Social Security approved

I applied for Social Security on June 1, 2024 in advance of turning 70 later this year.  If I recall correctly the website said it would take 30 days for a decision.  However I didn't hear anything until yesterday, August 31.  I received an email saying a decision had been made and upon logging into their website found out that my application had been approved.  This was expected as my case was pretty straightforward having worked for two big employers a combined 40 years.  Nevertheless it took them three months to approve the application.  This made no difference to me as I had applied as early as possible (four months in advance) and am not due my first check until November.  And I have no urgent need for the money.  However if you do need the money or your application is at all complicated it would probably be a good idea to apply as early as you can.     

The amount of your Social Security monthly benefit depends in part on when you start taking it.  You receive the smallest benefit if you start taking it as soon as you are eligible which is when you are 62.  Past age 62 each month you delay taking it increases the amount until you reach age 70.  Further delay past age 70 is pointless as your benefit stops increasing.  I have read (but not verified) that taking the benefit early or late makes little difference from an actuarial stand point. Based on this, I decided to take it as late as possible as that would give me the biggest benefit if I lived a long time and might need it.  Also I tend to procrastinate.

My full retirement age is 66.  According to Social Security this means that starting your benefit four years early at age 62 costs you 25% compared to starting it at age 66.  Whereas waiting until age 70 increases your benefit by 8% a year or 32%.  In practice it is more complicated as there are various inflation adjustments made each year.  In my case I had maximum earnings each year.  Social Security has computed a  table  giving the initial and current monthly benefit based on your age and year you retired for maximum earners like me.  If I had started taking the benefit at my full retirement age in 2020 I would now be getting $3623 a month.  But by delaying until this year I will getting $4873 a month.  Which is  34.5% more.

Pension Unguaranteed

 I started drawing a pension from IBM late in 2009 in the form of a single life annuity.  That is I will receive a fixed monthly payment for the rest of my life.  Initially less than half the monthly payment was guaranteed by the government through the PBGC.  However as I explained here over time this gradually increased until in 2017 the entire amount became guaranteed.  I had thought this meant I had nothing left to worry about (with respect to a default) however this was not quite correct.

Effective January 1, 2023 IBM paid the two largest insurance companies in the United States, MetLife and Prudential, to assume this pension obligation.  Each will be responsible for half presumably to spread the risk.  In the process the PBGC guarantee disappeared which I had not realized could happen.  There are state insurance guarantee funds which will provide some protection for these annuities but it appears that at least in some cases not for the full amount.  Although the risk of a default appears quite small it is a little disconcerting to be in any danger when I had thought I was totally safe in this regard.

Realistically the biggest risk to the pension value has been and remains inflation.  As of the end 2022 the value of my monthly pension payments as measured by the consumer price index (CPI) has decreased by 27%.  So the value has been slowly eroding.  Or over the last two years not so slowly as the decrease in value at the end of 2020 was only 17%.  Fortunately I have other financial resources.  However someone solely supported by a fixed income in retirement is quite vulnerable to inflation over time. 

Medicare

I recently applied for Medicare and last Friday I received my Medicare card in the mail. The eligibility age for Social Security has been rising but it is still 65 for Medicare. You have a 7 month window to apply starting the third month before the month you turn 65. So I could have applied back in July but I didn't get around to filing my application until September 30.  

The application process was fairly easy, I was able to apply online through the account that I had already set up. The government has resumed the two factor authentication system that caused me problems before but now can send the security code by email (as an alternative to a text message to my non-existent cell phone). As I recall there were just a couple of tricky parts to the application. The application asked when my current health insurance started. I was pretty sure this was the same day as my employment started (which was in fact the case) but thought I should double check with my employer. Then for some reason I had trouble entering the date on the form and eventually gave up and put it in the additional notes section at the end. The other tricky part of the application was that it asked for the exact form of my name on my social security card which required a trip to my safe deposit box to check.

