Most of us will be depending on Social Security for a big chunk of our retirement income without really knowing much about the program. Here are 12 things you might want to know about Social Security -- some because they're simply interesting, and some because they might help you get a lot more money from Social Security.
- Social Security delivers close to 40% of the income of elderly Americans. That's right -- it's a big deal. Roughly 40 million people currently collect retirement benefits, and for millions, that money makes up 90% or more of their income.
- You only need to work for 10 years. In order to qualify for Social Security benefits based on your earnings, you need to collect 40 credits, where a credit is represented by your earning at least $1,260 within a year, with up to four credits earnable per year. Thus, most of us can qualify simply by working for a decade. Even if you only worked half of each year, 20 years of working could qualify you.
- You should aim to work for 35 years. Of course, if you only worked the equivalent of a decade, your ultimate Social Security benefits won't be too generous. The formula the Social Security Administration uses to calculate your benefits is based on your earnings in the 35 years in which you earned the most money (adjusted for inflation). So, it's rather valuable to work a full 35 years. If you only earned income in 29 years, the formula will incorporate six zeros, which will shrink your benefits.
- You can collect benefits even if you've never worked. Yes, you need 10 years of work to qualify for benefits based on your earnings -- but you may be able to qualify for benefits based on someone else's earnings -- your spouse, ex-spouse, or late spouse. Spouses can collect up to 50% of their spouse's benefits, while widows and widowers can choose to start receiving 100% of their late spouse's benefit instead of their own. Even divorcees can collect benefits based on their ex's earnings as long as they were married for 10 or more years and they haven't remarried. (It doesn't matter if the ex has remarried.)
- You can make your Social Security benefits 30% smaller. The size of the monthly checks you'll receive in retirement is not set in stone; you have some control over it. If you start collecting your benefits early -- you can start as early as age 62 -- they will be smaller. If your full retirement age is 67 and you start collecting at age 62, your benefits will be about 30% smaller than they would have been had you started at age 67.
- You can make your Social Security benefits 24% bigger. Just as you can shrink your benefits by starting them early, you can enlarge them by delaying when you start. For every year beyond your full retirement age that you delay starting to receive benefits, you'll increase their value by about 8% -- until age 70. So delaying from age 67 to 70 can beef up your checks by 24%.
- It's a wash! Those differences -- 30% smaller, 24% bigger -- may seem kind of huge, but get this: The Social Security Administration has explained that, "If you live to the average life expectancy for someone your age, you will receive about the same amount in lifetime benefits no matter whether you choose to start receiving benefits at age 62, full retirement age, age 70 or any age in between." In other words, for those who live average lifespans, it's pretty much a wash. After all, the checks you get if you start collecting early might be a lot smaller, but you'll get a lot more of them. And if you delay until age 70, you'll get bigger checks, but fewer of them. (Of course, if you stand a good chance of living extra long or little, then when you start collecting will make more of a difference.)
- The average monthly benefit is about $1,348 per month. So what, exactly, can you expect to receive from Social Security? Well, the average monthly benefit only translates to income of about $16,000 per year. That's not exactly a princely sum, and isn't likely to support a luxurious retirement. That's why it's important to save and invest for retirement -- in order to be able to generate additional income.
- The maximum monthly benefit was recently $2,639. If you've been an above-average earner for a long time, then your benefits will be bigger than average, too. Still, they won't be more than about $32,000 per year. (All benefit checks do receive cost-of-living adjustments over time.)
- Some people pay twice as much in Social Security taxes than you do. Here's a surprising detail: You may be aware that your paycheck is taxed at 6.2% for Social Security, but you may not realize that your employer is chipping in 6.2%, too, on your behalf. Those who are self-employed, though, pay both the employer and employee portions, forking over a whopping 12.4%.
- The Social Security program isn't on a course to run out of money soon. Between taxes taken in and interest earned on them, less benefit checks written, the Social Security trust funds have been running a surplus in every year since 1984. In 2020, the surpluses are likely to stop -- at which point the Social Security system can rely on incoming interest payments to make up the deficit -- for a while. According to several government estimates, Social Security funds are likely to become insolvent between 2033 and 2037 if no changes are made. If that happens, payment checks won't disappear, but they'll likely shrink by about 25%. There's a good chance changes will be made to put the program on sounder ground.
- Millionaires pay relatively little into Social Security. Here's an underappreciated fact about Social Security: Someone earning $118,500 and someone earning $3 million will pay the same amount of money in Social Security taxes. That's because the amount of our earnings taxed for Social Security is capped at $118,500 for 2016. Any earnings above that do not get taxed for Social Security. Among the many proposed fixes for the program is the idea of taxing all of each worker's income instead of just the first $118,500. It's been estimated that 71% could be wiped out by eliminating the earnings cap over a 10-year period.
Spend a little time learning more about Social Security and the many strategies that exist regarding how and when to collect your benefits, and you may receive more from the program than you expected.