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12 Facts About Social Security You Didn't Know

By Matthew Frankel, CFP® - Updated Oct 10, 2017 at 4:17PM

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Fact No. 2: Social Security will pay out nearly $1 trillion in benefits this year.

Social Security is the major source of income for many elderly Americans, as well as for millions of dependents, disabled workers, and survivors. Despite the enormity of the program, there is a lot about Social Security that isn't well understood by many Americans, especially by those who aren't yet collecting benefits. With that in mind, here are 12 facts about the Social Security program that all American workers and retirees should be aware of.

1. Social Security is more than just retirement benefits

When many Americans think of Social Security, they only think of the retirement benefits that are paid to most senior citizens. However, there's a lot more to Social Security, and retirement benefits account for less than three-fourths of benefits paid. In addition to retirement benefits, Social Security also pays disability benefits, benefits to dependents of retired or disabled workers, and benefits to survivors of deceased workers.

Social Security card in a pile of money.

Image source: Getty Images.

2. Nearly $1 trillion in Social Security benefits will be paid out in 2017

According to the Social Security Administration (SSA), nearly 62 million Americans will receive Social Security benefits in 2017, totaling $955 billion. Forty-two million of those Americans will be retired workers, and their average monthly benefit is $1,369.

3. You only pay half of your Social Security tax

You might be surprised to learn that the Social Security payroll tax rate is a seemingly high 12.4% on the first $127,200 of wage income. However, employees only pay half of this amount. The Social Security payroll tax that comes out of your paycheck only represents a 6.2% tax rate.

4. Social Security isn't broke -- not even close

Don't believe headlines that tell you that Social Security is broke, insolvent, or "was raided by the government." None of these is true. In fact, Social Security ended 2016 with $2.85 trillion in reserves and ran a surplus for the year. What's more, the reserves are expected to keep growing for the next few years. It's true that the program is expected to start running a deficit in 2022 and to run out of reserves in 2034. The point, however, is that the situation isn't nearly as dire as many would have you believe.

5. Billionaires receive Social Security benefits, too

Social Security is currently not means-tested, which means that Americans who have paid into the system enough to qualify for benefits can get them regardless of whether they need them or not. Even billionaires can receive Social Security retirement benefits.

6. Social Security is designed to replace 40% of the average American worker's income

Social Security benefits are intended to replace 40% of the average worker's preretirement income. This percentage is generally higher for lower-income workers, and is lower for higher-income workers. Experts generally suggest that you'll need about 80% of your preretirement income to maintain your standard of living after retirement, so this means that roughly half of the average American's retirement income will need to come from other sources.

7. Most seniors rely on Social Security for more than half of their income

Despite the 40% intention, more than six-in-ten Social Security beneficiaries rely on their benefits for more than half of their income. One-third of beneficiaries rely on Social Security for substantially all of their income. This means that many Americans don't have enough in savings to produce enough retirement income to sustain their lifestyles after retiring.

8. Social Security is weighted in favor of lower-income workers

When computing your Social Security benefit, your 35 highest-earning years (up to each year's taxable maximum) are adjusted for inflation and averaged together. What many people don't realize is that this average is then applied to a formula that disproportionally benefits low-income workers. As of 2017, the Social Security formula is:

  • 90% of the first $885 in average monthly earnings
  • 32% of the amount between $885 and $5,336
  • 15% of the amount above $5,336

9. Social Security is paid after it's due

Social Security benefits are paid in the month after they are due. In other words, your July Social Security benefit will be paid in August. This can be important when deciding when you want to start your Social Security benefits. In other words, if you want to receive your first benefit check in December 2017, you should tell the SSA to start your benefits in November.

10. If you didn't work but your spouse did, you can still qualify for benefits

There's a Social Security provision known as spousal benefits, which is intended to provide retirement income to spouses who either didn't work or earned much less than their spouse. Simply put, spousal benefits can give individuals who qualify a retirement benefit of as much as one-half of the higher-earning spouse's, even if their own record doesn't justify such a benefit.

11. If you change your mind after you apply, you may be able to get a do-over

If you claim Social Security but later decide that you started benefits too early, there may be a way to get a do-over. First, if you applied within the past year, you can simply cancel your application, repay any benefits you've received, and it will be like you never applied at all. Or if you're past full retirement age, you have the ability to suspend your benefits and allow your future monthly checks to grow.

12. You may have to pay taxes on your benefits

Depending on how much other retirement income you have, up to 85% of your Social Security benefits can be considered taxable income. You can read about the formula the IRS uses there, but the general idea is that if Social Security is your only source of retirement income, you probably won't be taxed on your benefits. However, if you have significant income from a pension, 401(k), or other sources, you could end up paying federal tax on your Social Security. In addition, 13 states tax Social Security benefits in addition to any federal tax you may have to pay.

The more you know, the better equipped you'll be to make smart decisions

The bottom line is that since you're most likely going to rely on Social Security for a significant portion of your income in retirement, it's a good idea to know the basics of how the program works. This will not only let you know what to expect, but can help you make smart financial decisions for you and your family when it comes to your Social Security planning.

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