Discover the intricate history and important changes in Social Security on this insightful episode of Retirement Unpacked. Host Al Smith uncovers the fascinating backgrounds of Social Security’s early recipients and provides a comprehensive look at its legislative journey. From the Old Age Reserve Act to today’s prevailing policies, gain a better understanding of how these changes impact your retirement planning. Al also sheds light on the Social Security Fairness Act and the implications for those who’ve served in dual capacities. If you’ve been wondering about how your benefits may change or how to maximize what you’ve paid into the
Welcome to Retirement Unpacked with Al Smith, owner of Golden Eagle Financial. You want a retirement plan that alleviates your fears about the future so you know your money will last. As a chartered financial consultant, Al Smith will help you find a balance between the risk and reward of the market and the safety of your retirement income. And now, here’s your host, Al Smith.
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Welcome to another program of Retirement Unpacked. I want to thank you for tuning in. I’m sure there’s other things you could be doing, and I hope to give you some good, useful information today, some of which you may not have known. I haven’t given a radio show lately about Social Security, so I thought it would be a good, appropriate time. There have been a few changes for this coming year about Social Security, but before I dive into that, I want to let everyone know about an upcoming event. January 10th at Arapahoe Community College, there will be… a program that I’m putting on with some help of my staff called Essential Tax Strategies for Retirement. It’s at Arapahoe Community College, January 10th, a Saturday from 10 till 1130. And we have quite a few signups. It’s filling up fast, but there is room. Call my office if you would like to attend, 303-744-1128. Or if you’re driving, contact KLV. They’ll put me in touch with you to be sure you can get a spot there. It’s going to be really good information. Social Security. Before I dive into some of the changes and the current benefits, I want to do a little bit of history that some of which I was not even aware of myself. But that’s what research is for. It was passed into law August 14, 1935. It was described as the Old Age Reserve Act. It was the Old Age Pension. And interestingly, the very first recipient of Social Security, his name was Ernest Ackerman. He had five cents withheld from his pay, and he retired August 15, 1935, or at least I can’t say for sure if it was August 15, but he retired one day later than when Social Security went into effect. And something I did not know when Social Security was initially passed into law, the way it was administered, it was administered through grants to the states for various old age assistance, so to speak. And the federal government then allocated a certain amount of resources to the states, and then they determined benefits. based on the amount of money that was collected and the rules and so forth. And a little bit of interesting things about the language back then. In the actual act, they didn’t talk about a percentage of earnings. The language in the act was percentum. So I’m assuming in 1935 they didn’t use the word percent. They used percentum. But in determining benefits, one half of 1% of the first $3,000 was payable to the recipient in a monthly benefit. Now, that is a benefit of $15 per month. Now, benefits above that are reduced radically above $3,000 or that $15 a month. the benefit was 0.012% of the amount between $3,000 and $45,000. So in other words, the first $3,000 of earnings, someone could expect to get $15 a month, but if the earnings went all the way to $45,000, then their benefit would be very disproportionate. It would be approximately $50 a month, and the benefits of any amount above that would be even half of that benefit. So right from its very beginning, Social Security, besides being an old-age program, benefit on old age pension, it was also a mechanism for the redistribution of income. And the taxes to the workers in 1937, 38, and 39 were 1% of earnings. From 1940, 1941, and 1942, it was still 1% of earnings. 1943, 44 and 45, it was 2% of earnings. By 1948, that increased to 3% of earnings. Now this is just for the employee. And the employer for them, they described it as an excise tax. And it was an equal amount for employers. And one of the interesting stories I always like to repeat is the story of a lady named Ida May Fuller. I talk about her because I was unaware of Ernest Ackerman, who put in five cents and retired one day later. He was the first recipient. But Ida May Fuller is perhaps the most famous recipient. She paid in for four years. She lived in Ludlow, Vermont. She worked for a law firm. I think she was a legal secretary. She paid in $24.75 over four years. Her first Social Security check was $22.54. Ida Mae Fuller lived to be 100, and she died in 1975. she ultimately received $22,888 in benefits. And I think it’s easy for us to look back on that and not be surprised that Social Security is not in the very best financial shape when we look at some of those numbers. But Social Security has undergone a whole lot of changes since In 1936, the railroad benefits, and if any of you can remember back when you used to get Social Security statements in the mail, you’d see all of your total earnings. You’d see your benefit. You’d see basically the same thing that you now would see if you go online. But they used to mail