You may think you know Social Security, but there's a lot more to it than most people realize. It's worth learning more about the program since it plays a critical role in the future financial security of most Americans.
Here are 25 key things to know about Social Security. They can help you strategize better about your retirement and make smarter Social Security decisions, helping you get much more out of the program.
1: $1 trillion
You know Social Security is big, but you may not appreciate how big. It pays some 63 million Americans about $1 trillion in benefits annually. That $1 trillion makes up fully 5% of our country's entire gross domestic product (GDP), which was about $19 trillion in 2017.
One reason Social Security isn't likely to ever run out of money is because it's financed to a great degree by taxes collected from workers. In 2017, about 87.7% of funds coming into the program came from payroll taxes, while 8.5% came from interest and 3.8% came from taxes on benefits. (Social Security benefits are generally not taxed, but if your income passes a certain level while you're receiving Social Security benefits, those benefits may end up being taxed. No more than 85% of your benefits will ever be taxed, though.)
The Social Security program is probably more efficient than you might think. Out of its budget of roughly $1 trillion, only 0.6% is used for administrative expenses.
Close to 90% of people aged 65 and older collect Social Security benefits.
A full third of the income of elderly Americans is made up of Social Security benefits.
According to the Social Security Administration, 21% of married elderly Social Security beneficiaries and 44% of unmarried ones get fully 90% or more of their income from the program. Meanwhile, about 48% of married elderly Social Security beneficiaries and 69% of unmarried ones get 50% or more of their income from Social Security.
7: 22 million
According to a report from the Center on Budget and Policy Priorities, without Social Security income, 22 million Americans would be poor. That's rather meaningful, considering how low the official poverty line is. For 2018, the federal poverty level was $12,140 for individuals and $16,460 for a family of two.
Not surprisingly, 66% of Americans have reported that Social Security is one of the most important government programs, per an AARP survey.
You might think that almost all Social Security benefits go to retirees, but you'd be wrong. A hefty portion -- 73% -- of benefits paid out goes to retirees and their dependents, but 17% goes to disabled workers and their dependents, while 10% goes to survivors of deceased workers.
The normal (or "full") retirement age for Social Security -- the age at which you're eligible to start collecting your full benefits -- used to be 65, but it has been increased for many of us. For those born in 1937 or earlier, it remains 65; for those born in 1960 or later, it's 67; and for those born between 1937 and 1960, it's somewhere in between. Some lawmakers have proposed increasing the full retirement age further.
11: 62 and 70
No matter what your full retirement age is, though, you can choose to start collecting your benefits as early as age 62. That's actually the most common age at which retirees start collecting their benefits. You also can delay starting to collect your benefits beyond your full retirement age -- until age 70, if you want.
You can make your ultimate retirement benefit check bigger or smaller than what you'll get if you start collecting at your full retirement age by starting to collect earlier or later. For every year beyond your full retirement age that you delay beginning to receive benefits, you'll increase their value by about 8%, until age 70. So delaying from age 67 to 70 can leave you with checks about 24% fatter. That works in reverse if you start collecting early. For every year before your full retirement age that you start collecting, your benefits will shrink by about 7%. So if your full retirement age is 67 and you start collecting benefits at age 62, your checks will be about 30% smaller.
It can seem like a no-brainer to delay collecting until age 70, if possible, but it's not. The system is designed so that total benefits received are about the same -- a difference of $0 -- no matter when you start collecting, if you have an average life span. Checks that start arriving at age 62 will be considerably smaller, but you'll receive many more of them. (Of course, if many of your ancestors have lived into their 90s, delaying can be worthwhile.)
14: 1 year
It can be hard to decide exactly when to start collecting your benefits. If you make that decision and then wish you'd made another choice, you can change your mind -- as long as you do so within 12 months of starting to collect your benefits and as long as you pay back all the benefits you've received so far. (Form SSA-521 can get the job done.)
