Social Security is, for millions of Americans, a vital financial lifeline. Data from the Social Security Administration shows that a majority of seniors will lean on this program to generate at least half of their monthly income during their golden years.
But in spite of its importance, there's a lot the American public doesn't understand about Social Security. And as the old saying goes (which is true, by the way), what you don't know can cost you. In this instance, what you don't know about Social Security can cost you a lot in retirement income.
With that being said, let's look at 15 of the top questions about Social Security and answer them so there'll be far less confusion surrounding America's most important social program.
1. How do I qualify to receive Social Security benefits?
While it may be surprising to some, Social Security isn't an entitlement program. In other words, you're not simply given the right to collect Social Security benefits because you're an American citizen. To qualify for retired worker benefits, you'll need to earn 40 lifetime work credits, of which a maximum of four can be earned annually. In 2018, each work credit equates to $1,320 in earned income. That means if you earn $5,280 in 2018, you'll have maxed out the number of credits you can collect for the year. Do this for 10 years, and you'll have qualified to receive retired worker benefits when you retire.
But there are other ways of qualifying, too. Though better than two in three Social Security recipients are retired workers, the disabled and survivors of deceased workers are also covered by Social Security.
2. When can I begin receiving benefits?
Traditionally, Social Security benefits can begin at age 62, or any age thereafter. Should you want to receive retired worker benefits at age 62, you can apply with the Social Security Administration up to three months in advance of reaching your 62nd birthday.
There are, however, a few lesser common instances where benefits can begin before age 62. For instance, widows and widowers are eligible to begin taking Social Security survivor benefits as early as age 60. If these widows or widowers are disabled, they can actually begin receiving benefits as early as age 50. In addition, disabled workers can receive benefits at any age, and so can dependent children, as long as they qualify.
3. How much do benefits grow annually if I wait?
Though you can begin receiving Social Security benefits at age 62, there's a pretty big dangling carrot if you wait. Each year you hold off on enrolling for Social Security benefits, your eventual payout will have grown by approximately 8%. This 8% annual accrual begins once you turn 62, and it ends once you turn 70.
It's worth pointing out that this increase in benefits for waiting occurs with each passing month. Holding off just three extra months, for example, can increase your monthly payout by about 2%. Therefore, if you want to beef up what you'll be paid from Social Security, all you have to do is be patient.
4. What's my full retirement age, and why is it important?
Your full retirement age is determined by your birth year, and it's the age at which the Social Security Administration deems you eligible to receive 100% of your monthly benefit. You can use this handy table to find your full retirement age, which for all Americans falls between age 65 and age 67.
Knowing your full retirement age is important, because it's the inflection point that determines whether you'll receive a permanent reduction in benefits, or a permanent raise. In its simplest form, if you file for benefits at any point before reaching your full retirement age, your monthly benefit can be reduced by up to 25% to 30%. Conversely, waiting until after your full retirement age and up until age 70 could lead to a 24% to 32% increase over what you'd have been paid at full retirement age.
5. How are Social Security benefits calculated?
Your monthly Social Security benefit is determined by taking four factors into account:
- Your work history.
- Your earnings history.
- Your claiming age.
- Your full retirement age.
You have no control over when you're born, so your full retirement age is already determined. However, the Social Security Administration will take into account your 35 highest-earning inflation-adjusted years when calculating your monthly payment. You also control when you file for benefits, which can either lead to a permanent reduction, or raise, in what you'll receive each month. Remember, benefits accrue at approximately 8% annually for each year you wait, until age 70.
6. What percentage of working wages does Social Security replace?
According to recommendations from the Social Security Administration, benefits are only designed to replace about 40% of the average workers' wages. This percentage could be a bit higher for workers with a lower lifetime income, and a bit lower for more well-to-do workers.
In reality, we've seen retirees lean far more heavily than recommended on Social Security. Data shows that 62% rely on Social Security for at least half of their monthly income, and 34% count on their monthly check for 90% or more of their income.
7. What's the most I can be paid each month?
Chances are good that Social Security isn't going to make you rich. In 2018, the maximum monthly payout at full retirement age is $2,788. That works out to $33,456 a year, and you'd need to have earned a lot over a 35-year period to qualify for this figure. The Social Security Administration usually increases the maximum monthly payout annually in step with inflation.
However, this $2,788 figure is the advertised maximum at full retirement age. Should you qualify for this maximum and wait until age 70 to lay claim to your benefits, you could see up to a 32% increase in your monthly payout.
8. What's the best age to claim Social Security?
This is probably the hardest question to answer, because there's no concrete answer that applies to everyone. Your claiming decision will be based on your financial situation, and whether you have a spouse and/or children to care for.
But this breakdown may help clear things up a bit. Generally speaking, people in poor health, those who aren't reliant on Social Security income, and lower-earning spouses tend to do well by claiming benefits early. Meanwhile, folks in excellent health, higher-earning spouses, and people with little to nothing saved for retirement are often best served waiting until their full retirement age or later to sign up.
