Moreover, preretirement benefits may be available in case of disability. Social Security retirement payouts can be especially valuable because they are federally guaranteed for a lifetime, indexed to inflation, partially or fully tax-exempt, and may effectively include death benefits. Currently, a $25,000-per-year Social Security benefit provides more retirement cash flow than $1 million of ten-year Treasury bonds.

However, the Social Security system has complex rules for paying benefits. Disabled and retired clients naturally want to maximize their benefits, which can provide an opportunity for advisers to deliver tangible results. Considering recent changes in the rules, and the widespread press coverage, knowledgeable planning for Social Security may be especially welcomed by seniors.

Truncated tactics

The recent changes in the rules apply mainly to married couples, involving when each spouse should start Social Security and continue to receive retirement benefits. Some tactics have been terminated while others have effectively been grandfathered for certain seniors. For those strategies, and for those that still exist, planning begins around the date when an individual reaches “full retirement age” (FRA). For years, FRA has been 66, but that is now starting to change (see Exhibit 1).

As one can see, people who will be 62 to 73 in 2016 have an FRA of 66, but that age increases by two months for people who are 61 in 2016. Gradual increases in FRA will continue until it reaches age 67, for people 56 and younger in 2016.

FRA is important for three reasons. One, someone who waits until FRA to start Social Security retirement benefits will not incur an “earnings penalty.” Before FRA, certain amounts of earned income will cause a delay in receiving some benefits. By starting at FRA or later, a senior can have any amount of earned income and collect full retirement benefits. (There is no penalty at any age for any amount of unearned income, such as dividends and interest.)

The second reason to focus on FRA is that “full retirement age” means receiving full retirement benefits, according to the Social Security calculation, which is based on how much a worker has paid into the Social Security system. Starting earlier—retirement benefits generally can be collected as early as 62—means receiving a smaller monthly check. Ann Benson, born in 1954, with an FRA of 66, would get only $1,500 a month (75% of her FRA amount) if she started at 62, four years before she could collect $2,000 a month at her FRA. Craig Duncan, born in 1960, would get only $1,400 a month (70% of his FRA amount), if he started at 62, rather than starting at 67 with a $2,000 monthly benefit.

Finally, the FRA milepost marks the point at which waiting for benefits offers an 8% annual (but not compounded) increase in retirement benefits, all the way to age 70, the last starting date for Social Security. By waiting for benefits until age 70, Ann would get $2,640 a month (32% more than her FRA benefit of $2,000) while Craig would receive $2,480 a month (a 24% increase) by waiting for three years beyond his FRA for benefits. (All of these monthly amounts are before cost-of-living-adjustments.)

Patience can be prudent

Therefore, seniors have a choice when it comes to starting Social Security. Begin early, and start collecting, or wait and collect a higher benefit that will provide a plumper lifelong pension. The 8% annual delayed retirement credit, paid after FRA, as well as comparable increases before FRA, far exceed the return currently offered by federally guaranteed bonds and bank accounts.

The tradeoff, of course, is that waiting means forgoing substantial amounts of cash. Assume that Ann, in the above example, could start collecting benefits at age 62 without owing an earnings penalty. If she starts at $1,500 a month, that is $18,000 a year. She would forgo $72,000 in benefits by waiting until 66, and as much as $144,000 by waiting until 70.

The payoff is that Ann would get much larger payments at age 66, and especially at age 70, by waiting beyond age 62 to start Social Security. Depending on the assumptions used, the breakeven point for Ann—the time when she would gain more by waiting than she would lose upfront—is somewhere in her early to mid-80s.

Thus, if Ann can live comfortably without the early Social Security payments and has a reasonable expectancy of living for many years, deferring the start of benefits can pay off by addressing longevity risk. (Considering the rapidly increasing cost of health care at advanced age, longevity risk may become a key concern for many seniors.) After waiting to start benefits, Ann will collect ample payouts in her late 80s, 90s, and even longer.

Conversely, if Ann needs the money or if she has a relatively short life expectancy, she may do well to start Social Security benefits early. An early start also may be preferred by people who have doubts about the future solvency of the Social Security system.

Number crunching

As mentioned, the delayed retirement credit, for waiting to start Social Security until after FRA, is 8% a year: 16% for two years, 24% for three years, 32% for four years. Also, starting at FRA (now 66) rather than at age 62, the earliest possible date, raises Ann’s monthly benefit from $1,500 to $2,000: a 33.3% increase. This might appear to be a similar 8% increase, but the compound return, from $1,500 to $2,640 a month over eight years, is closer to 7%: still a good return today, for a government-guaranteed stream of income.

