Social Security Tips (from Smartmoney.com)

SEPTEMBER 6, 2011, 2:09 P.M. ET.

10 Things Social Security Won't Tell You
The secret of bigger benefits, and the truth about the agency's bottom line.
. By JONNELLE MARTE

1. "Long-term deficit? We can hardly afford our bills today."
Worried about the future of Social Security? You're far from alone. The Social Security Administration itself has said that unless something is done to reform the system, it will burn through its funds within the next few decades. Less talked about, perhaps, is the concern about the present: the program is having a hard time paying its bills. In 2010, the Social Security Administration collected less revenue in taxes than it needed to cover its benefit payments -- the first time expenditures have exceeded income since 1983. As a result, the program had to tap its $2.5 trillion trust fund, sooner than some had expected. The same is expected to happen this year. "The depth of the recession has slowed down revenues to the system," say Eugene Steuerle, an economist with the Urban Institute, a non-partisan think tank in Washington, D.C.

.A Social Security spokeswoman points out that interest income from the Treasury bonds held in the trust fund will allow it to keep growing until 2022 -- even if the agency has to siphon off some money to offset any shortages in tax revenue -- and won't be exhausted until 2036, when the first Gen Xers begin retiring. But that's already one year earlier than previous projections. After that, the agency says tax income under the current system will only cover about 75% of benefit payments through 2085.

2. "The more you make, the less you get back."
It's common to think of Social Security as an individual account of sorts -- what you pay in, you get back, more or less. That's far from accurate. By design, the Social Security Administration says, the system is tilted in favor of lower-income workers who have fewer resources to save for retirement. In practice, that means that the more money you make, the less you get back, at least as a percentage of your salary. For example, a single, 66-year-old man who earned $50,000 per year on average and retired in 2011 would get an annual benefit payment of about $22,800, or about 45% of his annual salary. If he had earned $150,000 per year, he would get annual benefits of about $30,670 -- just 20% of his annual salary. "People act like the percentage of benefits of your salary you get is the same for everyone and it really isn't," says Jo Anne Barnhart, former Social Security Commissioner.

That's particularly true for the highest earners. Benefits are calculated on a maximum average salary of $106,800, which means anyone who made that much or more -- whether by a few dollars or by a few hundred thousand dollars -- gets the same annual Social Security payment. To be fair, earnings over that threshold aren't taxed, either, and the agency spokeswoman says benefits are meant as supplemental retirement income, not full freight.


3. "This used to be a much better deal."
Today's workers -- boomers, Gens X and Y -- like to carp about Social Security, but it's not all sour grapes or skepticism about paying into a system with an uncertain future. Employees today pay more in Social Security taxes than previous generations did. They're also likely to get smaller benefits when it's their turn to retire.

Over the years, as the Social Security Administration has come to grips with the cost of its benefit program -- and the ranks of eligible beneficiaries has swollen -- taxes to fund the program have gone up and up, a trend that experts say is likely to continue over the coming years. As a result, workers now pay 6.2% in payroll taxes (reduced to 4.2% in 2011) -- nearly double the 3.6% tax rate workers paid in 1965. Over the same time period, the maximum earnings eligible for taxation have also increased from $4,800 (equivalent to about $34,500 in 2011 dollars) to $106,800.

For example, a single man who retired in 1980 at age 65 after earning an average wage of $43,500 would have paid about $96,000 in Social Security taxes, and probably received $203,000 in lifetime benefits, according to a study by the Urban Institute, a non-partisan policy think tank in Washington D.C. By contrast, a single man making the same average wage today and retiring in 2030 will likely pay $398,000 in lifetime taxes but receive just $336,000 in lifetime benefits -- about 16% less than he paid in. "People who were first in the system got a great rate of return," says Alan Gustman, chair of the economics department at Dartmouth College. "It's the younger generation that is going to be in the most difficult position."

The agency spokeswoman says the imbalance is partly due to the fact that the earliest beneficiaries only paid taxes in the later stages of their careers.