them to everyone before everyone had smartphones and computers. And railroad benefits, I’ve been in people’s homes who had railroad retirement. And it is nearly a clone of Social Security since 1946. Those benefits were combined. Some other changes in 1950, farm and domestic workers were included in Social Security and people who worked in nonprofits, there’s an option to participate in Social Security. By 1954, farm workers who were self-employed were covered under Social Security. In 1956, they added the military to benefiting from Social Security. And firefighters and police, that varied by state. In other words, if a particular state chose to provide benefits for police and fire in the form of pension or whatever retirement benefits that were selected, they could opt out of Social Security. Right now, Some firefighters, police, and Colorado state employees and governmental employees, municipal employees, some of those participate in Social Security and some don’t. In 1965, MDs positions were added to Social Security and also TIP income was added. In 1967, ministers could participate in Social Security. Way back in 1950, when nonprofits were added, ministers were not included. And 17 years later, they could participate if they chose to. 1983, There was a very big change. Prior to 1983, federal employees were covered under what’s called CSRS, which is Civil Service Retirement. They did not participate in Social Security up until 1983. After 1983, federal employees were no longer covered under CSRS. They’re covered under what’s called FERS, which is a federal retirement system. And they also participate in Social Security. And in 1990, they permitted state and local governments to participate in Social Security if those state and local governments were not already covered. Now, Among all of these other major changes, some big changes occurred, and these aren’t every single change in Social Security because the law is massive, but these are the ones that are most significant. During the Reagan administration, the Congress decided that they would tax Social Security in 1983. In 1993, they decided… They didn’t just want to tax Social Security. They wanted to create a two tier of the taxation of Social Security. And we’ll dive more into the Social Security benefits, some of the changes, some of the history after the break.
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SPEAKER 03 :
Welcome back to Retirement Unpacked. We were talking about Social Security. A lot of the changes that have taken place since 1935, when it was passed into law, not the least of which is in 1983, as I mentioned, when they first chose to make Social Security benefits taxable. And then in 1993, when they created a two-tiered system. So basically, if someone’s income is small, they may not pay any tax on Social Security. If their income is higher, they may pay tax on part of their Social Security. And with the recent change in 2026, I haven’t seen that, but I know it was passed into law with the recent Big Beautiful Bill or whatever that was called. Social Security may be taxed, but what took place is there was an enormous increase in the standard deduction for retired couples. So basically, that means their Social Security might be taxed, but only if their income is fairly significant. So that is good news, clearly good news for retired people, no question about that. A few of the other changes, in 1972, they added COLA, which is the cost of living. And it was based not on, initially, it was not based on increased prices and so forth. It was based on wages. But in 1973, it was made the coefficient for cost of living adjustment was based on the increase in prices. And the way they figure that is like a basket of goods and so forth. And they come up with a particular number. It was 2.8 was the increase this year. So this year, people who were drawing Social Security could anticipate an increase of 2.8%. Some other changes that have taken place a little bit more recently, there used to be a provision in the Social Security guidelines or rules or law called the Windfall Elimination Provision. And essentially, What that did is someone participated in Social Security, but they also worked for another entity, and they were not participating in Social Security during that time. The best example, in Colorado, for example, we have PARA, Public Employees Retirement Association, and essentially teachers and state workers and so forth, are not participating in Social Security. They have a para, which includes a pension and also, I believe, a 401k. But the point being, if someone worked in the private sector and had considerable Social Security benefits, and then they became a teacher or a firefighter or something, prior to under this windfall elimination provision, they would lose part of their Social Security benefits based on a certain scale. Well, this past year, I believe it was January, don’t hold me to that, but there was the Social Security Fairness Act passed. And essentially, anyone who falls into that circumstance where they work both with a pension where they didn’t participate in Social Security, as well as participating in Social Security, their reduction in their Social Security will be probably already been changed. But that is a tremendously favorable provision for people who worked both for a governmental entity that participated in in a private pension, but not Social Security, as well as those who participated in Social Security, both. Because for many years, it was described by a lot of people based on how incredibly unfair it