Upon closer inspection, the path from an age-62 benefit to an age-70 benefit is not a straight line. Above, Ann would get $1,500 a month from Social Security, starting at age 62, with an FRA of 66. If Ann starts instead at age 63, she would get 80% of her $2,000 FRA amount: $1,600 a month. That is an increase of 6.7% a month.

Now suppose that Ann waits to age 64, when she would get 86 2/3% of her FRA payout, about $1,733 a month. This one-year increase, from $1,600 to $1,733 a month, is over 8.3%. And so on, through Ann’s 60s, the true benefit of waiting will rise and fall. By waiting to start from 69 to 70, for example, Ann’s monthly Social Security check would increase from $2,480 to $2,640 a month, an increase of not quite 6.5%, rather than the posted 8%.

For some people, the difference between a 6.5% benefit increase and an 8.3% increase will not matter that much. The long-term advantage of a higher payout will still be appealing. In other cases, though, this pattern might lead seniors to start at, say, 68 or 69, rather than wait until 70, if immediate cash flow becomes important. Similarly, starting at age 64 rather than age 63 might be desirable, due to the 8.3% increase in benefits then.

Breaking even

People deciding when to start Social Security may want to see how long the makeup period would be. Not counting the time value of money, how long will it take to break even? If Ann waits from 62 to 70, she will not collect eight years of benefits at $1,500 a month, or $144,000. Starting at 70, she would collect $2,640 a month, an extra $1,140, so she would catch up in 127 months: more than ten years. By the time Ann reaches age 81, she would be ahead in total dollars collected, and the gap would grow throughout Ann’s lifetime.

Alternatively, suppose that Ann still has ample earned income, so starting before her FRA (66) does not make sense. As mentioned, Ann could get a Social Security benefit of $2,640 a month by waiting until age 70.

However, Ann could start Social Security at 69 and receive $2,480 a month. In the first year, she would collect $29,760 in benefits. By waiting until 70, she would get an extra $160 a month, so it would take her 186 months ($29,760 divided by $160) to recoup those forgone paychecks. Ann would not be ahead in total Social Security payments until she is 85 1/2 years old.

The actuarial formula used by Social Security has been designed so that people receive the same aggregate amount of money, regardless of when they begin claiming, assuming they all live to their life expectancy. In terms of total dollars, waiting is advantageous if recipients ultimately live longer than expected.

Spousal strategies

Deciding when to start Social Security may not be an easy decision, as explained. Moreover, the decision will be more complicated for married couples because one or both spouses typically have two choices: taking benefits on one’s own work record or on the other spouse’s work record. Previously, there were more opportunities to expand income by switching between one’s own record and a spouse’s record (often involving starting and stopping one spouse’s benefits, thus executing a “file-and-suspend” plan) but those methods generally expired in 2016.

The exception: “restricted applications for spousal benefits” are still allowed, but only for people who reached age 62 on or before 1/1/16. A restricted application can be approved at full retirement age of 66. With this tactic, someone applies for Social Security but restricts the

claim to a spousal benefit, on the other spouse’s work record.

To see how this might work, suppose Ed Franklin worked steadily for decades and his wife Gloria’s working career was interrupted while she stayed home with their young children. Thus, Ed contributed more to the Social Security system than Gloria, and he will receive a larger benefit.

If Gloria is now 63, she can file a restricted application to get a spousal benefit at her FRA. Her spousal benefit could equal 50% of Ed’s benefit. This approach would allow Gloria’s benefit to grow larger until she starts to take it, perhaps as late as age 70. Alternatively, if Ed meets the age requirement, he could use a restricted application to start his spousal benefit at FRA, allowing his regular benefit to grow larger, at 8% a year until age 70. (A restricted application by one spouse requires the other spouse to be receiving benefits.)

Some strategies are still viable

As explained, restricted applications are available to only some people 62 and older in 2016. Nevertheless, there are opportunities for all married couples to use in their planning. For example, one spouse might claim benefits early, to start cash flowing, while the other spouse waits to start Social Security, in order to receive a higher payout.

