Social Security isn’t just for seniors

Paul Hamilton | More Than Money | Posted: Thursday, February 11, 2016 6:59 pm

Hey Paul,

My parents are close to retirement and they each have a Social Security statement that gives their retirement benefits at different starting ages and shows their lifetime earnings. I don’t recall receiving anything like that. I am not thinking too much about retirement yet but should I have received a Social Security statement?

Leftout by SSA

The SSA stopped sending out annual reports to all workers about five years ago as a cost-saving measure. They still send a statement when a worker reaches 60 as that is when Social Security benefits become most relevant. However, Social Security isn’t just for old folks — it provides life and disability insurance to workers of all ages.

Fortunately, you can easily access your Social Security information online. Go to SSA.gov/MyAccount to set up access. As long as you know your name and Social Security number and can recall some personal trivia such as old addresses, lending banks, models of cars then you’ll be able to see some very interesting and important benefit information.

The chart accompanying this column shows a typical statement for a middle-class worker. Let’s suppose your report is identical. The report includes estimates of what your monthly benefit will be if you retire as early as possible at age 62, at your full retirement age of 67, and the latest age of 70 to begin benefits. This worker earned $47,423 last year but his retirement benefit at age 67 is predicted to be $1,680 monthly — $20,160 annually in today’s dollars. The projected benefits are based on your earnings history and then assumes you earn your past year’s income up to the start of your Social Security benefits. A lot can happen both to your actual earnings, as well as Social Security policy, in the few decades before you retire so don’t put too much weight on these retirement benefit projections.

More pertinent to your situation are the life and disability benefits. The core benefits are all roughly the same whether it turns out to be retirement, survivor or disability benefits — $1,680 if you make it to 67, $1,569 if your spouse makes it to 67 without you, and $1,527 if you become disabled this year. The SSA doesn’t track your family structure so the report will estimate family benefits under the assumption that you have a spouse and minor children.

I don’t like to bring up to people the possibility of their early departure from this world, but it may be of some comfort that your spouse could receive $1,176 in mother benefits while she has one or more children under 16. Additionally each child under 18 (or 19 and still in high school) can receive $1,176 — this is 75 percent of the full widow benefit of $1,569. Your family maximum benefit is $2,908 so if you have a surviving spouse and two minor children then each benefit will be reduced to remain at the benefit cap.

So, the next question to ask yourself is whether $2,908 along with your wife’s earnings, assets and life insurance proceeds are enough to sustain her while the kids are still around. Once the kids age out of Social Security, she will not receive any benefits again until early widow benefits kick in at age 60 at the earliest. In this case she will only receive $1,122 –- 71.5 percent of the widow benefit of $1,569 if she had waited to start benefits at age 67. Of course, she may have her own Social Security benefits that are larger or remarry.

Enough about a world with you. The next scenario may be equally sobering: Your health deteriorates to the point where you “can no longer perform any substantial work.” Social Security disability is more restrictive than most private disability insurance. If you qualify as a disabled worker you are entitled to a benefit of $1,527. Your wife and any minor children are entitled to 50 percent of this amount but only up to a family maximum of at most 150 percent of your benefit. Thus the highest monthly disability check your family could receive is $2,290.

In summary, it is well worth obtaining and looking over your Social Security statement even at younger ages to see what level of life and disability insurance would be available.

Hey Paul,

My husband and I are both in our early 30’s with two children ages 5 and 8. I have worked part-time since our first child was born. My husband had worked in construction but for the last few years has worked at a factory. We are both relatively healthy as are our children. A friend mentioned they had bought disability insurance through an insurance agent. Should we have disability insurance?

Young and Invincible

The decision to purchase disability insurance is complicated by the unpredictable onset and different forms disability can take. Even at your peak health years there is the possibility an accident or chronic illness will limit your ability to work.

This reminds me of a story of a professor who apparently had a stroke while teaching class. A student quickly called 911 reporting that the prof was hunched over and mumbling incomprehensibly. The ambulance arrived but emergency personnel were not given a room number. The EMS team ended up taking out five other professors on gurneys before they got the right professor.

OK, I made up this story but the moral is that if your work requires your full mental or physical abilities then acquiring disability insurance should be given strong consideration.

The SSA reports that about 30 percent of workers qualify for Social Security benefits at some point in their working years. This is astonishing given that the SSA definition of disability includes “the inability to engage in any Substantial Gainful Activity,” which is any job with $1,130 in monthly earnings. So a middle-income teacher or high-income lawyers are not eligible for Social Security disability if they can perform a minimum-wage job.

Based on what you have told me, both you and your husband would likely be eligible for Social Security disability benefits if you meet certain criteria — have earned income at least half the time since age 21 and in five of the last ten years. Earning only $5,040 in the 2016 calendar year qualifies you for a full year of work credits.

The first thing to do is to check what level of Social Security disability you may be eligible for if you become disabled. Reliable estimates of this can be retrieved online from the SSA but need some clarifications. Importantly, Social Security disability covers only major disabilities where the worker can no longer “perform any substantial work;” this is in contrast to most private disability policies that cover “own occupation.” For example, if your husband could no longer do construction work but could still work at a minimum-wage job, then Social Security disability would not kick in.

Social Security disability essentially allows the worker to retire and provides a benefit comparable to if they had worked up to their retirement age. In addition, a spouse and minor children receive up to 50 percent of the worker’s benefit. However, the total family benefits are usually capped at 150 percent of the worker benefit. The average worker’s Social Security benefit is about 40 percent of their average earnings, so the family maximum benefit would only replace about 60 percent of the worker’s income. Where does the other 40 percent come from?

If there were a group disability plan through your husband’s work, I would give that strong consideration. For one thing, there is likely no medical exam required. Secondly, the benefits are tailored to the types of disability that commonly disrupt this type of work. Like any insurance it is not an investment — you are likely to not need the benefits, but if needed, the benefits are a lifesaver.

I would prioritize other items such as term life insurance and saving for retirement above the need for disability insurance. If your budget can accommodate a couple of hundred dollars each month to purchase private disability insurance to supplement Social Security disability benefits, then give it serious consideration. Not all of us are profs that can lecture incoherently until retirement.