9. Can a Social Security claim be undone?
Once of the biggest Social Security worries is that you'll claim too early, or you'll regret having claimed early. There is, however, good news. Social Security has a do-over clause known as SSA Form 521, officially the "Request for Withdrawal of Application," that allows beneficiaries the opportunity to undo their claim and grow their benefits at 8% annually once more.
What are the catches, you ask? First, you only have 12 months from the time you begin receiving benefits to file SSA Form 521. Second, you'll also need to pay back every cent you've received from the Social Security Administration since signing up. This mulligan can be a great tool for those who recently landed a well-paying job, but had previously struggled to generate income.
10. Will my Social Security benefit increase with inflation?
Yes, your Social Security benefits are tied to an inflationary tether, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), but it isn't a perfect measure of inflation. In 33 of the past 35 years, Social Security's cost-of-living adjustment has been smaller than the medical care inflation rate that seniors have faced. Since 2000, The Senior Citizens League finds that the purchasing power of benefits has declined by 30%. In other words, your annual raise may not keep up with your actual expenditures.
Furthermore, there's no guarantee you'll even receive a raise from one year to the next. If the CPI-W were to show a decline in the prices of goods and services on a year-over-year basis, Social Security benefits remain static from one year to the next (thankfully, they don't fall). Beneficiaries have received no cost-of-living adjustment in three of the past eight years because of deflation.
11. Can Social Security benefits be taxed?
I'm sorry to say, but yes, your Social Security benefits can and probably will be taxed. In 1983, Congress passed numerous amendments, including one involving the taxation of benefits. For individuals earning more than $25,000 annually, or joint-filing couples earning more than $32,000 annually, up to 50% of their benefits could be exposed to federal income tax. A new tier was added under the Clinton administration in 1993 that allows up to 85% of benefits to be taxed for individuals with more than $34,000 in annual earnings and couples with more than $44,000.
In addition to federal income tax, 13 states also tax Social Security benefits to some varied degree. Four of those states -- Minnesota, North Dakota, Vermont, and West Virginia -- follow the same tax schedule as the federal government, while states such as Missouri and Rhode Island have sufficiently high annual income exemptions that few Social Security beneficiaries are exposed to tax on their benefits.
12. Can I work and collect Social Security?
Nothing is stopping you from working while collecting Social Security benefits; but that doesn't necessarily mean you'll be able to double-dip with two income streams (wages and benefits). Social Security has something called the "earnings test" that allows the Social Security Administration to withhold some, or all, of your benefits based on your annual earnings if you're enrolled before your full retirement age. You'll note the added emphasis on that last part, because once you reach full retirement age, the Social Security Administration won't withhold a dime.
If you're working, and you won't reach your full retirement age in 2018, you can earn up to $17,040 without having any benefits withheld. Beyond this point, the Social Security Administration will withhold $1 in benefits for each $2 in earned income above the $17,040 annual limit. If you're working and will reach your full retirement age in 2018, $1 in benefits can be withheld for every $3 in earned income above $45,360, until you reach your full retirement age.
Also, you won't lose these withheld benefits. They're given back to you in the form of a higher monthly payment once you reach full retirement age.
13. How do divorced spousal benefits work?
One of the many quirks of Social Security is that a divorced spouse may be able to claim benefits based on the earnings history of the former spouse, even if he or she has remarried. A divorced spouse will need to meet the following criteria to collect from the former spouse:
- The marriage lasted at least 10 years.
- You are unmarried.
- You're age 62 or older.
- Your ex-spouse is entitled to Social Security retirement or disability benefits.
- The benefit you're entitled to receive based on your own work history is less than the benefit you'd receive based on your ex-spouse's work history.
Best of all, a claim by an ex-spouse won't adversely affect the retirement or disability benefits paid to the primary worker. In other words, everyone can win.
14. How is Social Security funded?
In 2016, Social Security collected $957.5 billion in revenue. That revenue comes from three sources:
- Payroll tax: Social Security levies a 12.4% payroll tax on earned income between $0.01 and $128,700, as of 2018. Any income above this threshold is free and clear of the payroll tax. It's also worth pointing out that most workers only pay half of the listed payroll tax (6.2%), with their employer covering the other half. In 2016, payroll tax generated 87.3% of the $957.5 billion collected.
- Interest income: Social Security currently has more than $2.9 trillion in excess cash that it invests in special issue bonds and certificates of indebtedness. The interest earned on its asset reserves provided more than $88 billion for the program last year.
- Taxation of benefits: Finally, taxing Social Security benefits provided the government with nearly $33 billion in 2016, or a little more than 3% of what the program collected.
15. Is Social Security going bankrupt?
We can be thankful that Social Security is not going bankrupt. Social Security's insolvency is among the program's most pervasive myths, but its payroll tax ensures the program will always have money streaming in. As long as Americans keep working, Social Security will collect payroll tax revenue that can be disbursed to eligible beneficiaries.
However, that doesn't mean the current payout schedule is sustainable. The Social Security Board of Trustees in 2017 estimated that an across-the-board cut of 23% to benefits may be needed to sustain payouts through the year 2091. While Social Security will be there for you when you retire, it's possible that it could look very different from how it does now.