I quickly got an acknowledgement which stated at least five days would be required for a decision. According to some discussion of this I found on the web five days is optimistic and in fact the note accepting my application was dated October 15. Since I expect my case was about as straightforward as possible it appears you should allow at least two weeks. The acceptance note was posted to my online account and said a letter would follow. The letter arrived October 24 and the card sent separately arrived October 25. It appears from the card that my coverage actually started at the beginning of October (as opposed to the day I turned 65).

So it takes almost a month to get your card even when everything goes well. This didn't matter much in my case but if you need coverage as soon as you turn 65 or if you suspect your decision might be held up for some reason I would recommend getting your application in as soon as possible.

Since I am still working with medical insurance from my employer it seemed best to just apply for Medicare Part A which is free. When I stop getting coverage from my current employer I will have an eight month window to sign up for the other parts without penalty (otherwise there is a penalty in the form of higher monthly premiums depending on the length of the coverage gap as the government doesn't want you waiting until you get sick to sign up).          

Pension Guaranteed

The fourth post I made to this blog (which I started in 2009 after getting laid off from IBM) was about the Pension Benefit Guarantee Corporation (PBGC) which is an US government agency which insures private pensions up to certain limits.  These limits were of interest to me as I was planning to start taking an early retirement pension from IBM later that year.  For people who have started collecting a pension before their plan fails the insurance limit is determined by the year in which their plan fails and their age at that time.  This means the limit increases from calendar year to calendar year (due to an annual inflation adjustment which is sometimes 0) and on birthdays (due to a formula which guarantees larger amounts as your age increases from 45 to 75). 

The upshot was that when I started taking my pension later in 2009 as planned less than half of it was guaranteed but as time went by the guaranteed amount increased in a somewhat irregular way until on my birthday in 2017 it exceeded the amount of my pension (which is fixed).  My pension plan was (and remains) in pretty good shape so I wasn't all that worried that it wasn't completely guaranteed.  Still you never know what the future will bring so it is nice that it is now 100% covered.

The PBGC maximum monthly guarantee tables can be found here.  Note there are some additional limitations (none of which apply to me) that can reduce these amounts.

Social Security Update

In my last post I complained about the government recently making it impossible to access your Social Security Statement online if you don't have a cell phone.  This managed to annoy me enough that I sent a complaint (via email) in late August to my US Congresswoman, something I don't recall ever doing before (I did once email my state representatives when I lived in New York).  As if by magic on September 1, I got another email from Social Security stating they were making the new security features optional (at least for now).  And in fact I was able to log in and download my statement.  Which was in English instead of Spanish and had some different numbers as well (apparently because the Spanish statement assumed my future income would be zero while the English statement made the more reasonable assumption that I would continue to earn at the same rate which is what the earlier statements I received had always done).  So I could have saved myself some trouble if I had just waited a month for the government to come to its senses.

The response was too quick for it to be a result of my email and in fact I later received a pro forma reply from my Congresswoman's office which was unaware of the reversal in policy.  However it seems to be a pretty safe assumption that I wasn't the only person complaining.

Social Security Statements

Back in 2013 I noted that although the government had stopped mailing out annual Social Security Statements it was possible to obtain your statement by setting up an online account.  Unfortunately the government has recently made changes that make it impossible for me to use my online account. Near the end of July I received an email from the government stating that starting in August they were upgrading their security by requiring you to enter a code which they would send as a text message to your cell phone whenever you logged on.  Since I don't have a cell phone this means I can no longer use my online account.  And my attempt to get a statement before the changes took effect was unsuccessful as apparently they actually started sometime in July.

I found this rather annoying.  I have several online accounts with financial institutions which I can use without owning a cell phone.  So I think the government could provide acceptable security without requiring me to be able to receive text messages.  Furthermore they could at least allow you to request a mailed statement online.  Instead to be mailed a statement you have to fill out and mail in a form.  I was annoyed enough to do this and finally received my statement Saturday. My mood was not improved by the fact that it was all in Spanish. Although since the format is similar to previous statements in English it was not too hard to decipher.

