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Opinion - FA Playbook

Cuts to Social Security would hurt older, single women most of all

Key Points
  • The Social Security program is approaching insolvency, and the demographic to be hit hardest by any reduction in benefits will be women, who tend to earn less, claim benefits earlier and outlive men.
  • The average benefit for a retired woman of 65 is $14,184 a year, versus $18,000 for men the same age.
  • Social Security rules can be complex, so it pays to strategize years before you leave work for good.
Jim McGuire | Getty Images

The Social Security program is approaching insolvency.

Social Security costs keep escalating, with future expenses for the program expected to be 20% higher than projected revenue. To that point, action must be taken promptly to prevent an across-the-board benefit cut for many current and future beneficiaries, according to the Social Security 2019 Annual Report.

As soon as next year, Social Security's yearly expenses are expected to exceed its revenue — forcing the program to begin drawing down its trust funds. The projected impact will result in only 75% of benefits promised to actually be paid beginning in 2035. That will impact millions of individuals who rely on this income for their living expenses in retirement.

The population most dependent on Social Security benefits is older, single women. According to the Social Security Administration, nearly half (44%) of all unmarried and widowed women get 90% or more of their total income from Social Security, compared to just 21% of married women over age 65.

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The sting of a potential benefit reduction has a big impact on women because their Social Security checks are also much lower than those of their male counterparts. On average, a woman will enter retirement years poorer than a man. The average benefit for a retired woman is $14,184 a year, versus $18,000 for men (both 65 or older).

Women are more heavily dependent on their Social Security income because they are more likely to outlive their savings, due to a longer lifespan. The SSA calculates that women who are turning 65 now have a life expectancy of age 86 1/2. Men turning 65, by contrast, can expect to live, on average, to 84. Women collecting at the full retirement age of 67 have nearly 20 years of benefits, making collection choices even more important.

So how are benefits calculated? The SSA uses your earnings and work history to determine your eligibility for retirement benefits. Once you have 10 years of work (40 credits), you are eligible for retirement benefits. In 2019 you receive one credit for each $1,360 of earnings, up to the maximum of four credits per year. The credits remain on your record even if you change jobs or do not work for a period. The Social Security website offers multiple different calculators that you can use to get a rough estimate. These number-crunching machines will give you some idea of how you should plan for your financial future.

The main question that always comes up is: When should I collect benefits?

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Unfortunately, there is no answer to this question. Too many women make the mistake of claiming Social Security benefits early. Sadly, most women jump the gun and begin collecting benefits before their full retirement age, and even fewer wait to the maximum age of 70. Claiming Social Security before full retirement age (66 to 67, based on your year of birth) sets your monthly benefit at a reduced level for life. For those claiming at age 62, income could be as much as 30% lower than if they had claimed at full retirement age.

By waiting to claim benefits, a person will get an 8% increase each year after age 62 until they reach age 70.

A "risk-free" return of 8% per year is especially attractive, considering we are in a low-interest-rate environment, where "high-interest" bank accounts struggle to return more than 1%.

If you are still working, it makes even more sense to hold off on collecting.

Women are more heavily dependent on their Social Security income because they are more likely to outlive their savings, due to a longer lifespan.
Stacy Francis
president and CEO of Francis Financial

Employers often provide health-care coverage and other valuable benefits that cost quite a bit. If you want to keep working, collecting benefits before you reach your full retirement age probably doesn't make sense, especially if you have considerable earnings. That's because your Social Security benefits are slashed if you earn above a ceiling that is adjusted each year. Depending on your income bracket, 85% of Social Security benefits can be taxable.

This may come as a surprise, but women divorced after at least 10 years of marriage can collect on their ex-spouse's benefit. Women married for a decade or more are eligible for a sum equal to half of their ex's Social Security benefit. If 50% of your ex's benefit exceeds what you stand to receive on your own, you can claim theirs instead. According to the 10-year rule, you get whichever benefit is higher — 100% of yours or 50% of your ex's.

Too many divorced women don't realize they may be able to collect a portion of their ex-spouse's Social Security. Women do not even have to notify their ex-spouse to be able to find out the benefit to which they are entitled, and their ex need not even know when they begin collecting, either.

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Social Security costs will exceed income by 2020

The exception to the 10-year rule is if you remarry, in which case, you can no longer collect on your ex's Social Security record. However, if your second marriage were to end due to death or divorce, you would be eligible once again.

If your divorced spouse dies, you can receive 100% of their benefits as a widow if the marriage lasted 10 years or more.

The rules of the Social Security program can be complex, so it helps to start strategizing years before you leave work behind for good. It also makes sense to consult with a financial professional to see how these retirement benefits may work alongside your 401(k) plan, individual retirement account and other potential income sources.

— By Stacy Francis, president and CEO of Francis Financial