Author Topic: Social Security spousal benefit what-if analysis  (Read 3201 times)

Retireatee1

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Social Security spousal benefit what-if analysis
« on: March 01, 2020, 06:38:32 AM »
I performed an interesting what-if analysis.  Could a married retiree who never worked and filed for Social Security spousal benefits earn as much benefit as a single retiree who worked for 40 - 50 years?  The answer, of course, is yes.  But to what degree?  Assume the married retiree's working spouse maxed out for 35 years.  In 2020 that would be $137,700.  Assume the married retiree filed at their full retirement age of 66 this year.  Their benefit would then be approximately $17,500 / year.  So, based on my calculations, if the single retiree made $40,600 this year and the same amount adjusted backwards for inflation in previous years for a career of 35 years, their benefit would be about $17,500 / year as well.

Things get even worse for the single retiree if they work more than 35 years because their benefit does not increase.  They are getting a 43% income replacement after 35 years which isn't bad.  The retiree who maxed out can expect their individual benefit to equal a 25% salary replacement, but 38% if you include the spousal benefit as a household total.

The rawest deals go to the high-earning single retirees or the high-earning married couples who are dually entitled (both working) who will get the 25% salary replacement, especially if they have careers lasting longer than 35 years.

The simulations were performed using my Retireator tool (v2020.0229)

https://www.retireator.org/

six-car-habit

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Re: Social Security spousal benefit what-if analysis
« Reply #1 on: March 02, 2020, 12:08:08 PM »
 I'm not sure i would call the non-working spouse a "retiree" , as I'm unsure what they are retiring from [?]

 Interesting point on the 35 year plateau. I'll be above that # of years , due to a defined benefit check starting at 57 yrs [ when i'll retire hopefully], and SS taxes taken out since i was about 16 yrs old.  I make about twice what my spouse does [ but under the 137K limit]  but according to the SS statements she will get more on her own earned benefit , than claiming 1/2 of mine as a spousal benefit.

 I'm starting to think the spousal benefit should be phased out, especially the 10 year qualifier.  It's essentially "free" money for being married , going into the couples household, whereas the single folk are basically susidizing this...

Retireatee1

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Re: Social Security spousal benefit what-if analysis
« Reply #2 on: March 02, 2020, 02:30:37 PM »
The spousal benefit is tricky because so many depend on it.  Nobody, myself included, wants to bring down the hammer on low income stay-at-home moms and divorcees.

The survivor (death) benefit is even better, the spousal benefit essentially goes from 50% to 100% (assuming no reduction factors).  There are no annuities on the open market where a spouse (and an ex-spouse or two) can receive significant benefits for life at zero cost or reduction in benefits to the primary owner.

dandarc

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Re: Social Security spousal benefit what-if analysis
« Reply #3 on: March 03, 2020, 02:46:45 PM »
Is this a correct reading of your post, OP?

Single earner - makes $40K for their whole career. SS benefit is $17,500

Married worker - makes $137K for their whole career. SS benefit is $35K
Non-working spouse - SS Benefit is $17,500


If that's accurate, actually falls in line with the "worth" of a stay at home spouse - pretty sure I've seen it written elsewhere that you'd need to pay a salary of roughly $50K per year. $40K is well within the hand-waving range on that.


dandarc

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Re: Social Security spousal benefit what-if analysis
« Reply #4 on: March 03, 2020, 02:50:01 PM »
Also - and I think what you're saying agrees with this - due to the progressive nature of the benefits computation, for a high earner, having some zeros during your 35 years doesn't hurt that bad.

Average the income across the 35 years - a dollar in one year, up to the SS limit anyway, is the same as a dollar in any other year when averaging the income.

Retireatee1

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Re: Social Security spousal benefit what-if analysis
« Reply #5 on: March 04, 2020, 03:03:49 PM »
Is this a correct reading of your post, OP?