My earnings for 2013-2015 seem to be correctly recorded.  I was a bit surprised that my Medicare earnings for my new job are still well under those for my final years with IBM since I had thought several years of regular (albeit small) raises had largely recovered the pay cut I took in changing jobs. There seem to be several factors that explain this.  At IBM in addition to my base salary I regularly received a small bonus (perhaps 4% or so) which I was not accounting for while comparing salaries. And my new job has a mandatory 5% 403b contribution which is exempt from Medicare tax.  As is the 1% or so I contribute my health insurance (IBM paid the entire cost).  And I won't have received my current salary for an entire year until some time in 2017.

Taking all this into account my current salary is about the same as my final salary with IBM.  Of course since 2008 the annual Social Security earnings limit (which is derived from average wage index) has increased from $102,000  to $118,500 so in a sense I am still behind.  On the other hand I have also been collecting a pension from IBM while working at my new job so I didn't really suffer a loss of income.

Added 9/8/2016:  As of September 1, 2016 the new security feature has been made optional (at least for now).  See next post.

Annual Funding Notice

Last week I received the Annual Funding Notice for the IBM Personal Pension Plan (which is paying me a pension). Rather than require companies to adequately fund their pension plans Congress instead makes them send all participants annually a report on their plan's financial status. This is pretty pointless as most people won't get much from the disclosure. Pension accounting is inherently complicated and to make matters worse current rules are full of loopholes which can make a plan appear to be in better shape than it actually is. So the report is pretty opaque. And even if your plan is currently in good shape the weak regulations mean it may not stay in good shape. So I expect most people pay little attention to this notice and just hope for the best.

This year I actually tried to understand the report. Although the IBM plan is relatively easy to evaluate because it was frozen some years ago (which means participants are no longer accruing benefits) this proved rather difficult. Besides the notice for this year (2013) I looked at prior year notices, the 2013 IBM annual report and documents on the Department of Labor website for 2012 (the documents for 2013 aren't available yet). As best I can tell the only numbers in the notice worth paying attention to are in the "Fair Market Value of Assets" section. For IBM this says:

As of December 31, 2013, the fair market value of the Plan's assets was $53,953,692,333. On this same date, the Plan's liabilities were $47,920,350,174.

The key points here are that the valuation date is at year's end (as opposed  to 1/1/2013 or earlier elsewhere in the notice) so is relatively recent.  The assets are valued at fair market value which is fairly straightforward as opposed to elsewhere in the notice where a bogus accounting value can be used (although IBM does not do this)  based on what the assets would have been worth if the plan had achieved its expected rate of return.   Valuing the plan liabilities is a bit less straightforward as you have to figure the present value of future obligations which requires choosing a discount rate.  This should be determined by looking at the current yields of safe bonds which is not that complicated.  However elsewhere in the notice an artificially high discount rate is used which makes the plan liabilities look smaller than they really are.  This artificially high rate is a recent loophole created by Congress to allow companies to reduce their contributions to their pension plans while pretending they are adequately funded.  The notice for 2012 in the Fair Market Value section using a realistic (or at least more realistic) discount rate valued the plan liabilities at $52,939,309,074 (at 12/31/2012) while the artificially low discount rate used elsewhere in the 2013 notice gave a plan liability value of $40,044,112,196 (at 1/1/2013) which illustrates the magnitude of the loophole.  The actual discount rates used in the Fair Market Value section are not stated in the notice.  The IBM annual report lists discount rates of 4.5% and 3.6% for year end 2013 and 2012 respectively which may be the rates being used.  As best I can tell the present value of future plan administrative costs aren't included in plan liabilities which means they are understated a bit.  Still the IBM plan appears to be in reasonable shape.  And since it is frozen it less dependent on regular additional funding from IBM than active plans.

