For millions of current and future retirees, Social Security will be a vital source of income. According to the Social Security Administration (SSA), more than three out of five current retired workers counts on Social Security to provide at least half of their monthly income. A Gallup poll of pre-retirees found an almost identical expectation from those set to claim benefits in the years to come.
Yet in spite of its importance and their expected reliance, Americans really don't have a very good understanding of Social Security. And, as you might have rightly surmised, what you don't understand about Social Security can come back to cost you thousands, or perhaps even tens of thousands of dollars, over your lifetime.
Social Security's "secrets," revealed
Some people might refer to these Social Security unknowns as secrets, but I'd only do so with quotations around the word. There are no true Social Security "secrets." The information is out there, but seniors and workers need to have the motivation to seek out the answers.
With this in mind, let's look at what could arguably be described as five of Social Security's greatest "secrets," even if they are in plain view.
1. Your benefits increase each month you wait
Perhaps one of the biggest misconceptions about Social Security is what you'll be paid based on when you choose to file for benefits. Most consumers understand the concept that waiting longer yields a bigger monthly check, but most don't have a good idea of how those benefits grow.
Seniors can begin receiving Social Security benefits as early as age 62 and at any point thereafter. However, the SSA offers a pretty juicy incentive to encourage you to wait to file a claim: for every year you hold off on enrolling for benefits, your eventual payout grows by approximately 8%. This continues up until age 70, meaning a person claiming at age 70 with an identical work length and earnings history as a 62 year-old could be paid up to 76% more per month than the earliest filers.
The "secret" that many people overlook is your benefit grows for each month that you wait to file. Even holding out an extra three-to-six months to sign up for benefits could boost your payout by 2% to 4%.
2. Your benefits are taxable
Another well-kept Social Security "secret" is that your benefits are indeed taxable at the federal, and maybe even state, level.
If you earn more than $25,000 annually as an individual, or $32,000 as a married couple filing jointly, then at least half of your Social Security benefits could be subject to ordinary federal income tax. When the taxation of benefits first came into being some 34 years ago, only around 10% of households were affected. As of 2015, according to The Senior Citizens League, 56% of seniors will owe at least some federal tax on their benefits. The reason? The $25,000 and $32,000 minimum earning thresholds haven't been adjusted for inflation since 1983.
In addition to federal taxation, 13 states also tax Social Security benefits to some varying degree. Some states, like Missouri, have exceptionally high income exemptions that allow most seniors a pass from paying state tax on their benefits. However, four states (Minnesota, North Dakota, Vermont, and West Virginia) mirror the tax schedule of the federal government without exemptions.
3. You may be able to claim benefits from an ex-spouse's work history
An interesting "secret" that might elude a number of former couples is that your ex-spouse may be able to claim Social Security benefits based on your work history, and vice versa. If you were married for at least 10 years, are at least age 62, and your ex-spouse is currently unmarried, he or she may be able receive up to half of what your benefit would be at full retirement age (the age where the SSA deems you eligible to receive 100% of your monthly payout).
Now, there is a catch. Your ex-spouse will only receive a benefit based on your earnings history if it's higher than the benefit he or she would receive based on their own work and earnings history.
Also, it's worth pointing out that an ex-spouse's claim has absolutely no bearing on what you'd be paid monthly. In other words, if an ex-spouse is being paid half of what you receive monthly from the SSA, it won't lower your payout by one cent. It can be a win-win for both parties.
4. You may be able to claim benefits without ever having worked
One of the more interesting quirks of Social Security, and certainly something that could be considered a "secret," is the idea that you may be able can collect Social Security benefits despite never having worked and paid any payroll tax in your life.
Normally, an individual needs to have collected 40 lifetime work credits in order to be eligible for Social Security benefits. You can earn up to four credits per year, and in 2017 each "credit" equates to $1,300 in earned income. In short, it's pretty easy to qualify for benefits over the course of 10 years.
But even if you've never worked, Social Security allows a person to qualify for benefits based on the earnings history of their spouse. The same goes for survivor benefits. If a spouse passes away, the surviving spouse can claim benefits based on the deceased spouse's earnings history.
5. Social Security isn't going bankrupt
A final point that deserves some attention is the belief that Social Security is going bankrupt and that it won't be around for future generations of retirees. Here's the "secret": while not in the best of shape, Social Security will be paying out benefits to many future generations of seniors.
The secret to its success is in the way revenue is generated for the program. In 2015, based on data from the SSA, 86.4% of the $920.2 billion in revenue for Social Security came from payroll taxes. Social Security's portion of FICA taxes (as they're also known) is 12.4% of earned income between $0.01 and $127,200 (as of 2017). This 12.4% tax on earned income is often split down the middle between employers and employees, meaning workers tend to owe 6.2% of their wages toward Social Security. As long as people keep working, payroll taxes will continue to be collected. This means that even if the Trustees are correct and Social Security exhausts its $2.8 trillion in excess cash by 2034, revenue will keep coming into the program. That's why it'll never go bankrupt.
Keep in mind it doesn't necessarily mean today's payouts are sustainable past 2034. Benefit cuts may very well be needed to sustain the program for future generations. But, as long as Americans are working, Social Security has revenue it can disburse to its beneficiaries.
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