Let me take a moment to acknowledge a historic event. Jan. 31 marks the 75th anniversary of the first monthly Social Security retirement check. Ida May Fuller, a legal secretary from Vermont, received the first monthly old-age benefit of $22.54 under the then-new Social Security law. The check was dated Jan. 31, 1940.
Ms. Fuller's story, recounted in detail in the history section of the Social Security Administration website, underscores one of the most important aspects of the nation's retirement system: Benefits continue for the rest of your life, no matter how long you live. In Ms. Fuller's case, that turned out to be a very long time indeed.
Born on a farm outside of Rutland, Vt., on Sept. 6, 1874, Ms. Fuller lived to 100. By the time she died on Jan. 31, 1975 — 35 years after receiving her first Social Security check — she had collected nearly $23,000 in benefits.
As American longevity continues to increases, deciding when and how to claim Social Security benefits becomes a very important decision. And in this era of disappearing pensions and increased reliance on personal savings, Social Security benefits may be the only source of lifetime income many current and future retirees will ever see.
The second lesson is that Social Security represents one of the largest pure insurance pools in history. Individuals who live long lives may receive much more in benefits than they ever contributed to the pool, as in Ms. Fuller's case, while individuals with short lives may never recoup their investment. Between 1937 and 1939, Ms. Fuller paid a total of $24.75 in Social Security payroll taxes before retiring as a legal secretary. Her first retirement benefit check of $22.54 represented nearly a full return on her payroll taxes. Over the next 35 years, she received nearly 1,000 times more in benefits than she ever paid in Social Security taxes.
Although Ms. Fuller received substantially more in Social Security benefits than she ever paid in taxes, she died just as one of the most significant modern features of the program took effect: automatic annual cost-of-living adjustments.
COLAs were first paid in 1975 as a result of a 1972 law. Prior to that, benefits were increased irregularly by special acts of Congress. Since then, annual Social Security benefits have been increased as much as 14.3% during the hyper-inflationary period of 1981 and as little as 1.3% in 1987. For two years — 2010 and 2011 — there were no annual COLAs following a robust 5.8% increase in 2009. Because of the particular way Social Security cost-of-living adjustments are calculated — measuring the increase in the third-quarter Consumer Price Index over the previous year's third-quarter CPI — a large COLA one year creates a high bar to overcome, and often results in paltry increases — or sometimes no increase — in the next year or two.
Benefits increased 1.7% for 2015 and so did the amount of earned income subject to payroll taxes. This year, employers and employees each pay 6.2% of the first $118,500 of earned income to fund Social Security retirement, survivor and disability benefits, plus an additional 1.45% each on total earnings — even amounts above the Social Security cap — to fund Medicare. Self-employed individuals pay Social Security/Medicare tax of 15.3% — a combination of the employer and employee shares. Beginning in January 2013, high-income individuals with earned income of more than $200,000 ($250,000 for married couples) pay an additional 0.9% in Medicare taxes.
Of course, the costs and benefits of the Social Security system have changed dramatically over the past 75 years as payroll taxes take a larger bite out of workers' paychecks. The age for full retirement benefits will continue to increase to 67 in 2027, affecting Americans born in 1960 and later. In addition, some retirees pay income taxes on up to 85% of their Social Security benefits.
Despite the tax increase and benefit reduction in the form of a higher full retirement age, the Congressional Budget Office projects that future retired workers will receive higher initial Social Security benefits than today's retirees, net of income taxes paid on the benefits and adjusted for the effects of inflation. In its 2014 report on long-term projections for Social Security, the CBO noted that the average benefit increases over time because of the growth in average earnings. However, the effect of growing earnings will be partly offset by a higher full retirement age.
One final thought: With the help of their financial advisers, today's current and future retirees can take advantage of creative claiming strategies that can boost their lifetime Social Security benefits by $100,000 or more, particularly for married couple or families with minor dependent children. Ms. Fuller, single and childless her whole life, never had any of those options.
(Questions about Social Security? Find the answers in my ebook.)