138: Social Security 101 (ft. Chase Rose)

Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.

Josh Robb:
All right. Hey, hey, hey, welcome back to The Invested Dads Podcast, a podcast where we take you on a journey to better your financial future. I am Director of Wealth Management, Josh Robb, not Austin Wilson. He is not with us today. And so, we are joined by Chase Rose.

[0:32] – Who is Chase Rose?

Chase Rose:
Hi, my name is Chase Rose, our newest Associate Wealth Advisor here at Hixon Zuercher Capital Management. I started back here beginning of January, that followed my graduation from Ohio Northern University back in December. So, I’m excited to be here.

Josh Robb:
All right. What are we talking about today, Chase?

Chase Rose:
Believe we’re talking about social security. Is that right?

Josh Robb:
That’s right. Social security, the ability that when you’re in a large group, you are safe.

Chase Rose:
I don’t know if that’s exactly what we’re talking about. I’m pretty sure we’re talking about the government program. Is that right?

Josh Robb:
Oh yeah, so, I got notes on both of those, so we’ll switch over and talk about the government’s social security program.

Chase Rose:
I would actually appreciate hearing a little bit about your social skills a little later, if you don’t mind.

[1:16] – Brief History of Social Security

Josh Robb:
Yes, that’s right. There’s safety in numbers. That’s what they always talk about. So, let’s start with a little history of social security, and a lot of this I got straight from the social security website, ssa.gov. They have a history page there, and I’m not going to talk through it all, but if anybody’s interested and loves history of government programs, that’s a place to go. I’m sure it’s one of their most well-read websites on the internet.

Chase Rose:
Yeah, that’s actually how I prefer to spend my leisure time is reading on government websites and the history of them.

Josh Robb:
Perfect. So, this is right up here alley. One thing that I didn’t realize is the concept of some sort of safety net for individuals has been around for a long time, all the way back to the middle ages, when there were guilds, groups of merchants or craftsmen, and they would form a group of common people that do the same thing together, and the concept was to give each other safety, in that if someone got sick or hurt, that group would kind of help supplement them along the way. And so, these guilds were formed as kind of a group or organization to help with health benefits, illnesses, death, all those things.

Now, it wasn’t a government entity, but it was that concept of, again, social or groups working together. Fast forward a little bit to England in 1600s, they had this kind of idea, they started passing what were called poor laws, so laws that affected the poor of the country, and the idea there was that there were different groups of poor people, they were the worthy poor people and the unworthy poor.

And I don’t really know exactly how they classify those two, probably based on power, why you got in that situation, but they created these laws to help provide them some sort of help, but they also, within there, created some ways of discouraging dependency on it as well. They were pretty strict along with that, and, in some cases, you even had to wear a large ‘P’ for poor on your clothing to announce that you were a part of this program. So, that’s pretty crazy.

Chase Rose:
That has got to just be brutal for those people. Not only are you poor, but you have to be shamed for it as well. Is that right?

Josh Robb:
Yes, I know. It’s crazy. Along with that, they created these poor houses where you had to live and stay to get these benefits, so that carried through and obviously with the settlers coming over from Europe, they kind of brought some of those ideas, and so throughout the early years of the United States, there were some different programs put out to try to kind of help those that were in need.

Thomas Paine, right after the Revolutionary War, had some ideas and published some papers on his thoughts on how it would work. He proposed having some sort of tax on inheritance and that tax then would be used to not only provide a safety net for people over a certain age, but also some money right when you turned 21 to help get you a kickstart into being successful as an adult. So, that was his proposal in the late 1700s.

And then really, we saw social security start officially in 1935. But before that, we did have one other government program that was similar and that was following the Civil War. There was a large population of disabled people as a result of the Civil War, and so there was actually a social security program, if you want to call it that, set up just for Civil War veterans that provided them with some benefits for the rest of their life.

Josh Robb:
It was pretty loosely defined, because spouses and kids and other relatives could get some of these benefits as well if they lost somebody in the war. So much so that due to their not being any age. There were some older Civil War veterans that married some pretty young people, so much so that there were Civil War veterans, or people associated with them, still receiving the Civil War pension as late as 1999.

Chase Rose:
Wow. 1999 is not that long ago.

Josh Robb:
No.

Chase Rose:
That seems-

Josh Robb:
Chase, how old were you in 1999?

Chase Rose:
I was exactly zero in 1999. I was born in ’99.

Josh Robb:
There you go.

Chase Rose:
I cannot even fathom that Civil War benefits were still being paid.

Josh Robb:
That’s crazy. But that was kind of the concept there, was to help a group of people that they designated for that. But, like I said, in 1935 was when the official social security act was signed. President Roosevelt was the one that signed that. There were some additional changes and amendments added later on, we’ll talk about some of those, but that was the start of what the modern-day social security is.