Take a hypothetical married couple, Heidi and Ivan King. They are both 60, so they cannot use a restricted application or the now banned file-and-suspend plan. Suppose both spouses have made substantial contributions to the Social Security system over the years, so they will both receive ample benefits, but Ivan would get a higher payout. One approach would be for Heidi to begin her own benefits at age 62, the earliest date possible, while Ivan waits until age 70.

Assuming no earnings penalty, Heidi’s checks would provide eight years of cash flow in their 60s, making it easier for the Kings to wait for Ivan’s large payout. If Ivan is the first spouse to die, Heidi would receive the amount Ivan had been getting, as a surviving spouse; if Heidi dies first, Ivan would continue to receive his high benefit.

What if Ivan had contributed much more to Social Security than Heidi, so that Ivan is entitled to a $2,500 monthly benefit at FRA but Heidi’s FRA benefit is only $750 a month? One approach would be for Ivan (born in 1956) to claim benefits at 66 and four months, his FRA, and start getting $2,500 a month. Heidi, about the same age, would also claim at her FRA. Then Heidi would get a spousal benefit, so she would receive 50% of Ivan’s benefit—$1,250 a month—which is larger than her own. Again, Heidi would get a large bump in benefits if she is the surviving spouse.

Things could be different if Heidi (with a low benefit on her own work record) is now 55 years old, instead of 60. Then, Ivan could wait until he is age 70, to get the maximum monthly benefit. Heidi could start at age 62, the earliest date, claiming her own benefit. Heidi would get a reduced benefit, because she started early, but she would still get monthly checks. At age 65, when Ed is 70 and claims his maximum benefit, Heidi could get a spousal benefit, increasing her Social Security checks. (If Ed is older than Heidi, that increases the likelihood he will be the first spouse to die, so waiting for his benefit also increases the widow’s benefit Heidi could receive.)

In real life, the decision to start Social Security will go beyond spreadsheets to health and the need for cash flow. Still, it will pay to know the rules, so seniors can figure out how much they will collect and how much they will forgo, at various points in time.

Fine points

Despite the changes in Social Security rules, some people are still able to use the banned strategies. Anyone who initiated a file-and-suspend strategy before 4/30/16, is grandfathered, and thus remains eligible to maintain that method of claiming benefits.

As mentioned, restricted applications for spousal benefits are still allowed for people who were 62 or older at the start of 2016. Moreover, the same opportunity applies to divorced spouses who were 62 or older by that deadline. If they were married at least ten years, have been divorced at least two years, and are unmarried, divorced spouses can file a restricted application at FRA to get a 50% spousal benefit, then switch to their own higher retirement benefit as late as age 70.

How benefits are taxed

The starting date for Social Security benefits might also affect how those benefits are taxed. The reasoning behind this opportunity is complex, to put it mildly.

The key is the formula that determines how benefits are taxed. That starts with a calculation of “combined income” (CI), also known as provisional income. To find someone’s CI, add one-half of annual Social Security benefits received to all other income, including tax-exempt income, and other exclusions from income. Once CI is found, it is compared to certain base amounts. If CI is under $25,000 (for single filers) or under $32,000 (for couples filing joint tax returns), no federal income tax will be imposed on Social Security benefits.

As CI climbs over those thresholds, a gradually increasing portion of Social Security benefits will be taxed, up to 50%. Eventually, CI may reach a second set of thresholds: $34,000 for singles and $44,000 for joint filers. With CI in excess of those amounts, the tax rate keeps climbing, and up to 85% of Social Security benefits can be taxed.

Note that Social Security benefits are never fully taxed under current law. If Jim and Lynn Martin, high income seniors, collect a total of $60,000 in benefits, it is likely that $51,000 (85% of $60,000) will be included in their income, subject to income tax. If the Martins are in the top 39.6% tax bracket, they would owe $20,196 in tax on their Social Security benefits—39.6% of $51,000, for an effective tax rate of 33.7% on their $60,000 from Social Security.

Tax planning possibilities

Thus, taxpayers with CI below $25,000 (single) or $32,000 (joint) will owe no tax on their Social Security benefits, without any planning. Taxpayers far above $34,000 or $44,000 in CI probably will owe tax on 85% of their Social Security benefits. In the middle ground, though, some steps may be effective.