4. "Want a bigger check? Go back to work."
Most people within ten years of age 62 have already started doing the Social Security math problem: How much do I get if I wait one year to take payments? How much if I wait two years? To get the biggest bump in benefits, workers have to delay their benefits beyond full retirement age -- around 66 for people born before 1957, closer to 67 for people born after. (To find your exact date, see Social Security Online http://www.socialsecurity.gov/retire2/agereduction.htm.) For every additional year you wait, you'll get an 8% increase in payments until you hit age 70. Someone who earned, on average, $50,000 per year over their working life would get $1,900 per month at 66, but $2,505 if he waited until age 70 -- a 32% boost. "You'll get a bigger benefit amount for the rest of your life," says Dennis Marvin, a financial planner in Cleveland.

If you've already started collecting benefits and you're under full retirement age, it's not too late to get a raise. One strategy: Go back to work. If you earn more than $14,160, the Social Security Administration will dock $1 in benefits for every $2 you earn. But once you reach full retirement age, your benefits will be recalculated to account for the money you didn't get while working. So, for example, someone who took their benefits at 62 -- at a 25% reduction compared to full benefits -- but went back to work from ages 63 to 66 and earned enough to zero out his entire Social Security check could end up collecting close to full benefits at age 66.

5. "Good luck qualifying for disability."
More than 8 million people receive Social Security Disability Insurance, which is awarded to people who are unable to work because of a long-term physical or mental disability. But qualifying is no easy task, says John Roberts, manager of Myler Disability, an advocacy group. Only 30% who applied in 2009 were awarded benefits, down from 44% in 1999, according to agency data.

Some of that change can be attributed to more people applying for benefits -- 2.8 million in 2009 compared to 1.5 million a decade earlier. That's common when the economy is tough, says Gustman: The number of applications rises, along with an increase in claims that fall short of the agency's standards. Even for people with true and serious disabilities, it can be difficult to qualify. The process can take years and often requires legal help. Most people have to wait for a hearing, says Roberts: "Best case, it is 18 months before you get approved." In some cases, the battle goes to federal court.

To improve your chances, Roberts recommends applying for benefits as soon as you become disabled. Waiting too long could leave you in a situation where you haven't worked long enough to qualify for disability benefits. You must generally have worked at least three to ten years before you became disabled, depending on your age. The spokeswoman for the Social Security Administration says it does not pay benefits for partial or short-term disability and taxpayers must be able to show that they cannot do work they did before or adjust to other work because of their medical condition.

6. "You can be unemployed and retired."
A growing number of people in their 60s are collecting unemployment and Social Security benefits at the same time. Since 2002, seventeen states have changed the rules to allow people to qualify for more unemployment benefits while they receive Social Security, according to the National Employment Law Project, which has advocated on behalf of allowing seniors to claim both. It's perfectly legal; you just have to report the income to both agencies.

There is no clear data on how many people are drawing both. About 10% percent of people who collected unemployment benefits in 2010 were 60 or older, according to the Department of Labor; the minimum age to collect Social Security retirement benefits is age 62. For those who qualify, the option has obvious appeal for older Americans struggling to find work in today's weak job market. "We are generally talking about older workers who lose their jobs involuntarily, who are trying to survive," says George Wentworth, an attorney with the National Employment Law Project.

Receiving unemployment benefits doesn't affect your Social Security payments, but the reverse is not always true: In some states, collecting Social Security can reduce your unemployment checks. In Illinois, Louisiana, South Dakota, Utah and Colorado, your unemployment benefits can be reduced by half of your monthly Social Security benefit.

7. "Your Social Security number is no state secret."
Don't carry your social security card in your wallet. Don't give your number over the phone. Don't use it as a password. For all the precautions workers are told to take to protect that nine-digit number, a Social Security number is still surprisingly vulnerable. So far this year, more than 13 million names and Social Security numbers have been exposed to potential theft as a result of more than 270 data breaches at state governmental agencies, according to the Identity Theft Resource Center, a nonprofit that helps victims of identity theft.