[5:42] – A Couple Interesting Facts

Couple random things I thought was interesting is, first of all, prior to social security, there was no benefit for retirees from the government. And when they set this up, they kind of had this window between 1935 and 1940 when they were going to really start these payments, and they needed to find a way of tracking all workers in the United States. And the government said, we don’t really know how we’re going to do this. You know, who does do a good job of knowing where everybody is, is the postal service.

So they had the postal service help come up with some way of identifying everybody that’s a worker and then also tracking their earned benefits, so they had a way of identifying each person how much they earned. And so, they came up with the social security number. And so, everybody who’s born now gets a social security number and that’s there to help identify you for your benefits for social security. Grace Dorothy Owen received the social security number 001-01-0001. So, she got the very first issued social security number.

Chase Rose:
I was going to say, she had to have been the first person in this program.

Josh Robb:
Well, she was the first one that was assigned. There’s no record who actually got the first one, because if they were just… Maybe it had to do with submissions or whatever, but she received that number. No one knows who actually received the first one in the mail, their little social security card that we all have and lose all the time.

Along with that, as the plan was started, like I said, there was a period where you can’t just start right away because no one had added benefits into it. Because you have to have part of your earned income pay into social security so there’s benefits there for others. So, there was that four-year gap where people started paying in to then be eligible once it started for social security.

On January 31st of 1940, five years after it started, four and a half actually, but the first monthly check was sent out to Ida May Fuller, she’s from Vermont, and she got a check of $22.54.

Chase Rose:
Wow. That’s life changing.

Josh Robb:
Well, back in 1939 I’m sure it was worth a little more in dollar terms because of inflation, but amounted to a pretty good check for her because the accumulated taxes on her salary during the three years that she was paying into this new program that was started, she paid in a total of $24.74 cents, so her first monthly check was almost the full amount she’d paid in. So for her that’s not too bad in fact.

Chase Rose:
Good return on investment, I would say.

Josh Robb:
Oh yeah. In fact, for her whole lifetime, because she ended up living to be 100 years old, so she started claiming at age 65 and lived to 100 years old, she collected $22,888.92 cents, having only put in $24.75.

Chase Rose:
Wow.

Josh Robb:
Great for her. In the first handful of years actually, her monthly amount was the same, but we know that in 1975 she got a cost-of-living adjustment, as well as everybody else. And in 1975 they actually adjusted that to be an annual increase tied to inflation. So, prior to that, every year the Congress had to figure out what they wanted to do, so it wasn’t set in stone. So, for her, from when they started doing that 1950, they started increasing benefits, so for the first 10 years she had no increase, and then in the 1950 they started increasing it. So, her first increase went from $22.54 to $41.30 cents. So, they played a little catch up there for her and everybody else. That’s a little history. The idea though, is that protecting those less fortunate or who have had things happen to them is something that a lot of modern societies have done. And actually, a lot of societies going back in time have tried to do in one way or another.

[9:23] – Dad Joke of the Week

Chase Rose:
Very interesting. Well with that being said, assuming that I am the lucky person to be featured on this podcast, I figured I would bring along a dad joke with me.

Josh Robb:
That is great. I love dad jokes. So what do you got.

Chase Rose:
I do want to disclose that I am not yet a father, but I am a want to be ‘Invested Dad’.

Josh Robb:
There you go.

Chase Rose:
So that’s why I’m trying to live up to the spirit of the dad joke this week.

Josh Robb:
There you go.

Chase Rose:
With that being said, I am what we call nowadays a Gen Z, in that Gen Z generation, so my dad joke of the week this week was, I was going to tell my Gen Z friend about social security, but he probably wouldn’t get it.

Josh Robb:
That is great. The joke behind that, for those that don’t know, is that social security is based off people paying into the system and then that bucket of money is used to pay out. Well, as we’ve had a big baby boomer group and they’re all starting to retire and hitting that retirement age where they’re eligible for social security, and there’s not as many people that followed up that generation to be working, there’s more and more people collecting and few and fewer people paying in, and so the worry is that at some point the social security program will be bankrupt and that maybe these younger people may not get those benefits that other people have gotten. So, I love it.

[10:34] – Social Security Eligibility & Design

Josh Robb:
Let’s talk about that. So again, social security is designed to be a income replacement for you after your working years. So, there’s some rules there and we’ll walk through that. For instance, they take the highest earnings of your 35 years or so, based on the past 35 years they take your highest earnings, and that’s how they calculate your benefit.