Investing in municipal bonds will not help because tax-exempt interest is fully included in CI. Conversely, taking capital losses to offset taxable gains might pay off; so might investing in no-dividend stocks or growth funds. If it is possible to convert a traditional IRA to a Roth IRA at a low tax rate, in part or in full, this might cut future taxable withdrawals and thus reduce future CI—Roth IRA owners never have required minimum distributions (RMDs), so fewer RMDs can mean lower CI in the coming years.

Patience may be prudent

What does the starting date of Social Security benefits have to do with taxes on those benefits? As mentioned, the formula counts Social Security benefits at only 50 cents on the dollar, when computing CI. Other income, including withdrawals from traditional IRAs, is fully included in CI, dollar for dollar.

Thus, people who are in the middle ground for the taxation of Social Security benefits (CI not too low to be fully exempt and not too high to certainly face maximum taxation) might do well to delay Social Security until age 70, to get the maximum benefit, even if that means withdrawing money from a traditional IRA to provide needed cash flow. Those IRA withdrawals, which might be lightly taxed in retirement, will reduce future RMDs, while more post-age-70 cash flow will come from Social Security, only partially included in CI.

The advantages of delaying Social Security will vary, from one individual to another, and number crunching will be necessary to determine the probable best result. However, withdrawals from traditional IRAs will always be taxable, at any age, and the tax rate on those withdrawals may be higher if 85% of Social Security benefits are also included in income, moving taxpayers into a higher bracket. On the other hand, Social Security benefits may not be included in income for some taxpayers, or at least not included up to the 85% maximum. Taking taxable IRA withdrawals in lieu of early Social Security benefits may be a long-term tax savings strategy, in the right circumstances.


Savvy Social Security Strategies

Even after the recent changes to the rules for claiming Social Security benefits, there are still some moves that work. Examples:

  • It is never too late to increase Social Security benefits. Retirement benefits, as well as other individuals’ Social Security benefits tied to those retirement payouts, are based on a worker’s 35 highest-earning years. At any age, a top-35 earnings year can be replaced by a year with greater earnings, boosting the amount of the checks from Social Security.
  • Do not dally for spousal benefits. Waiting past FRA will not increase spousal benefits. FRA, now 66, is scheduled to gradually increase to 67 in the coming years.
  • Social Security planning can be family planning. People with a spouse and perhaps children who can collect on the breadwinner’s record might want to start Social Security retirement benefits at age 62, the earliest age possible. Then other qualified family members may be able to accelerate their benefits from Social Security.
  • Family benefits may be as high as 80% of the breadwinner’s Social Security retirement benefit. The maximum amount might be reached if the retiree has children under age 18, or slightly older and still in high school. Older children may get a disability benefit, also based on the breadwinner’s earnings record.
  • Widows and widowers can still double-dip. Someone who qualifies for a widow(er)’s benefit can claim their own retirement benefit first, then claim a widow(er)’s benefit; or file first as a widow(er), if that works better. However, filing for retirement benefits before a spouse or ex-spouse dies will limit the widow(er)’s benefit. The earnings penalty described previously also applies to widows and spouses, however.
  • Widowed divorcees can start early. The starting age for collecting Social Security on a deceased ex-spouse’s work record is as early as 60 for people who were divorced and then widowed by an ex-spouse’s death (age 50 for people who are disabled). That is the case if the marriage lasted at least ten years and the divorced individual does not have a work record that would provide a higher benefit.

Determining disability

Social Security benefits also may be available to people who cannot work because of a medical condition. To qualify, the condition must be expected to last at least one year or result in death. Moreover, a disabled worker usually must meet: (1) a recent work test, based on age at the time of becoming disabled; and (2) a duration of work test to show how long payments were made to the Social Security program.

Certain blind workers must meet only the duration of work test. In addition, family members of disabled workers may also receive disability benefits from Social Security.

Under the recent work test, someone who became disabled in or before the quarter of turning age 24 must have worked 1.5 years under Social Security during the three-year period ending with the quarter the disability began.

If the disability occurred in the quarter after turning age 24 but before the quarter of turning age 31, the requirement is work for at least half the time of the period beginning with the quarter after turning 21 to the quarter of becoming disabled. For example, someone who becomes disabled in the quarter of turning 27 would need three years of work out of the six-year period ending with the quarter of becoming disabled.

If the disability occurred in the quarter after turning 31 or later, the requirement is work for at least five years out of the ten-year period ending with the quarter the disability began.

The test for duration of work generally requires a total of 1.5 years of work that was covered by Social Security for a disability before age 28. That requirement gradually increases, to a total of 9.5 years of covered work for a disability at 60 or older.