IBM assumes an 8% annual return on its US pension fund investments.  This is too high in the current environment but doesn't affect the above liability numbers as IBM (as a private company) is not allowed to discount plan liabilities using this rate.  In contrast public entity pension plans can and do discount their liabilities using their assumed rate of return (which is typically in the 7% to 8% range) thus grossly understating their actual liabilities.  IBM's assumed rate does affect IBM's reported earnings.

Social Security

The second post I made to this blog concerned Social Security.  I recently was a bit startled to learn that while the general thrust of the post was correct I had misunderstood a significant detail.  For some reason (perhaps because I had over generalized an example for someone who retired at age 62) I was under the erroneous impression that only earnings before age 62 count in determining your benefit.  However as this example clearly shows such is not the case.  Your highest earning 35 years (which determine the amount of your benefit) can include years in which you are 62 or older.

This means it will be possible for me to earn a maximum benefit (one based on 35 years of maximum earnings).  Through 2009 I had 26 such years from my job with IBM.  Through 2013 I have 4 more from my new job.  And if I continue to work through 2018 (when I will be 64) I will have 5 more for a total of 35.  So by continuing to work (after being laid off from IBM) I can potentially be credited with as many as 9 additional years of maximum earnings (instead of the limit of 6 I had assumed in my earlier post) and increase my benefit by about 15% (instead of 10%).  However it remains the case that the increase in the benefit is considerably less than the increase (35% for 9 additional years) in years worked.       

While looking into this I noticed I hadn't gotten my annual Social Security Statement since 2010.  This is because the government (in a somewhat dubious effort to save money) stopped sending them out in 2011.  I found this a bit annoying but it turned out to be fairly easy (for me at least) to create an online account with Social Security and print out my current (based on my earnings through 2012) statement.

Early Retirement

If you have a high paying job the key to retiring earlier rather than later is to avoid developing expensive tastes.  This wins in two ways, you can save more of your income and you will need less savings to maintain your accustomed standard of living in retirement.  Of course there is no free lunch, by retiring early you are reducing your lifetime earnings and hence your potential lifetime consumption.  But past a certain point there are diminishing returns to additional spending and you may sensibly prefer the additional leisure time early retirement makes possible.  Of course you may also prefer to keep working (especially if you like your job) but people with good incomes should realize they have a choice and not just default to spending whatever they make.

This is a point the "Mr. Money Mustache" blog (which I recently added to my blog list) makes with which I agree.  Although in my view the blog has a tendency to go overboard veering towards "what doesn't kill you makes you stronger" territory which discussing biking in lousy weather and the like.

Princeston, NY 08540

Well this is rather annoying.  When I moved from New York to New Jersey at the beginning of the year I made numerous change of address notifications.  One of them was to my former employer, IBM, which is paying me (through direct deposit) a monthly pension.  IBM somehow recorded the last line of my new address as being "Princeston, NY 08540" instead of the correct "Princeton, NJ 08540".  This was rather dumb of them as the zip code and the state are incompatible and a simple check would detect this.  However the post office managed to deliver the confirmation to my new address and I didn't notice the error until I received a year end summary showing all the state withholding had gone to New York instead of New Jersey.  So now I will have to file a New York return just to get these payments back.

I guess the lesson here is that just because the post office manages to deliver something doesn't mean the address was correct.

Pension started

Back in September I sent in all the paperwork required to start my pension on November 1. You might think this would be soon enough to get my first payment on time but it seems it wasn't. I didn't receive anything until Wednesday when I was paid for November and December. Fortunately the delay didn't matter for me but people who need the first payment on time should make sure they get all the paperwork done well in advance.

My pension is a small fraction of what I was being paid but it does look a bit better on a net basis since a smaller percentage is being taken out. On the other hand I will have to start paying my own medical insurance next year. Still the pension amount will be adequate for me to live on (although if inflation is high it may not remain so). If you are well paid (as I was) it isn't really necessary to match (or nearly match) your previous income for a satisfactory retirement. I find the benefit of not working to be worth quite a bit.