But a social security number need not even be stolen to be compromised. A 2009 study from Carnegie Mellon University finds that it's possible -- and not too difficult -- to guess a Social Security number using details easily gleaned from a Facebook profile, such as date of birth and home town. Researchers were able to accurately guess the first five digits of 44% of Social Security numbers issued after 1988 on the first try, just by using the date and the state the number was issued in; they were able to guess the complete numbers almost 9% of the time. The authors used a list of known Social Security numbers from the Social Security Death Master Files to find patterns on how the last four digits are assigned -- the first five digits are based on the state the number was issued in -- and they found that they are largely assigned in order, based on when the number was issued.

A spokeswoman for the agency says it implemented a new system starting in June that randomly assigns numbers, making more nine digit combinations available in every state. Anyone with a number issued before then might want to guard their birth date and place of birth as carefully as they do their Social Security number -- or at least tighten their Facebook privacy settings.

8. "We think you're dead."
The distinction between dead -- cold, no pulse -- and alive -- just went for a jog! -- seems pretty obvious. But the Social Security Administration commonly records living people in its Death Master File -- a public database that includes Social Security numbers, dates of birth and addresses -- an error that can have grave financial consequences. Of the 2.8 million deaths the Social Security Administration reports each year, about 14,000 people added to the Death Master File are very much alive, according to agency statistics.

People who are incorrectly reported dead can rack up bank fees for bounced checks after Social Security payments stop without warning, and will have to follow up with credit bureaus and other institutions once they get their names off the death file, says Gabriela Beltran, a spokeswoman for the Identity Theft Resource Center. Some people don't find out until they're applying for a loan and they're denied because records show them as decease, she says.

A spokeswoman for the Social Security Administration says it takes "immediate action to correct and reinstate benefits" once it notices an error. Getting off of the list and resuming Social Security payments requires beneficiaries to bring identification to a Social Security office where they can have a face-to-face interview, the administration says.

9. "If you make too much, we'll tax your benefits."
Your Social Security benefits come from paying taxes while you were working, so surely they can't be taxed, right? Wrong. You may in fact be taxed on your Social Security benefits if you have substantial income from other sources, such as dividends, self employment, investment interest and other sources. And studies find many Americans aren't aware of the fact: Some 42% of pre-retirees surveyed by the Financial Literacy Center did not know that benefits could be taxed if their income in retirement exceeded a certain amount.

The rule is that if your combined income -- a measure that includes other sources of income and half of your Social Security benefits -- exceeds $25,000 for an individual or $32,000 for a married couple filing a joint return, you may be taxed on up to 85% of your benefits. People who find themselves in this group can make quarterly estimated payments or choose to have federal taxes withheld from their benefits. The Social Security Administration says the provision to tax benefits became law in 1983 and was "intended to restore the financial soundness" of the Social Security program and Medicare.

10. "Your cost-of-living adjustments come up short."
Every year, Social Security recipients get a cost-of-living adjustment, a little bump based on the current rate of inflation and designed to cover the rising cost of everything from toothpaste to airline tickets. But some critics say the current measurement of inflation doesn't reflect the higher costs that seniors truly face. For example, many older people spend a large share of their budgets on health care, where prices have risen about twice as fast as overall prices, according to a 2010 paper published by the Congressional Research Service. "In many parts of the country a monthly Social Security benefit is not enough to cover basic living expenses," says Catherine Collinson, president of the Transamerica Center for Retirement Studies.

The pricing pressure means some retirees could find themselves struggling to cover essentials like gas, medicine and groceries, says Collinson, meaning they will have to cut spending in other areas. For pre-retirees, it means ramping up your savings today so that you can struggle less in your golden years, she adds. The Social Security Administration says it has been using the Consumer Price Index since legislation instituting automatic cost-of-living increases was enacted in 1972, and changing the benchmark would take an act of Congress.