Social Security is a cornerstone of most retirement plans, but people have a lot of misconceptions about it. If you don't have a realistic understanding of how it works or how your choices affect your benefits, you could wind up in hot water. Here are five important things that everyone should know about Social Security.
1. It was never intended to be a primary source of income.
Social Security was only ever meant to replace about 40% of pre-retirement income for "average earners," according to the Social Security Administration, though it gives no indication of what average earnings are. High earners may find that it doesn't replace 40% of their pre-retirement income, while lower earners may find that it covers a higher amount. You can estimate your Social Security benefit by creating a my Social Security account.
2. Social Security isn't going bankrupt -- but it is changing.
It's estimated that the Social Security trust fund reserves will be depleted by 2034 unless the government makes changes to the program. Several possible solutions have been proposed, but nothing is set in stone yet. Some of the suggestions include:
- Raising the full retirement age (currently 66 or 67, depending on birth year)
- Raising the amount of income subject to Social Security tax ($132,900 in 2019)
- Raising Social Security tax (currently 12.4%, split between employee and employer)
- Reducing cost-of-living adjustments (COLAs), which help the value of Social Security keep pace with inflation
- Reducing benefits
Some of these changes could reduce the value of Social Security over time, forcing retirees to make up the difference by reaching into their personal retirement accounts. That is why it's crucial to make sure you have ample retirement savings of your own.
3. The age you start taking benefits matters.
You become eligible for Social Security at age 62, but if you're trying to maximize your benefits, this probably isn't the time to start taking them, unless you don't anticipate living a long life. What many people don't know is that you don't become eligible for your full benefit amount until you reach your full retirement age. This is 66 or 67, depending on when you were born.
If your full retirement age is 66 and you start claiming benefits at 62, you will only get 75% of your scheduled amount per check. Those with a full retirement age of 67 will only get 70% if they start at 62. But this trend also works the other way. You can delay Social Security past your full retirement age, and your checks will get bigger. This stops at age 70, when you become eligible for 124% of your scheduled amount if your full retirement age is 67, or 132% if your full retirement age is 66.
4. The government could tax your benefits.
The federal government could tax up to 85% of your Social Security benefits, and some states tax benefits as well. How much of your Social Security benefits are subject to tax depends on what your combined income is. This is defined as the total amount of taxable income you have coming in from a job or tax-deferred retirement savings, plus any nontaxable interest that you have and half of your Social Security benefits.
If this amount exceeds $25,000 for a single adult or $32,000 for a married couple filing jointly, the government could tax up to half of your Social Security benefits. A combined income greater than $34,000 for a single adult or $44,000 for a married couple could result in taxation on up to 85% of benefits. This could be a problem if you weren't planning on your benefits being taxed because you'll have to withdraw more from your personal retirement savings to cover your expenses. Use this calculator to figure out if any of your Social Security benefits may be subject to tax. If you believe they will be, try cutting spending or reducing your tax-deferred retirement withdrawals to lower your combined income below the above thresholds.
5. It's not just a retirement program.
In addition to providing a supplementary income to retirees, Social Security also helps support the disabled, widow(er)s, and the dependent children of deceased or disabled workers. Even dependent parents may be entitled to some compensation if the worker had been providing a significant portion of their income. The benefit amount that these individuals are entitled to depends on what the worker's own Social Security benefit was and their relation to the worker.
If you believe that you qualify for any of these types of benefits, contact your local Social Security office. You may be asked to provide information about your work history, disability, or relationship to the individual whose work record you're claiming on.
Now that you've got a better grasp of Social Security, you can make plans to use it strategically. It's not a replacement for your personal retirement savings, but it can be a nice supplement, especially if you take steps to maximize your benefits. But you also have to be mindful of how much other income you have in your retirement, or you could end up losing some of those benefits back to the government.