Calculating Social Security Benefits
Q: Every year I get an “estimated benefits” statement from the Social Security Administration to see if they have correctly recorded my annual earnings and contributions. My 1993 statement shocked me. Even though my contributions to Social Security for the year were $150 higher than what I had paid in 1992, the amount I was told that I could expect to receive upon retirement was $50 per month less in 1993 than it was in 1992. How can this be?-- M.R .
*
A: There is a rather simple, straightforward explanation for the difference, although the Social Security Administration didn’t bother to openly share it with taxpayers. Fortunately, it doesn’t portend lower benefits upon retirement.
Here’s what happened: Sometime in the middle of 1993, the Social Security Administration decided to begin expressing taxpayers’ estimated retirement benefits in terms of current dollars. Until then, the agency had been adjusting the benefits by an estimated inflation rate--1% was the last figure used--to project the amount a taxpayer might actually receive.
What’s the difference? The current system is designed to give you the present value of your estimated future benefits--not the amount of money you will actually receive.
For example, if your 1993 statement said you were entitled to $800 in monthly benefits at age 65, it means that when you begin receiving benefits, your monthly check at that time should have the same buying power as $800 does today. The agency is no longer forecasting exactly what that figure will be, only that it should be roughly equivalent to $800 in 1993 dollars.
Why was the switch made? A couple of reasons. According to the agency, the new system should give taxpayers a better idea of the buying power of their future retirement benefits. For example, how well can you live on $800 a month right now? Will it cover your rent, food, utilities, transportation? Probably not, a conclusion that should lead you to begin--if you haven’t already--your own personal retirement savings program.
Another reason was to eliminate confusion caused by the inflation factor projections. In some cases, particularly those involving taxpayers many years away from retirement, the amount of inflation-adjusted future benefit estimates was obviously far higher than current Social Security benefit limits. It was also far in excess of estimates given to older taxpayers much closer to retirement, a situation that apparently caused tremendous confusion and consternation.
Can you imagine the reaction of a 55-year-old taxpayer--who has paid into the system for decades and is just 10 years from retirement--when he discovers that his projected benefits are apparently lower than a younger worker who has contributed substantially less into the system and is still decades away from retirement?
Of course, these apparent discrepancies are the result of applying the inflation factor over the remaining employment years of the two workers. But try telling that to thousands of irate taxpayers! It was easier just to change the estimating system.
By the way, taxpayers interested in finding out how much they have contributed to Social Security and what they can expect to receive upon retirement should call (800) 772-1213 and ask for form SSA-7004, “Personal Earnings and Benefit Statement.” When you get the form, complete it and mail it back to the enclosed address. The Social Security Administration will then send you a listing of your employment earnings and expected retirement benefits. If you think there is an error in the information, call the toll-free phone number provided on the form.
Taxpayers Responsible for Their Savings Bonds
*
Q: I am buying U.S. Savings Bonds on a regular basis as part of my retirement planning effort. However, I am concerned about the safety of my certificates in the event of fire, loss or theft. Is there any way to have the U.S. Treasury hold my certificates just as brokerage houses hold stocks for their clients?-- H.M .
*
A Taxpayers are responsible for holding their own Savings Bonds. However, the Treasury Department will replace lost, stolen or damaged bonds free of charge.
Clearly, you would be wise to keep your bonds in the safest possible location, such as a safe deposit box at your local bank. You would also be wise to keep a list of your bond holdings, including their serial numbers, issue dates, denominations and Social Security number of the bondholder, in another equally safe spot. (You should do the same thing with other “paper assets,” such as stock certificates, that you choose to hold yourself.)
If, however, your Savings Bonds are lost or destroyed, you can get them replaced fairly easily. Simply ask your local bank for form PDF 1048, complete it and mail it to your local Federal Reserve Bank. Taxpayers in the central and western United States can mail the forms to the Federal Reserve Bank of Kansas City, P.O. Box 419440, Kansas City, MO 64141-6440.
IRA Contribution Deadline Is April 15
Q: Have I missed the deadline for making my 1993 contribution to my tax-deferred retirement account? I am self employed and have an SEP-IRA. *
R.F .
*
A The deadline for making contributions to individual retirement accounts is April 15 of the year following that for which the contributions are being made. Contributions to Keogh and SEP-IRA accounts can be made as late as Oct. 15 of the year following that for which the contributions are intended, if the taxpayer wins an income tax filing extension.
However, Keogh accounts must be established before the end of the taxable year in order to be eligible to accept a contribution for that year. SEP-IRA accounts may be established at any time up until the taxpayer’s income tax filing deadline.