Single earner - makes $40K for their whole career. SS benefit is $17,500

Married worker - makes $137K for their whole career. SS benefit is $35K
Non-working spouse - SS Benefit is $17,500

Yes that's correct.

Retireatee1

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Re: Social Security spousal benefit what-if analysis
« Reply #6 on: March 04, 2020, 03:08:44 PM »
Also - and I think what you're saying agrees with this - due to the progressive nature of the benefits computation, for a high earner, having some zeros during your 35 years doesn't hurt that bad.

Average the income across the 35 years - a dollar in one year, up to the SS limit anyway, is the same as a dollar in any other year when averaging the income.

Yes there are two knee points that are compared against your AIME.  If you are below the first knee point, you get the most benefit.  If you are in the middle, you get a bit less.  If you are above the second knee point, you get the least benefit.  So the more you put in, the less you get out as a percentage.

So yes, if you are above the second knee point and take a year off, there is less of a hit to your benefit percentage.  So that's a silver lining I guess.

Retireatee1

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Re: Social Security spousal benefit what-if analysis
« Reply #7 on: March 04, 2020, 06:36:03 PM »
Relatively speaking, low earners do quite well here.  If you retire in 2020 making around $14,100, you can expect a benefit of $10,085.  That's an income replacement of 71% after 35 years of investing 6.2% (12.4% including the employer contribution).  That puts you right at the first bend point, and the rate of return goes down as you earn more than that.

If the low earner started working at age 18 and instead invested the 12.4% instead (using historical stock return data), after 48 years they might have $585,110.  Doing a basic annuity simulation, this would provide approximately $23,600 / year in income starting at age 66.  So even the low earner would have made out twice as well with traditional investments.

six-car-habit

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Re: Social Security spousal benefit what-if analysis
« Reply #8 on: March 05, 2020, 12:27:06 AM »

If the low earner started working at age 18 and instead invested the 12.4% instead (using historical stock return data), after 48 years they might have $585,110.  Doing a basic annuity simulation, this would provide approximately $23,600 / year in income starting at age 66.  So even the low earner would have made out twice as well with traditional investments.

Seems like using an investment rate of 6.2 percent of pay is a better comparison.  Reason i say this is the job wouldn't necessarily pay 6.2% more into the employees paycheck if the company didn't have to fund the SS portion.  Sort of like a company that provides clean coveralls for its blue collar workers, or a food service so they don't go out to fast food on their lunch break - the employee wouldn't necessarily get a raise if the company got rid of the cafeteria or coveralls.

   I'm thinking of two groups this might have applied to that did not pay into SS - Federal CSRS employees [ the old system]  and certain railroad workers , at least for the CSRS employees, they made the same hourly rate/ annually, as the persons in the newer FERS [ pays into SS] system, when both employees had the same job description / skill set.

beltim

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Re: Social Security spousal benefit what-if analysis
« Reply #9 on: March 05, 2020, 01:02:35 AM »
Relatively speaking, low earners do quite well here.  If you retire in 2020 making around $14,100, you can expect a benefit of $10,085.  That's an income replacement of 71% after 35 years of investing 6.2% (12.4% including the employer contribution).  That puts you right at the first bend point, and the rate of return goes down as you earn more than that.

If the low earner started working at age 18 and instead invested the 12.4% instead (using historical stock return data), after 48 years they might have $585,110.  Doing a basic annuity simulation, this would provide approximately $23,600 / year in income starting at age 66.  So even the low earner would have made out twice as well with traditional investments.

Two things. First, why are you comparing a 35 year working career to a 48 year one?  The extra 13 years completely changes the analysis. Second, don’t forget all of the other programs included in Social Security besides retirement income, like disability and survivors benefits. Those would have a significant cost on the open market and are a significant benefit.

Retireatee1

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Re: Social Security spousal benefit what-if analysis
« Reply #10 on: March 05, 2020, 03:29:11 PM »

If the low earner started working at age 18 and instead invested the 12.4% instead (using historical stock return data), after 48 years they might have $585,110.  Doing a basic annuity simulation, this would provide approximately $23,600 / year in income starting at age 66.  So even the low earner would have made out twice as well with traditional investments.

