Many ranchers think of Social Security strictly in terms of retirement, unaware of the benefits available in situations of accidental sudden death or a long-term medical disability.
The vast majority of us won't have to take advantage of the disability or survivor portions of our benefits. But we all can profit from knowing exactly what our benefits are and considering them, along with other personal retirement resources, in planning for the future.
Let's begin by looking at how much we pay into the Social Security system.
Your Social Security contributions basically consist of Federal Insurance Contributions Act (FICA) taxes, which earners pay the government in exchange for financial assistance in retirement and disability, survivor and Medicare benefits. Think of it like insurance protection.
FICA taxes amount to 7.65% of earnings. Of that 7.65%, the Social Security portion is 6.20%. The remaining 1.45% is for Medicare.
If you're an employee and receive a W-2 form each year, you pay 7.65% of your salary in FICA taxes. Your employer then matches that 7.65% dollar for dollar up to the maximum earnings limit of $84,900 in 2002.
If you earn more than $84,900 in 2002, you still pay Medicare taxes of 1.45% on all your earnings. But you don't pay the 6.20% portion on any earnings beyond $84,900. Remember, however, that the maximum earnings limit goes up each year.
If you're considered contract labor and receive a 1099 at the end of the year, or if you're self-employed, then you must pay the entire amount yourself. That amounts to 15.30% of your net self-employment income up to the $84,900 earnings limit. You also pay 2.90% (1.45% x 2) for Medicare on all earnings over the limit.
The reason for the larger amount for self-employed workers is that you're responsible for the entire amount since you have no employer to match your contribution.
Your Social Security Statement
Each year — about three months prior to your birthday — you should receive a Social Security statement at your home address (the address listed on your previous year's tax return. The Social Security Administration is required by law to provide these statements to all workers 25 and older who are not already receiving monthly Social Security benefits.
This four-page document lists your estimates of retirement, survivor and disability benefits. It's also an easy way to ensure your earnings or self-employment income is accurately posted. It's very important to check your earnings for accuracy since your eventual benefits are based on your lifetime earnings.
Confirming your numbers are accurate is particularly important if you've worked for an operation that's no longer in business due to bankruptcy. It's not uncommon for an employee to have a year of missed earnings from a bankrupt operation.
In such a case, you need to provide your original W-2 from that year to ensure you are credited for those missing earnings, even though the company is no longer in business. Not all bankrupt operations fail to report earnings, but some do fail to pay all their FICA taxes.
Social Security uses your entire earnings record to determine your benefits. For full retirement-age workers, this is the formula:
First, the highest 40 years of an individual's earnings are determined. Then the five lowest years of earnings are eliminated, leaving the highest 35 years to determine an individual's level of benefits.
Your wages are then indexed to current wage standards. Your 1975 earnings, for example, are probably considerably less than your income today. After indexing, they become much closer than you would think.
Upon receiving your Social Security statement, you and your spouse should review the benefits on your record. It isn't uncommon for a married couple that has worked together in a family operation to file all the self-employment income under the husband's Social Security number as a way to reduce tax obligations.
In such a case, the wife has worked for the business but was never paid a salary, leaving her with no earnings posted to her Social Security number. Without an earnings record, she's ineligible for Social Security benefits based on her own earnings record, and she may only be eligible for widow's benefits if the husband dies or spouse's benefits when they both reach retirement age.
If a tragedy strikes, such as death or disability, your spouse needs to be aware of the family's eligibility for Social Security benefits. The Social Security statements provide this information.
What About Retirement?
A recent national poll found that 75% of U.S. workers worry about not having enough money to live comfortably in retirement. This percentage is probably even higher among cattle producers, many of whom have experienced the equity drain of the past few years.
A financial advisor's rule of thumb to clients is that they will need about 70% of pre-retirement income to live comfortably in retirement. Social Security only replaces about 40% of an average wage earner's salary.
Currently, you can retire at age 62, even if your full-retirement age falls between 65 and 67. But the full-retirement age is increasing for those people born in 1938 and after.
If your full retirement age is older than age 65, (born after 1937) you can still retire at age 62. But the reduction in your benefit amount will be greater than those folks who reached full retirement age at 65. Here's how it works:
If your full retirement age is 67, the reduction for starting your benefits at age 62 is about 30%. It's 25% at age 63, 20% at age 64, 13⅓% at age 65 and 6⅔% at age 66.
As a general rule, early retirement gives you about the same total Social Security benefits over your lifetime but in smaller monthly payments. You have to take into account the number of monthly payments you will receive during your lifetime. Everyone needs to be aware of his or her retirement figures and check to see what benefits, if any, may be available at age 62.
The only other incomes that may affect your Social Security retirement benefits are wages or self-employment income. Everyone should strive to have other sources of retirement income such as investments, individual retirement accounts (IRAs), personal savings and/or 401K accounts, none of which have any impact on your Social Security retirement benefits.
The Importance Of Disability
Imagine that tomorrow you're unable — by accident or medical condition — to perform even the simple indoor duties of managing your cattle operation. Few agricultural-related careers offer employees a private long-term disability policy, but nearly all workers have Social Security disability protection.
Under Social Security, workers are considered disabled if they can't do work they did before and their medical condition doesn't allow them to adjust to other work. Such a disability must be expected to last for at least 12 months or to result in death, as Social Security doesn't pay any short-term disability benefits. Once benefits begin, they continue for as long as the worker is disabled and can't work.
The average monthly payment to a disabled worker is $815. For a disabled worker with a spouse and one or more children, the average payment is $1,360. After receiving disability payments for two years, the worker becomes eligible for Medicare.
Survivor benefits are monthly benefits paid continuously to a deceased worker's family. The value of such survivor benefits for an average wage earner that dies and leaves a spouse and two children is equivalent to a $403,000 life insurance policy. The difference is that the Social Security benefits are paid monthly, not in a lump sum.
The average monthly payment for a family consisting of the surviving spouse with two children is $1,747/month. The payments increase based on the annual cost-of-living index, which is something few private insurance plans offer.
Children age 18 or younger, or 19 but still in high school, are eligible for survivor benefits. So can a child who is 18 or older but becomes disabled before age 22.
A surviving spouse who is disabled or caring for children under age 16 may receive benefits depending on his/her income from wages or self-employment. The surviving spouse (age 60 or older, or 50 or older and disabled) may also receive benefits.
While this isn't an all-inclusive discussion of your Social Security benefits, it should aid you in understanding the benefits your tax money can provide. Depending on your age, past earnings and family composition, Social Security benefits will be a little different for all of us.
For more information, log on to www.ssa.gov or contact your local Social Security office.
Shawn Mercer is a public affairs specialist for the Social Security Administration and owns/operates a cow-calf and stocker operation in southern Mississippi. E-mail questions or comments to firstname.lastname@example.org.
7 Facts About Social Security
In 2002, more than 45 million Americans received more than $450 billion in Social Security benefits.
Social Security is the major source of income for most of the elderly.
Social Security provides more than just retirement benefits.
An estimated 154 million workers, 96% of all workers, are covered under Social Security.
In 1940 the life expectancy of a 65-year-old was 12.5 years; today it is 17.5 years.
By 2030 there will be twice as many older Americans as today — increasing from 35 million today to 70 million in 2030.
There are currently 3.4 workers for each Social Security beneficiary. By 2030, there will be 2.1 workers for each beneficiary.
For more information about Social Security, visit the Social Security Administration's Web site at www.ssa.gov or call 800/772-1213.