Now, to be eligible, you have to have 40 credits, and a credit is earned per quarter. So you can get four a year, four credits per year, and in order to earn a credit, you have to earn in that quarter $1,510 this year, in 2022, then increase it with inflation periodically. Roughly speaking, if you need 40 credits, you get four per year, about 10 years of work if you’re earning about $5,000 a year, $6,000 a year, roughly, over time, that is how you are eligible to claim some form of social security.

Chase Rose:
I’m going to pause for a second. I feel like you just proposed some pretty important information, so I actually have a couple of questions. You mentioned that our social security benefits are based on the highest 35 years of our earnings, is that correct?

Josh Robb:
Yes.

Chase Rose:
Does that mean that essentially, I really only need my social security and retirement, or should I be saving elsewhere?

Josh Robb:
That’s a great question. So social security is an income replacement, but it has never been designed to be the full replacement of your earnings. On average, social security only replaces about 40% of your needs in retirement. And so, the other 60%, it’s up to you to provide that through savings. And when it takes your highest earnings, that’s to calculate, but it doesn’t replace your highest earnings, that’s just for the calculation. I mean, we’ll talk about the max amounts in a minute.

Along with that, people who are eligible for this: Early on it was just workers. So, when they first set this up, you had to qualify to get benefits, and what they realized a lot was there’s a lot of single earning families where only one of the spouses is earning and the other one is not, maybe a stay-at-home spouse, those type of things, so they’ve expanded that so that spouses now are eligible for benefits as well. They get a portion, usually half, of what the working spouse is eligible for. And so they’ve added to that to protect the other spouse, because if the working spouse passed away, it just stopped, and so then they realized that wasn’t really helping, especially when you look, historically speaking, the man in the relationship was the one that was the earner, especially back when this was started, and a lot of times the spouse, the wife, was the stay at home, but they also had a longer life expectancy, and so you had a lot of times where this income would go away and the one that needed it the most was not eligible. They’ve adjusted that.

There’s also disability benefits now. If you qualify for social security, so you’ve got those 40 credits, but you become disabled before the retirement age, you can actually qualify for social security benefits on a different amount for disability. Then that covers you up until you’re eligible for regular social security. And then it also works for survivors, spouses, or kids as well. There’s certain benefits that are eligible for minors who are dependents, as well as widowers. They’ve expanded that to make sure they’re trying to encompass as many people that may need some support or help along the way.

Chase Rose:
That’s great. It sounds like they’ve made a lot of necessary changes to the social security program over the years, so that’s great.

Josh Robb:
Along the way too, they also tried to make sure that it’s not their sole source. I mean, it’s still designed that it’s there to provide that safety net to provide for the basic minimum needed, but it’s not there to really offset high income earning and high expenses.

Chase Rose:
Makes sense. So, let’s say, theoretically, you said that you need 40 credits in order to be eligible to claim social security. Let’s say I start working right when I get out of high school, so I start working at 18 years old, I worked a full-time job paying into social security every paycheck, and I work for 10 years, and I get my 40 credits. Can I retire and claim social security?

Josh Robb:
You could retire if you wanted to, but social security actually does not start until age 62. The youngest you can claim social security is age 62. And at that point you don’t even get the full amount you earned. At 62, you get what’s called a reduced amount, and so they reduce social security. They have what they call your full retirement age. So, for anybody born after 1960, so you’re born in 1999, so that means you’re born after 1960, your full retirement age is 67 years old. So that’s what they’re using for their calculation. 67 is the age where they consider you fully retirement age. You could claim earlier, as early as 62, but they’re going to reduce your benefits. They reduce it about an 8% reduction over those years.

The other way, if they say, you know what, if you don’t want it at 67, we’re not going to make you take it, you can wait as long as age 70 and we’ll increase it 8% each year. And so, they kind of give you a window from 62 to 70, there’s about an eight-year window, somewhere in there you can claim social security. There’s no benefit of waiting after 70. The benefits do not go up, so there’s no advantage to holding off, but there is a kind of a calculation you can make into which one gives me the best bang for my buck.

One thing to think about is, how much is social security going to pay me? Well, if you make the highest income that social security will take their tax out of, you could qualify in this year, if you had maxed it out, your top earning years were the highest amount, you would be eligible for a max of $3,345 at your full retirement age. That’s the max amount you can get.

Chase Rose:
It’s a big difference from the $22 that the first social security payment.

Josh Robb:
Yes. Along with it, though, if you think about it, if you’re maxing on social security, you’re earning probably about $180,000, give or take. Your take home pay is more than $3,300, probably your lifestyle’s more than $3,300. And so, again, that comes back to, it’s not designed to fully fund retirement, even for those that are putting the max amount in. Chances are that you’re still going to need to supplement that with something else.

[16:37] – When Should You Claim Your Benefits?