Seems like using an investment rate of 6.2 percent of pay is a better comparison.  Reason i say this is the job wouldn't necessarily pay 6.2% more into the employees paycheck if the company didn't have to fund the SS portion.  Sort of like a company that provides clean coveralls for its blue collar workers, or a food service so they don't go out to fast food on their lunch break - the employee wouldn't necessarily get a raise if the company got rid of the cafeteria or coveralls.

   I'm thinking of two groups this might have applied to that did not pay into SS - Federal CSRS employees [ the old system]  and certain railroad workers , at least for the CSRS employees, they made the same hourly rate/ annually, as the persons in the newer FERS [ pays into SS] system, when both employees had the same job description / skill set.

It might be an interesting social experiment to eliminate the 6.2% employer contribution and observe the effect on average wages.  It's not like it's a pot of free money that can be tapped to fund the employees' retirement, there is always a cost.  And that cost is surely downwards pressure on salaries.  Any employer is going to figure it in to the total labor costs before making job offers, right?

I'm fairly sure it was done that way for the optics.  It just doesn't "feel" like 12.4%.  Had it always been an employee-paid 12.4% the same as self-employment income for decades, the net take-home pay would probably be about the same today in my opinion.

Retireatee1

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Re: Social Security spousal benefit what-if analysis
« Reply #11 on: March 05, 2020, 03:42:56 PM »
Relatively speaking, low earners do quite well here.  If you retire in 2020 making around $14,100, you can expect a benefit of $10,085.  That's an income replacement of 71% after 35 years of investing 6.2% (12.4% including the employer contribution).  That puts you right at the first bend point, and the rate of return goes down as you earn more than that.

If the low earner started working at age 18 and instead invested the 12.4% instead (using historical stock return data), after 48 years they might have $585,110.  Doing a basic annuity simulation, this would provide approximately $23,600 / year in income starting at age 66.  So even the low earner would have made out twice as well with traditional investments.

Two things. First, why are you comparing a 35 year working career to a 48 year one?  The extra 13 years completely changes the analysis. Second, don’t forget all of the other programs included in Social Security besides retirement income, like disability and survivors benefits. Those would have a significant cost on the open market and are a significant benefit.

There are many possible case studies here, I've highlighted a few which I happen to find a bit alarming. 

Case in point: the problematic 35-year cap.  The median retirement age is 62, so most retirees are going to be paying FICA for more than 35 years and getting goose eggs for the surplus.  This cap has never been increased along with life expectancies.

I mentioned survivor benefits already.  It's like a spousal benefit, but twice as problematic in terms of fairness. 

These issues are difficult to fix because it isn't designed to be "fair", in any traditional sense.  It's a reverse pyramid Ponzi scheme where money is funneled from today's single high-earning suckers taxpayers to "investors" and their families who got in early and paid much less.

dandarc

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Re: Social Security spousal benefit what-if analysis
« Reply #12 on: March 06, 2020, 05:54:05 AM »
Social Security is intended to keep our elderly and disabled out of abject poverty. Actually does a decent job of accomplishing this.

If you're surprised it under-performs market returns, then you might also be shocked to learn that water is wet.

EngineerOurFI

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Re: Social Security spousal benefit what-if analysis
« Reply #13 on: March 06, 2020, 01:07:02 PM »
I performed an interesting what-if analysis.  Could a married retiree who never worked and filed for Social Security spousal benefits earn as much benefit as a single retiree who worked for 40 - 50 years?  The answer, of course, is yes.  But to what degree?  Assume the married retiree's working spouse maxed out for 35 years.  In 2020 that would be $137,700.  Assume the married retiree filed at their full retirement age of 66 this year.  Their benefit would then be approximately $17,500 / year.  So, based on my calculations, if the single retiree made $40,600 this year and the same amount adjusted backwards for inflation in previous years for a career of 35 years, their benefit would be about $17,500 / year as well.