Sunset years

I recently turned 55. Trying to look at the bright side this makes me eligible for more senior discounts . It also provides an excuse to post the picture which I took this July when I was in Denver. It is looking across Smith Lake in Washington Park .

Pension finalized

Last week I sent in the forms to initiate my pension. As discussed earlier I chose to receive it all in the form of a single life annuity. I called today and verified that the forms had arrived ok. So I am all set to begin receiving a pension in November (although the first payment may be delayed a little).

Traditional defined benefit pensions like mine are becoming less common especially for private employers. Defined contribution plans (eg 401k) are becoming more popular. And in fact my former employer had shifted during the time I worked there, first putting all new employees into a 401k plan and later terminating the traditional pension plan (while preserving benefits earned). I think the main reason for this is that the value of a 401k plan is more apparent to employees. Each year you see how much money is added and the accumulated value. And it is totally portable. By contrast I expect most employees have little idea how to value a traditional pension. Since traditional pensions are in fact quite costly for employers this makes them an undesirable form of compensation.

One liberal complaint, which getting laid off has made me a bit more sympathetic to, is 401k plans and the like require people to be investment managers a task that many people are likely to be bad at. I am smart and fairly knowledgeable about financial markets and I still find managing my 401k and other investments a bit daunting. I expect many people would make expensive mistakes.

I consider this a strong argument against privatization of social security. Social security is not all that generous but it does provide a safety net. Left totally to their own devices I expect many people would end up worse off.

Annuity math

As I noted earlier I plan to start receiving a pension from my former employer in November after I turn 55. For obscure reasons I have options to take portions as a lump sum instead of a single life annuity. In one case the lump sum is about 90 times the monthly annuity and in the other case it is about 133. The information packet I received suggested these options are bad deals and that a fair conversion ratio would be about 188.5. This is roughly consistent with annuity quotes I found on the web which had ratios which varied from 164 to 206.

According to the information packet a life expectancy (for males) at 55 of 26 years and a discount rate of 4.3% was used to compare the value of the annuity and lump sum options. And indeed assuming I will live exactly 26 additional years (receiving 312 monthly payments) and applying a discount rate of 4.3% does produce a similar ratio, 189.3. The discount rate needed to produce a ratio of 133 seems to be over 8%. Since I don't think my expected investment returns are over 8% and I don't have any reason to believe my life expectancy is significantly less than average it looks like I will decline the lump sum options.

Pension initiation

I am entitled to a pension from my former employer. I could start it at any time but it is greatly to my advantage to wait until I am 55. This means starting it in November. On Monday I called to start the process. I will be sent some forms detailing my options. It is my understanding that taking it in the form of a single life annuity is clearly best but I will double check before committing myself. I can't procrastinate too long however as there are some time constraints and apparently missing them is bad as retroactive payments aren't made.

Suspending social security

In an earlier post I commented about a loop hole in FDIC bank account insurance limits that can be exploited to raise the limit. My local paper published a column on Sunday about how you can apply for social security at age 62, collect a reduced benefit for 8 years and then pay it all back (without interest) at age 70 and start collecting the maximum benefit. This appears to be better than just waiting until age 70 to collect the maximum benefit as it hedges against the possibility that you will die between age 62 and 70. See here for more on this and other scenarios for optimizing your social security benefit. Again I think it is dubious public policy to provide options like this whose main benefit appears to be to provide employment for financial planners at the expense of making life more complicated for ordinary people.

Inflation

Some people don't see why we should be worried about inflation given the current situation. Actually there is a fairly large group of people receiving pensions, annuities or other fixed income streams for which inflation is a real concern. For example I will start to receive a fixed pension later this year when I turn 55. Since I could live another 30 years I would like to see this pension lose value due to inflation as slowly as possible. Inflation of 3% a year will halve its value in about 24 years, of 6% a year will halve its value in about 12 years and quarter its value in 24 years, of 9% a year will halve its value in about 8 years, quarter its value in about 16 and eighth its value in 24 years. These are significant reductions in a pension which is not overly generous to begin with.