was. And I’m truly glad to see that pass. A whole lot of people who are teachers, firefighters, state employees, engineers, people who work for the snowplows and people who work for the state and the counties and things like that that participate in a retirement plan other than Social Security but have Social Security benefits, they can look forward to receiving much better benefits. Now, people sometimes ask, what are some of the changes? How do I qualify for benefits? Well, based on those original rules in 1935, that’s obviously changed considerably. Right now, what’s required is that you have what’s called 40 work credits. You get one work credit for each change. $1,810 in earnings. And right now, to what they call full retirement age, which is when you receive your full Social Security benefits for people age 65 or younger, full retirement age is age 67 for people who are 65 years and older, it’s a sliding scale. It could be slightly earlier than age 67. But essentially, people can retire earlier than that. But there’s two things. Obviously, their benefits are reduced as much as between 25% and 30%. If someone were to retire, let’s say, at age 62, And in 2025, if that person earns more than $23,400, then he or she would lose $1 of Social Security for each $2 they earned above that threshold, which in 2025 is $23,400. Next year, that threshold will go to $24,800. But the point being, if someone is working and they have earned income and they decide to collect Social Security earlier, then they will have to really keep close track of their income or be fully aware they may lose income. Now, something you may not be aware of, what if you reach full retirement age during the middle of the year? Well, then… That same limit holds true, but the threshold is 62,160. So the threshold is substantially higher. And that is very, very good to know. Some other changes, well, I already told you about the 2.8% COLA. So anyone collecting, their benefits will increase by 2.8%. the threshold after which there’s no Social Security deductions has increased from 176,000 to 184,000. And those of you who, you know, work for a company and get a pay stub or you go online and see your pay stub, you see that FICA, Well, that’s what the benefit deduction is for Social Security and for Medicare. And you’re probably wondering, well, what does that stand for? Well, it stands for Federal Insurance Contribution Act, and that’s been around for a very long time. And right now people are wondering, are there a lot of people working right now? Well, there were some really interesting trends in the past. For example, in 1950, 40% of people over age 65 were still working. By 1980, only 20% of people over age 65 were working. By 1990, only 11% were working. But that’s still 35 years ago. Right at the present time, 23% of men over age 65 are still employed, and 16% of women over age 65 are still employed. And that’s kind of good to know. And I know there is also a lot of talk about the Social Security and Medicare being on a very weak financial footing. And people ask me, well, younger people especially, said, well, I don’t know if that’s going to be around when I’m here. And mathematically, it really doesn’t look tremendously promising. However, in order to make any changes in Social Security, it would have to be done through an act of Congress. and I’m confident that Congress, one way or another, will shore up Social Security, because people in the House of Representatives have to run for office every two years, and I can’t imagine anyone running for office with the slogan, vote for me, I will lower Social Security benefits to make it financially sound. I don’t think that person has a chance of being elected. So I think they will figure out some way to shore up Social Security so that it will be there for younger people. And I don’t think that will be a reduction in benefits. I think they will have to do something slightly different. Again, I wanted to remind everyone who’s listening of the event I have coming up January 10th at Arapahoe Community College. That’s a Saturday. It’s a week from this coming Saturday, Essential Tax Strategies in Retirement. It’s from 10 till 1130. We have a fair number already signed up, but there is room. We have a good-sized classroom at Arapahoe Community College, and there will be some really good information there. I encourage you to think about attending. Bouncing back to Social Security, it’s a really important component of many people’s retirement. And the fact that Social Security may be taxed is an important consideration. That’s one of the things we’re going to be talking about on the event January 10th. But I think if you have not created a plan for your own retirement, if you’ve not gone into the Social Security website to take a look at your future benefits, and to make certain that they have all of your earnings on there, I strongly suggest that you do that, because occasionally they do make errors, and there may be earnings that you weren’t given credit for. So I strongly encourage you to go onto the Social Security website, take a look at your own benefits, And if that’s something that you have some concerns about, how that’s going to fit together with your own retirement plans, give my office a call and you can come in and we’ll have a conversation. Take a look at how Social Security is going to work together with what you’ve been saving and accumulating for retirement. Thank you for listening. God bless you. And hopefully you’ll be here next week.
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