Things get even worse for the single retiree if they work more than 35 years because their benefit does not increase.  They are getting a 43% income replacement after 35 years which isn't bad.  The retiree who maxed out can expect their individual benefit to equal a 25% salary replacement, but 38% if you include the spousal benefit as a household total.

The rawest deals go to the high-earning single retirees or the high-earning married couples who are dually entitled (both working) who will get the 25% salary replacement, especially if they have careers lasting longer than 35 years.

The simulations were performed using my Retireator tool (v2020.0229)

https://www.retireator.org/

Social Security is designed as a basic functional safety net to keep elderly, disabled, widows (of either sex), and children out of poverty.  As a child whose father died and whose family therefore received a small SSI stipend until I turned 18, I can attest that it does this pretty well.

Another way to look at your scenario (since you seem to be concerned that non-working widows are gaming the system) is that:

1) the $40,600 single employee makes less than one-third of what the $137,700 employee makes, yet his benefit is the same as the widowed spouse.  Seems like the single employee has been pretty well rewarded for his work in comparison to the single spouse.  This is thanks to the "bend points" in SSI that ensure lower wage workers have closer to full income replacement.  This phases out at certain "bend points" in the equation.

2) +1 to @dandarc in that the "value" of the non-working spouse is $40-50k and it would be insulting to say that they don't deserve some kind of safety net in recompense for being the spouse of the worker who put in 339% more in taxes than the $40,600 worker.  Plus it goes with the whole point of SSI - basic safety net to make sure this spouse doesn't fall through the cracks.

3) Non-working spouse may not have worked for a number of reasons that allowed the high earner to get that salary in the first place.  My wife could make $100k and in fact left a $100k job and now has a job that is flexible and only $50k.  But we don't have to pay for daycare ($32k/yr savings) and I was able to take a higher paying job ($50-70k pay bump including bonus) that requires significantly more travel etc. since kids are covered.  Plus, she's happier.  Happy wife, happy life.

4) In my personal above scenario - if my wife dies, I would welcome the SSI I would receive until kids are 18 to help pay for daycare, especially since I would likely need to downshift my career.  Most folks would *NEED* it since they aren't mustachian in any sense.  If I were to die without life insurance (and let's assume I was the average non-mustachian 31 year old), my wife would desparately need SSI until kids were 18 to make it through and she would absolutely deserve the spousal benefit for my SSI record since her career earnings were severely depressed through not being able to work at full capacity.  To me all of that is pretty fair and again, basic benefit coverages.

Retireatee1

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Re: Social Security spousal benefit what-if analysis
« Reply #14 on: March 06, 2020, 01:44:29 PM »
Social Security is intended to keep our elderly and disabled out of abject poverty. Actually does a decent job of accomplishing this.

If you're surprised it under-performs market returns, then you might also be shocked to learn that water is wet.

I don't disagree at all.  Are we debating here?

I've been studying Social Security for years and learning how to model it in Excel.  So I'm not shocked, although I thought the sweetheart deals might do a bit better against the market.  The $10,085 per year is not the sweetest deal, if you add in a couple of ex-wives you can get it up to the family maximum benefit of around $19,000.  So if that guy only worked 35 years, it would be closer to a push.

There is a lot of talk about the program being broken, but when it comes to solutions you see a lot of shoulder shrugs and everyone moves on.  How often do you see teardowns like in this thread?  I'm able to run complex simulations and provide hard numbers very easily, so I'd like to share some of it.  Fixing these problems is well beyond my pay grade, although I have a few ideas:

- There has been loose talk of an "earnings test" for Social Security benefits.  This seems a bad idea, although perhaps an earnings test for only the spousal benefit is in order.

- The 35 year cap should be at least 40.

- A portion of it should be invested (not my idea but I agree)

So I feel I've met my burden of proof to support these assertions.