Even after passing both tests, applicants for Social Security disability benefits must undergo an extensive review process before collecting. In 2017, the average disability benefit for a disabled worker, spouse, and one or more children is about $2,000 a month.

Exhibit 1. Full retirement age

Full retirement age

Exhibit 2. Checklist for Social Security Planning

Checklist for Social Security Planning


2017 Social Security Benefits Increase

By Uncategorized

Social Security Cost of Living Adjustment Announced

retirement benefits

retirement benefits

The annual cost-of-living adjustment (COLA) usually means an increase in the benefit amount people receive each month. By law, the monthly Social Security and Supplemental Security Income (SSI) federal benefit rate increases when there is a rise in the cost of living.


The government measures changes in the cost of living through the Department of Labor’s Consumer Price Index (CPI-W). The CPI-W rose this year. When inflation increases, your cost of living also goes up. Prices for goods and services, on average, are a little more expensive. Since the CPI-W did rise, the law increases benefits to help offset inflation.

As a result, monthly Social Security and SSI benefits for over 65 million Americans will increase 0.3 percent in 2017.

Social Security Wage Base Increases to $127,200 for 2017

Other changes that would normally take effect based on changes in the national average wage index will begin in January 2017. For example, the maximum amount of earnings subject to the Social Security payroll tax will increase to $127,200.

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers-one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).

For 2017, the FICA tax rate for employers is 7.65%-6.2% for OASDI and 1.45% for HI.

For 2017, an employee will pay:

  • (a)  2% Social Security tax on the first $127,200 of wages (maximum tax is $7,886.40 [6.2% of $127,200]), plus
  • (b)  45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
  • (c)  35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return).

For 2017, the self-employment tax imposed on self-employed people is:

  • 4% OASDI on the first $127,200 of self-employment income, for a maximum tax of $15,772.80 (12.40% of $127,200); plus
  • 90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a separate return), plus
  • 8% (2.90% regular Medicare tax + 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return).

There is a maximum amount of compensation subject to the OASDI tax, but no maximum for HI.

Note: On a salary of $127,200 (or more), an employee and his employer each will pay $7,886.40 in Social Security tax in 2017.

Note: A self-employed person with at least $127,200 in net self-employment earnings will pay $15,772.80 for the Social Security part of the self-employment tax in 2016.

Note: Self-employed workers deduct half of their self-employment tax above-the-line in arriving at adjusted gross income.

Information about Medicare changes for 2017, when announced, will be available at For some beneficiaries, their Social Security increase may be partially or completely offset by increases in Medicare premiums.

Want to discuss how this impacts you and your retirement planning? Contact us for a free consultation.

Matt Leonard

Veterans Benefits Increase in 2017

By Uncategorized

Veterans Will See Same Cost-of-Living Hike As Social Security in 2017

Veterans’ benefits will match the Social Security cost-of-living increase in 2017, thanks to a measure recently finalized by Congress this week. But Veterans’ groups hoping for a more permanent answer to the annual legislative hand-wringing over their benefits boost will have to wait longer for that solution.
Under law, annual cost-of-living increases are automatic for Social Security benefits, determined by the executive branch without intervention from Congress. But Veterans’ benefits fall into a different category, one that requires lawmakers to vote on an adjustment every year.
In the last few decades, Veterans have seen their annual adjustment differ from the Social Security COLA only one time (in 2000, as a result of a minor rounding difference between the two rates). But outside groups have called having the two increases dealt with separately confusing at best and potentially ripe for abuse or mistakes.
The measure finalized by the Senate links the Veterans’ benefits boost to Social Security rates for 2017 alone. Legislation to permanently tie veterans payouts to the Social Security cost-of-living calculations was passed by the House in February, but has languished in the Senate since then. Bill sponsor Rep. Ralph Abraham, R-La., said he is still hopeful that measure can advance through Congress later this year.

The change affects the annual rates of VA disability compensation, dependency compensation for surviving children and spouses, and medical clothing allowances for veterans, among other benefits.

It will not affect adjustments for military retirement pay, which are calculated through other methods.

Social Security and veterans benefits did not see a cost-of-living increase in 2016, due to lower inflation costs and the methodology used by government officials to calculate the raise. No announcements have been made on a possible 2017 social security increase which the veterans benefits are tied to.

Source: Military Times