PBGC maximum amounts guaranteed

The Pension Benefit Guarantee Corporation (PBGC) is a government entity which guarantees traditional pensions up to certain limits. The monthly maximum payments for plans which fail in 2009 can be found here . As you can see these maximums strongly depend on your age in 2009. For example at 55 the maximum is $2025/month, at 60 the maximum is $2925/month and at 65 the maximum is $4500/month.

The above site explains these reductions as follows:

The maximum amount is lower for benefits commencing at ages below 65, reflecting the fact that younger retirees receive more monthly pension checks over a longer expected remaining lifespan. The maximum amount is higher for benefits commencing at ages above 65, reflecting the fact that older retirees receive fewer monthly pension checks over their expected remaining lifespan.

But in fact the reductions are much greater than needed to equalize the present value. According to this annuity calculator (for a New York state male, quotes obtained on 3/2/09), a single life annuity paying $2025/month to a 55 year old has present value $331948, a single life annuity paying $2925/month to a 60 year old has present value $445704 and a single life annuity paying $4500/month to a 65 year old has present value $622755. So in fact the limits strongly favor older retirees.

In my case this means I best hope the large American technology company stays solvent for a few years.

Early retirement and social security

Suppose you retire early. How much does this reduce your eventual social security benefit? Generally not as much as you might expect if you were well paid. This is because social security is front loaded, in other words you tend to earn a disproportionate share of your benefit in your first years of work. Traditional private pension plans are often back loaded.

Social security benefits are based on your average monthly earnings (from jobs that paid into social security) over your 35 highest earning years prior to age 62. When computing your average monthly earnings, your earnings are scaled to account for inflation. So for example if you were born in 1947 (so you would be 62 in 2009) your earnings in 2008 are multiplied by 1.00 but earnings from 2000 are multiplied by 1.26, earnings from 1990 are multiplied by 1.92, earnings from 1980 are multiplied by 3.23 etc.

Your average monthly earnings are then converted to a monthly social security benefit via a formula that gives greater weight to the first dollars earned (thereby favoring low income workers). So for example if you were born in 1947 your benefit will be 90% of your average monthly earnings up to $744 plus 32% of any additional average monthly earnings up $4483 plus 15% of any average monthly earnings exceeding $4483. The formula for other dates of birth will have different break points but the same general nature, your first dollars earned will count for 6 times as much in figuring your benefit as the last dollars earned (assuming you earn enough to get your average earnings above the second break point).

So in my case I can make the following rough estimates. I currently have 26 years of maximum earnings. If I hadn't been laid off I could have expected another 6 prior to age 62 (I started working too late to get in the 35 years of maximum earnings required to get the maximum benefit). So my current average monthly earnings are about 26*102000/(35*12) = 6314 (note 102000 is the 2008 earnings limit) which corresponds to a monthly benefit of .90*744+.32*3739+.15*1831 = 2140.73. Another 6 years of maximum earnings would increase my average monthly earnings by 6*102000/(35*12) = 1457 and my monthly benefit by .15*1457 = 218.55. Hence increasing my average monthly earnings by 23% by working another 6 years would only increase my benefit by about 10%. This is a very rough estimate (for example each year of maximum earnings does not actually contribute exactly the same amount to your average monthly earnings) but illustrates the point.

Note the combined social security tax rate is 12.4% so each additional year of maximum earnings represents $12648 of additional tax paid into the system. Over 6 years this is about $75000 for an added monthly benefit of $218 not a terrific deal.

See here for more on how social security is calculated.

Added 1/12/2014:  The general point of this post, that social security is front loaded,  is correct but a detail is wrong.   Your 35 highest earning years which are used for computing your benefit can include years in which you are 62 (or older).  So by continuing to work I can increase my benefit by a bit more than indicated above.  See here for more.