Retireatee1

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Re: Social Security spousal benefit what-if analysis
« Reply #15 on: March 06, 2020, 01:58:54 PM »
One point I'll add is that the statement that the program is modelled like a reverse pyramid Ponzi scheme and the statement that the program functions as a critical safety net for the elderly, disabled, widows, and children are not mutually exclusive.  It is possible for both of those things to be true.

ericrugiero

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Re: Social Security spousal benefit what-if analysis
« Reply #16 on: March 09, 2020, 07:22:13 AM »
I performed an interesting what-if analysis.  Could a married retiree who never worked and filed for Social Security spousal benefits earn as much benefit as a single retiree who worked for 40 - 50 years?  The answer, of course, is yes.  But to what degree?  Assume the married retiree's working spouse maxed out for 35 years.  In 2020 that would be $137,700.  Assume the married retiree filed at their full retirement age of 66 this year.  Their benefit would then be approximately $17,500 / year.  So, based on my calculations, if the single retiree made $40,600 this year and the same amount adjusted backwards for inflation in previous years for a career of 35 years, their benefit would be about $17,500 / year as well.

Things get even worse for the single retiree if they work more than 35 years because their benefit does not increase.  They are getting a 43% income replacement after 35 years which isn't bad.  The retiree who maxed out can expect their individual benefit to equal a 25% salary replacement, but 38% if you include the spousal benefit as a household total.

The rawest deals go to the high-earning single retirees or the high-earning married couples who are dually entitled (both working) who will get the 25% salary replacement, especially if they have careers lasting longer than 35 years.

The simulations were performed using my Retireator tool (v2020.0229)

https://www.retireator.org/

So, the higher earning worker and spouse made 3.4 times as much money (combined) and will receive 3 times as much money from social security (combined).  Their benefit is still a lower percentage of the taxes they pay.  Also, a stay at home mom (or dad) provides a significant value to society by the work they do in raising their kids.  I don't see a problem with rewarding that.   

Retireatee1

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Re: Social Security spousal benefit what-if analysis
« Reply #17 on: March 09, 2020, 06:10:49 PM »
I performed an interesting what-if analysis.  Could a married retiree who never worked and filed for Social Security spousal benefits earn as much benefit as a single retiree who worked for 40 - 50 years?  The answer, of course, is yes.  But to what degree?  Assume the married retiree's working spouse maxed out for 35 years.  In 2020 that would be $137,700.  Assume the married retiree filed at their full retirement age of 66 this year.  Their benefit would then be approximately $17,500 / year.  So, based on my calculations, if the single retiree made $40,600 this year and the same amount adjusted backwards for inflation in previous years for a career of 35 years, their benefit would be about $17,500 / year as well.

Things get even worse for the single retiree if they work more than 35 years because their benefit does not increase.  They are getting a 43% income replacement after 35 years which isn't bad.  The retiree who maxed out can expect their individual benefit to equal a 25% salary replacement, but 38% if you include the spousal benefit as a household total.

The rawest deals go to the high-earning single retirees or the high-earning married couples who are dually entitled (both working) who will get the 25% salary replacement, especially if they have careers lasting longer than 35 years.

The simulations were performed using my Retireator tool (v2020.0229)

https://www.retireator.org/

So, the higher earning worker and spouse made 3.4 times as much money (combined) and will receive 3 times as much money from social security (combined).  Their benefit is still a lower percentage of the taxes they pay.  Also, a stay at home mom (or dad) provides a significant value to society by the work they do in raising their kids.  I don't see a problem with rewarding that.

Well any social program is going to have winners and losers.  If there are too many winners and not enough losers, the plan goes insolvent.  This appears to be where we are headed.  It's easy and feels good to list all the reasons why the winners deserve to be the winners.  What's hard is pointing the finger at who we deem the losers to be (especially for a politician).  So there's a slow and steady creep of more and more people in the Winners' Circle.  I'm not the "bad guy" here.  I'm the numbers and hard facts guy.