Chase Rose:
I have a question. Considering that you are the Director of Financial Planning and Wealth Management here at Hixon Zuercher, from a financial planning perspective, obviously looking at the numbers here, just from a black and white perspective, I would assume waiting until 70 is probably the best choice in all cases, right? I mean, you’re going to get the most money out of the social security program. Why would I ever want to claim at 62?

Josh Robb:
That’s a great question. And really it comes down to the one variable, if we’re putting in calculations, the one variable no one knows is, how long am I going to live to claim this social security? And that matters. So, if I wait until 70, but I only lived to 75, that’s only five years of claiming. But if I would’ve claimed at 62, that would’ve given me 13 years of claiming, I probably actually would’ve got more money from social security.

There’s kind of a breakeven age where it says, how long do I need to live in order to getting higher amounts pay off and make it worth waiting. For most people, if you run the calculation, it’s somewhere in the mid-eighties, 82 to 87, somewhere in there you got to live to make that worthwhile. So, if you look at the life expectancy, the tables that they use for these calculations, good chance you’re going to live to around there, waiting from a dollar standpoint makes a lot of sense.

But there’s some other factors that you play, and you also look at, well, if I claim earlier, I’m not going to take as much money out of my portfolio, because I have this income, so I need less withdrawals in my portfolio. If I can earn more in my portfolio than that increase, then maybe it’s worth taking that social security early.

Some people just do it from the standpoint of, I paid in my whole life. I want to make sure I get something. I don’t know how long I’m going to live. There’s a lot of factors that go into it. But in straight dollar terms, if you’re going to live into your mid to late eighties, if you just want max dollars, yeah, waiting until 70, from a calculation standpoint, gets you the most dollars. But there’s a lot of variables in there that make it for most people that the average claiming is well below that. And so that’s where it lands.

The other thing you see a lot of people claim at 65, part of that has to do with just with ease. They can be eligible for Medicare at that point, and Medicare is automatically deducted from your social security paycheck, so you don’t have to pay your Medicare costs. So sometimes they just go ahead and file for both, just for the ease of not having to pay that Medicare cost.

Chase Rose:
Interesting.

Josh Robb:
Along with that too, the other thing you got to keep in mind is if you are claiming early, before your full retirement age, social security actually has an income limit on if you earn above $19,560, so just under $20,000, they take $1 of your benefit for every $2 you make above that. Your benefits get reduced pretty significantly during that timeframe before your full retirement age, as a way to say, “Hey, if you have this income, you probably should wait to take social security.”

[19:29] – How to Make Social Security Decisions

Chase Rose:
That makes sense. Let’s say I’m a listener of this great Invested Dads Podcast, what should I do about social security? What would be your recommendation?

Josh Robb:
This is one of those where having a financial advisor really helps, because there’s a lot of options when it comes to claiming and maximizing out social security, offsetting that with other things, your investments and other income. Planning for how and when to take social security is a big decision. There are ways to undo your decisions. Within a certain year or timeframe you can suspend or pause or cancel, but more often than not getting it right the first time is your best bet, because it’s a lot of work to change it after. That’s why having a financial advisor makes a lot of sense, is to make sure that you’ve thought through all your options and it’s makes sense to file and claim when you do.

If, let’s say, there’s an issue or disability, how do I know if I qualify? Talking through all those… The website, the government’s website, has a lot of information, but just working through it… It’s kind of a crazy thing, if you call social security and talk to one of their agents and you get an answer and then you wait a day and you call back, talk to another agent, chances are they may give you a different answer. There’s just so many nuances, so many different things, that it’s hard to understand what’s going on. So having a good advisor really helps with that.

Chase Rose:
Makes sense. Awesome. Well, I appreciate you having me on the podcast today, Josh.

Josh Robb:
Yes. I’m glad you’re here. Hopefully you learned a little something about social security and you can go tell all your Gen Z friends that there’s a good chance it will be there, because, honestly, that is a benefit for a lot of people in that safety net that I really don’t see the government letting go. So you can tell your Gen Z friends that they will probably get something.

Chase Rose:
Oh yeah, I can’t wait.

Josh Robb:
Also, as a reminder, and Chase, I know you are already doing this, but we have an Invested Dads Stock Draft, it’s a fantasy stock draft where you go to Investopedia and we have a fake scenario where you get a pretend $100,000 and you get to choose some investments for the second half of this year, and at the end of the year we get to see who had the best investments. So if you’re interested in that, it’s all on our website or on our social media pages. There’s also an episode a little while back that we did on that, so check that out, sign up. It’s not too late. You can join anytime throughout the second half of this year. Well, Chase, thanks again. And we look forward to our next episode.

Chase Rose:
Thanks.

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