In order to qualify for Social Security benefits based on your earnings, you need to collect 40 credits. Each credit represents earnings of at least $1,320 (as of 2018) within a year, and you can earn up to four credits per year. Thus, most of us can qualify simply by working for a decade and earning at least $1,320 per quarter (that amounts to $5,280 for the year) as of 2018. For 2019, the value of a credit rises to $1,360.
The formula that the Social Security Administration uses to calculate your benefits is based on your earnings in the 35 years in which you earned the most money (adjusted for inflation). So for maximum benefits, aim to work a full 35 years. If you only earned income in 28 years, the formula will be incorporating seven zeros, which will shrink your benefits considerably.
Social Security retirement benefits are designed to replace about 40% of your preretirement income if you earned an average income during your working life, so don't expect it to mostly replace your current income. The percentage is higher for lower-income folks and lower for higher earners. Note, too, that while 40% is more than some countries offer, it's a significantly smaller portion of earnings than many other countries offer via their retirement programs. Spain and the Netherlands, for example, offer more than 80%, while France, Italy, Sweden and Finland, among many others, offer more than 50%.
The average monthly retirement benefit was recently $1,417. That amounts to about $17,000 per year. If your earnings have been above average, you'll collect more than that -- but not a whole lot more.
19: $1,565 vs. $1,244
The benefits retirees receive differ widely by gender. As of the end of 2017, the average retirement benefit for men was $1,565, while the average for women was considerably less, at $1,244. That's because women are typically paid significantly less than men and are often out of the workforce for some years, too, raising children or caring for family members.
The overall maximum monthly Social Security benefit for those retiring at their full retirement age was recently $2,788 -- or about $33,500 for the whole year. You can collect even more than that if you earned the maximum wages on which the government collects Social Security payroll taxes and start collecting at age 70. In that case, the most recent maximum monthly benefit was $3,698, or $44,376 for the year. For 2019, the maximum benefit for those retiring at their full retirement age rises to $2,861, and the maximum for those who wait until age 70 rises to $3,777.
Social Security benefits are designed to increase in step with inflation, and annual cost-of-living adjustments (COLAs) are common. For 2019, benefits will get the biggest boost they've seen in a while -- a 2.8% increase. The increase in 2018 was just 2%, which was much higher than 2017's 0.3% increase, and 2016, when there was no increase at all.
Employee income is taxed at 6.2% for Social Security. That figure may seem familiar from your pay stubs. What you may not appreciate, though, is that employers cough up a corresponding 6.2%. That's not news to self-employed people, unfortunately, as they have to pay both the employer and employee portions, forking over a whopping 12.4% of earnings. (The combined rate when Social Security was created was just 2%!)
Someone earning $128,400 in 2018 and someone earning $5 million will pay the same Social Security tax. That's because the amount of our earnings that are taxed for Social Security is capped -- at $128,400 for 2018. Any earnings above that do not get taxed for Social Security. (Many view this as unfair, and one proposed way to bolster the Social Security funds is to eliminate this cap or at least increase it substantially.) For 2019, the cap will rise to $132,900.
One troubling trend for Social Security is that the ratio of contributing workers to beneficiaries has been plunging over time. Back in 1950, the ratio was 16.5, with about 48 million workers supporting close to 3 million beneficiaries. The ratio was recently just 2.8 -- and it's expected to hit 2.2 by 2035. This is making the program in its current configuration no longer self-sustaining over the long run. Thus, many ways to cut benefits or increase income to the program are being proposed.
Social Security also offers survivor benefits for family members of eligible workers who die. The Center for Budget and Policy Priorities notes that, "For a young worker with average earnings, a spouse, and two children, that's equivalent to a life insurance policy with a face value of over $725,000 in 2018, according to Social Security's actuaries."
Clearly, Social Security has a lot to offer not only retirees, but also disabled workers, their dependents, and survivors of workers. The more you know about Social Security, the more you may be able to get from the program.