Social Security arguably is the most important social program in this country, but you wouldn't know that by quizzing the American public on their knowledge of the program. Back in 2015, MassMutual Financial Group did just this and found that only 28% of the more than 1,500 respondents could pass its straightforward, 10-question, online true-false quiz with at least seven correct answers. Such poor results suggest that most seniors are likely to leave money on the table or make a non-optimal claiming decision during their golden years.
The fact of the matter is that the American public doesn't know much about Social Security. And while there's a laundry list of things they don't know, the following seven facts stand out most of all.
1. Did you know that Social Security is only designed to replace 40% of your working wages?
To begin with, you may or may not be aware that Social Security is not meant to be a primary source of income for retired workers. When it was signed into law in 1935, its purpose was to provide a financial foundation for lower-income workers during retirement.
Today, the Social Security Administration (SSA) suggests that benefits be relied on to replace about 40% of working wages, with this percentage perhaps a bit higher for low-income workers and lower for well-to-do workers. By comparison, 62% of current retirees lean on Social Security to account for half of their monthly income. That's a bit worrisome, as the average check for retired workers is only $1,410 per month.
2. Did you know that the Social Security Administration can withhold some or all of your benefits, depending on when you claim?
Claiming benefits before your full retirement age -- the age where you become eligible to receive 100% of your monthly benefit, as determined by your birth year -- may entitle the SSA to withhold some or all of your benefits. If you won't reach your full retirement age in 2018, the SSA is allowed to withhold $1 in benefits for every $2 in earned income above $17,040. Meanwhile, if you'll reach your full retirement age in 2018 but have yet to do so, the SSA can withhold $1 in benefits for every $3 in earned income above $45,360.
The good news is you'll get every cent withheld back in the form of a higher monthly payment once you hit your full retirement age -- likely between 66 and 67 years old. The bad news is it'll prevent most folks from double dipping with working wages and Social Security income prior to hitting their full retirement age -- i.e., between the ages of 62 and 66 to 67.
3. Did you know that Social Security benefits may be taxable?
Believe it or not, your Social Security benefits may be taxable at the federal and/or state level. If your adjusted gross income plus half of your Social Security income totals more than $25,000 as a single filer, half of your Social Security benefits are taxable at federal ordinary income tax rates. For couples filing jointly, this figure is $32,000. A second tier allows 85% of Social Security benefits to be taxed above $34,000 for single filers and north of $44,000 for couples filing jointly.
What's more, 13 states tax Social Security benefits to some extent. A few, like Missouri and Rhode Island, have exceptionally high income exemptions, allowing most retired workers to escape state-level taxation. Others, like Vermont and West Virginia, mirror the federal tax schedule and can act as a double whammy for seniors.
4. Did you know that Social Security offers a mulligan?
You probably aren't aware that there's a do-over clause built into Social Security if you regret claiming benefits early. Beneficiaries are allowed to undo their claim within 12 months of receiving benefits if they file Form SSA-521 or a "Request for Withdrawal of Application." The catch? First, you only have 12 months to make this choice, and second, you'll have to repay every cent you've received from Social Security in order to undo your original filing.
The benefit of this mulligan is that it'll allow your benefits to grow once again at 8% per year, until age 70. It's as if your claim was never made. Seniors who wind up going back into the workforce shortly after they start receiving Social Security income usually benefit the most from SSA-521.
5. Did you know that your claiming decision may be about more than just you?
Deciding when to take benefits might be one of the most important decisions a senior citizen will make. However, it may be an equally important decision for their spouse.
In addition to providing retired worker benefits, Social Security provides benefits to the disabled and the survivors of deceased workers. If a high-earning spouse passes away, a lower-earning spouse may be able to claim survivor benefits based on their deceased spouse's earnings history, assuming the survivor benefit pays more per month that the low-income worker's own retirement benefit. If a high-earning spouse enrolls for benefits early -- i.e., before his or her full retirement age -- it can adversely impact the survivor benefit that the lower-income spouse receives.
6. Did you know Social Security isn't going bankrupt?
Surprise! Despite a pervasive myth that Social Security is spiraling into bankruptcy, I can assure you that it's not.
Social Security is funded three ways:
- A 12.4% payroll tax on earned income up to $128,400, as of 2018.
- The taxation of Social Security benefits.
- Interest earned on almost $2.9 trillion in asset reserves.
The secret sauce here is the 12.4% payroll tax, which accounted for 87.3% of the $957.5 billion collected by the program in 2016. As long as Americans keep working and Congress leaves the funding mechanism for the program as is, there will always be money collected that can be disbursed to eligible beneficiaries.
Mind you, this doesn't mean the current payout schedule is sustainable. Social Security's Board of Trustees projected last year that sweeping benefit cuts of up to 23% may be needed by 2034 to sustain payouts through 2091.
7. Did you know it's been 35 years since the program's last overhaul?
Finally, were you aware that it's been 35 years since Congress last enacted a sweeping overhaul to the Social Security program? Sure, it's tweaked a few things over the years, but it hasn't made any major adjustments in over three decades.
That's disturbing for one big reason: Social Security is facing a $12.5 trillion cash shortfall between 2034 and 2091, and lawmakers are simply kicking the problem under the rug. Make no mistake about it, Democrats and Republicans each have a core fix for Social Security that works. Unfortunately, with politics in Washington highly partisan, no middle-ground solution has been reached.
While there's much more to learn about Social Security, these seven facts offer a solid foundation on which to build your wealth of knowledge.