4 Life-Changing Facts About Social Security Benefits Americans Must Know in 2023

The Social Security program is a key source of financial well-being in retirement. In fact, nearly nine in 10 retired workers depend on benefits to some extent, according to Gallup, and Social Security checks are often the largest source of income for seniors. Yet, many Americans are misinformed about certain aspects of the program.

Here are four potentially life-changing facts about Social Security benefits that every American needs to know.

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1. Starting Social Security benefits early results in a permanent penalty

Nearly half of adults in the U.S. believe their monthly benefit checks will automatically increase when they reach full retirement age (FRA), according to Nationwide Retirement Institute. That is incorrect.

Eligibility for Social Security retirement benefits begins at age 62, but a worker is not entitled to their full benefit (i.e., primary insurance amount) until FRA. Any worker that starts benefits before FRA is penalized with a permanent reduction in benefits. The exact size of the reduction varies based on how early benefits start, but it can be as large as 30%.

Also problematic, only 13% of adults can actually identify their FRA based on their birth year. The chart below provides specific details.

Source: Social Security Administration.

2. Social Security benefits typically replace 40% of pre-retirement income

About half of adults in the U.S. don't know much retirement income Social Security will provide, according to Nationwide. That can lead to poor planning because, as mentioned earlier, benefits are often the largest source of income for seniors.

Generally speaking, Social Security checks replace about 40% of pre-retirement income, but certain variables can affect that figure. Fortunately, anyone can create a my Social Security account through the Social Security Administration, and that resource can be used to estimate future benefits.

3. Social Security benefits receive an annual cost-of-living adjustment (COLA)

Nearly 70% of adults in the U.S. believe Social Security benefits are not protected from inflation, according to Nationwide. That is incorrect.

Social Security benefits are tethered to inflation via the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). All beneficiaries get an annual cost-of-living adjustment (COLA) based on how much the CPI-W increases in the third quarter of each year. For example, the CPI-W climbed 8.7% in the third quarter of 2022, so benefits got an 8.7% COLA in 2023.

That safeguard effectively protects the buying power of benefits by ensuring Social Security checks increase at the same pace as inflation. Without those annual COLAs, the buying power of benefits would diminish over time, meaning beneficiaries would effectively receive a little less Social Security income each year.

4. Social Security benefits will not disappear

About 70% of adults in the U.S. worry Social Security will run out of funding in their lifetime, and 33% of adults not currently receiving benefits believe they will never receive any income from the program, according to Nationwide. Both of those statements are incorrect.

To clarify, the Social Security trust fund (the source of benefits paid to retired workers and other beneficiaries) could indeed be depleted by 2035, according to the Board of Trustees. But the Social Security program itself is funded by payroll taxes and interest earned on trust fund assets. Even if the trust fund asset reserves are depleted, payroll taxes will still cover 80% of scheduled benefits in 2035, and that figure will only fall a few percentage points to 74% by 2096.

That means the worst outcome is a reduction in Social Security benefits, not a complete collapse of the Social Security program. Of course, a benefit cut is far from ideal, but politicians in Washington have proposed a number of different solutions.