Textbook
1. Introduction
2. Investment vehicle characteristics
3. Recommendations & strategies
3.1 Type of client
3.2 Client profile
3.3 Strategies, styles, & techniques
3.4 Capital market theory
3.5 Tax considerations
3.6 Retirement plans
3.6.1 Generalities
3.6.2 Rules
3.6.3 Workplace plans
3.6.4 Individual retirement accounts
3.6.5 Government plans
3.7 Brokerage account types
3.8 Special accounts
3.9 Trading securities
3.10 Performance measures
4. Economic factors & business information
5. Laws & regulations
6. Wrapping up
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3.6.5 Government plans
Achievable Series 66
3. Recommendations & strategies
3.6. Retirement plans

Government plans

The U.S. government provides social programs to create a financial safety net for vulnerable and retired Americans. Two of the most prominent programs are Social Security and Medicare.

Social Security

Social Security provides financial assistance to nearly 70 million Americans (as of 2022). This government program supports:

  • Retirees
  • Disabled persons
  • Survivors of deceased workers
  • Dependents of Social Security beneficiaries

Social Security is primarily funded through specialized taxation, a type of transfer payment. The employer and the employee both pay Social Security taxes, currently amounting to a 6.2% tax for each party (12.4% tax for self-employed individuals). These taxes are collected and re-distributed to beneficiaries of this program. A person must generally work for 40 quarters (10 years) to qualify for full Social Security retirement benefits.

Definitions
Transfer payment
Payment made that involves no direct benefit to the payee

For example: working Americans pay Social Security taxes, which are paid out to other disabled and retired Americans.

Payments made to retirees are meant to provide a baseline but often don’t cover every expense in retirement. As stated by the Social Security Administration:

Social Security was never meant to be the only source of income for people when they retire. Social Security replaces a percentage of a worker’s pre-retirement income based on your lifetime earnings. The amount of your average wages that Social Security retirement benefits replaces depends on your earnings and when you choose to start benefits.

This demonstrates the importance of saving for retirement outside of Social Security. Additionally utilizing qualified workplace plans, individual retirement accounts (IRAs), and annuities helps older Americans thrive and live comfortably through retirement.

Social Security retirement benefits can first be acquired at age 62. However, the earlier one claims these benefits, the lower the payments. For retirees born after 1960, the “full” retirement age is 67. At this age, a person gets 100% of their allocated Social Security benefit. Payments can continue to be delayed beyond this age to receive a higher benefit. For example, a person delaying benefits until age 70* will receive 124% of their Social Security benefit. Once age 70 is reached, there is no incentive to delay payments further.

*This example is true for Americans born in 1960 or later. Regardless, the specifics are not important test points.

The amount a retiree receives in benefits varies depending on how long they worked, their earnings during their working years, and when Social Security payments begin. In 2023, the average monthly payment was $1,827, which is $21,924 annually. This further proves that Social Security is only meant to serve as a baseline in retirement. For reference, the federal government considers a person to live in poverty if their annual income is $14,580 or lower in 2023.

Social Security can also benefit people other than the beneficiary. A surviving spouse can sometimes claim Social Security benefits after their partner dies. This is especially helpful for a surviving spouse who did not earn much (e.g., a homemaker). Additionally, children, parents, and ex-spouses can claim the benefits of a deceased person in certain circumstances.

Ex-spouses can even claim Social Security benefits of their former partner without a death occurring. For example, assume Partner 1 and Partner 2 were married for a long time. Partner 1 worked full-time, while Partner 2 remained unemployed. If the two get divorced, Partner 2 could potentially claim part of Partner 1’s Social Security benefits. The following circumstances must apply:

  • The marriage lasted at least 10 years
  • The ex-spouse claiming the benefit:
    • Remains unmarried
    • Is at least age 62

Even if an ex-spouse claims benefits, it does not affect the benefits received by the other ex-spouse. Continuing with our example above, let’s assume Partner 2 claims benefits from Partner 1. The claim will not affect Partner 1’s personal Social Security benefits.

Social Security benefits are taxable as ordinary income. Many Americans are subject to taxation on their benefits, although only a portion* is taxable. Those that report Social Security as their only retirement income are not generally subject to tax. Remember, these benefits are not significant, so a person living only off Social Security is barely above the poverty line. The lower a person’s income, the less likely they’re subject to taxes.

*Americans who pay taxes on Social Security benefits are only taxed on 50% or 85% of their benefits. Those with lower incomes pay taxes on 50%, while those with higher incomes pay 85%.

Medicare

Medicare is government-mandated healthcare coverage offered to disabled persons and senior citizens. Most Americans 65 or older* use this government program as their primary health insurance. Like private insurance, Medicare covers most healthcare costs, but the covered person is subject to deductibles, co-insurance, and out-of-pocket expenses.

*Older Americans who remain employed at organizations with 20 or more employees that offer private health insurance may delay enrolling in Medicare.

Medicare is divided into multiple parts. The part covering hospital services is free if the covered person worked for 40 quarters (10 years). Like Social Security, Medicare is funded* by payroll (employment) taxes. If a person does not meet the 10 year work qualification, they may pay monthly premiums to gain access. The other parts of the program, which cover non-hospital services (doctor’s visits, outpatient procedures) and prescription drugs, require monthly premiums to be paid.

*Besides payroll taxes, Medicare is funded by premiums paid by covered persons, taxation of Social Security benefits, and other federal revenues.

As with many government benefits, individuals with higher incomes are required to “chip in” more. Medicare recipients reporting annual incomes over certain thresholds are subject to income-related monthly adjustment amount, better known as IRMAA. This program requires individuals meeting these requirements (higher income) to pay higher insurance premiums.

Sidenote
Medicaid

Medicaid is another government-sponsored healthcare program, except it is provided to Americans reporting low incomes. Don’t confuse this program with Medicare!

Key points

Social Security

  • Provides retirement payments to:
    • Retirees (age 62 or older)
    • Disabled persons
    • Survivors of deceased workers
    • Dependents of Social Security beneficiaries
  • Qualify for payments with 40 quarters (10 years) of payroll
  • Payments taxable as ordinary income
    • Only a portion may be taxed

Important Social Security ages

  • 62 = first time SS can be claimed
  • 67 = “full retirement” benefits attained
  • 70 = last age where benefits increase due to delay

Social Security payments to ex-spouses

  • Marriage lasted at least 10 years
  • The ex-spouse claiming the benefit:
    • Remains unmarried
    • Is at least age 62

Medicare

  • Government-mandated healthcare program for:
    • Retirees (age 65 or older)
    • Disabled persons
  • Qualify for free hospital coverage with 40 quarters (10 years) of payroll
  • Other benefits subject to co-payments and deductibles

Income-related monthly adjustment amount (IRMAA)

  • Requires Medicare recipients with higher incomes to pay bigger premiums

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