If you're working in America, chances are really strong that you and your boss contribute funds toward the Social Security program. With over half of American retirees relying on the program for at least half of their income, Social Security typically fills the role of providing guaranteed income to people who've stopped receiving paychecks.
Still, it may surprise you to learn that it is very possible for you to lose some or all of the Social Security benefit you've been contributing toward throughout your career. Indeed, here are three ways you can lose at least part of your Social Security benefit.
No. 1: Keep working while taking benefits early
Perhaps the most important age for Social Security is your full retirement age. That's the age where if you start collecting benefits, you'll get exactly what the Social Security formula says you'll get based on your work history. It's also the age where you can collect, keep working, and still receive your full benefit no matter how much you earn.
If you start collecting early but then you continue working, you get penalized. This can happen, for instance, if you're downsized at age 62 and decide to start collecting to help make ends meet, but then you find another job. The penalty in 2018 is as steep as $1 cut from your benefit for every $2 you earn above $17,040 in the year. Earn enough, and your benefit can actually go all the way down to $0.
You will start getting the money paid back to you once you reach full retirement age. Still, it's painful to accept the lifetime reduction of benefits that comes from starting early and not actually receive the money for what could be several years after you claim.
No. 2: Be a substantially lower-earning spouse
If you're married, your Social Security benefit is based on the higher of what you are entitled to from your own earnings record or half of what your spouse is entitled to from his or her earnings record. This often comes to pass if your spouse had a steady income for 35 years or so, but you took substantial time off to raise kids and/or care for your aging parents.
As a result, it's possible for you and your boss to pay taxes into Social Security on your behalf for years, and then when you retire, you don't see a dime's worth of benefits based on your own earnings. Granted, you're still getting money from Social Security in this case; it's just not based on the taxes you yourself paid into the system.
No. 3: Be alive in 2034
The Social Security Trust Funds are on a path to run out of money in or around 2034. Assuming no change in the law between now and then, Social Security will only be able to pay benefits based on the money coming in from people who are still contributing to the system. If that comes to pass, benefits are likely to be slashed by somewhere in the neighborhood of 20% to 25%, keeping most of the money flowing but still representing a substantial loss to those who depend on it.
Congress has patched Social Security in the past, and it is likely some adjustment will come in the future to help protect benefits. Still, if past fixes are any guide to what's to come, at least part of the fix will come from reducing benefits in some way. For instance, past net benefit cuts have come in the form of raising the full retirement age and by making benefits taxable for those with other sources of income.
As a result, if you believe you will be alive in 2034, you should anticipate your Social Security check will be somewhat smaller than the official calculations indicate. How much smaller is still to be determined, but if you plan the rest of your finances around a 25% cut in benefits, you're likely to wind up OK.
Social Security still provides an important foundation for retirement
Despite the pitfalls that can mean you can lose some of the benefit of the money you've put toward the program, Social Security still provides an important foundation for most Americans' retirement plans. With knowledge of what you do and you don't get for the tax dollars you're putting toward it, you can reduce the risk to your overall financial picture from these ways you can potentially lose your benefits.