Last year represented a landmark for the Social Security Administration. It was the first time since the program was signed into law in 1935 that spending topped $1 trillion.
Fiscal 2017 data from the U.S. Treasury showed outlays of $791.1 billion for retired workers and survivors, $143 billion for those with disabilities, and $58.7 billion for the Social Security Income program. There were additional outlays for Railroad Retirement accounts and general administrative expenses to run the Social Security Administration. All told, it was a record-breaking year of expenses.
What's more, America's most important social program now sends a payout to nearly 67 million people a month. This includes 42.4 million retired workers who, on average, bring home a $1,404 check each month. Though that may not sound like a lot, it represents at least half of the monthly income for 62% of retired workers receiving benefits.
Despite being a trillion-dollar program, Social Security is all about you
When taken as a whole, Social Security is simply a mammoth program. It's the financial rock for tens of millions of Americans today, and it'll likely help keep tens of millions more out of poverty in the decades ahead.
But at the heart of Social Security is the individual and choice. That's right, folks: Social Security is really all about you.
It's all about your work and earnings history
Sure, Social Security may be viewed as a massive government-backed program, but your own actions will determine your payout. To begin with, the Social Security Administration (SSA) determines your eventual payout by taking into account your 35 highest-earning years, adjusted for inflation. For each year less of 35 worked, the SSA will average in a $0. In other words, the more you earn and the more years you work, the better chance you have of receiving a larger monthly payout when you retire.
But there's more to it than simply "work longer and earn more." Your work and earning history may also allow you to be covered in case of a long-term disability or by survivors' insurance in the event of an untimely death.
Despite the ongoing myth, Social Security isn't a right. It's a privilege earned through work, income, and time. To qualify for retirement benefits, a worker needs to have earned 40 lifetime work credits, of which no more than four can be earned annually. In 2018, each credit equates to $1,320 in earnings. Thus, $5,280 in earned income this year will max out your work credits earned for the year.
However, the disabled or deceased workers may not have had the time or ability to earn 40 lifetime credits. A staggered credits scale exists for younger people (i.e., those under age 62) that, as of today, effectively covers 90% of the workforce aged 21 to 64 in the event of a long-term disability, and 96% of the spouses and/or children of workers aged 20 to 49 by survivors' insurance.
It's all about your birth year
Your birth year also determines your full retirement age in the eyes of the SSA.
Your full retirement age is the age at which the SSA determines you eligible to receive 100% of your full retirement benefit. Essentially, if you claim your payout at any point before reaching your full retirement benefit, you'd be accepting a reduction in your monthly payout of up to 25% to 30%. At the other end of the spectrum, waiting until after your full retirement age to sign up for a monthly benefit could boost your payout by up to 24% to 32%.
Folks born between 1943 and 1954 all have the same full retirement age of 66 years. But beginning in 2017, for those born in 1955 and turning 62 last year (62 being the first age of eligibility to take benefits), the full retirement age began climbing by two months. It'll climb by two months a year through 2022, whereby all those born in 1960 or later will have to wait till age 67 to claim 100% of their retirement benefit. Therefore, your birth year determines what age you need to be to receive 100% of your monthly payout.
It's all about your claiming decision
And, of course, Social Security is all about your personal claiming decision.
As noted, retirement benefits can begin at age 62, or at any point thereafter. But there is a pretty big dangling carrot that the SSA uses to entice seniors to wait. For each year that seniors hold off on enrolling for benefits, their payout grows by roughly 8%, until age 70. All things being equal (work and earnings history, along with birth year), claiming at age 70 could result in a 76% higher monthly payout than someone claiming as soon as possible at age 62.
Interestingly enough, though, statistics show that at least 60% of seniors claim benefits before reaching their full retirement age, thus accepting a permanent reduction in their monthly payout in the process. That might seem like a bad thing, but the financial situation for each individual is different. That's why your personal claiming decision with Social Security is so important,
For example, claiming early might make sense for people who aren't in great health and don't believe they'll reach the average life expectancy, which in the U.S. is close to 79 years. Lower-income spouses also tend to benefit from claiming early in order to generate income for the household while the higher-income spouse's benefit grows with each passing year.
Comparatively, seniors in excellent health, higher-earning spouses, and those who have very little saved for retirement would all probably benefit from waiting until their full retirement age or after to begin taking their Social Security payout.
No matter how big Social Security gets, or how many workers it covers, it'll always be about you and the decisions you make.