Social Security is the largest retirement plan in the United States, providing important retirement income for workers, spouses, survivors, disabled individuals, and in some cases, children. And as a massive program, it's also a complex one, and many of the rules about Social Security aren't well understood.
With that in mind, here are three lesser-known Social Security rules that all future beneficiaries should be aware of, and why they're so important to know.
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How spousal benefits work
Spousal benefits are a valuable but often misunderstood part of Social Security. The short version is that spousal benefits are designed to provide retirement benefits for people who didn't work or earned significantly less than their spouse throughout their lifetime. For example, people who were stay-at-home parents are common recipients of spousal benefits.
A spousal benefit can be as much as half of the higher-earner's full retirement benefit. For example, if you are entitled to $2,500 per month at full retirement age, your spouse could get $1,250 per month at full retirement age, even if your spouse never worked.
There are a few important rules to be aware of. First, to claim a spousal benefit, the primary earner must have also filed for Social Security. Second, a spouse can receive a spousal benefit, or a Social Security benefit paid on his or her own work record, whichever is higher.
One particularly little-known spousal benefits rule is that while spousal benefits can be reduced for claiming early, they don't increase if you wait beyond full retirement age. For this reason, if you were the primary earner and your spouse is expecting a benefit on your record, it may not make sense to wait beyond your spouse's full retirement age to claim your benefits.
The earnings test and how it works
Many people who have claimed Social Security have some idea of what the earnings test in. I commonly hear things like "If I make too much money, I'll lose some of my benefits." But that isn't entirely accurate.
First, it's true that there is an earnings limit. It applies to people who have claimed Social Security but have not yet reached full retirement age (67 for those born in 1960 or later). In 2024, beneficiaries who will reach their full retirement age sometime after this year can earn as much as $22,320 with no effect on their benefits. Beyond that, Social Security will be reduced by $1 for every $2 in additional income. For retirees who will reach full retirement age during 2024, there's a separate and much higher earnings limit. There is no earnings test whatsoever if you've already reached full retirement age.
However, the most commonly misunderstood point is that if your benefits are reduced because of the earnings test, the money isn't lost. The SSA is withholding these benefits, but the effect is that once you reach full retirement age, any withheld benefits will serve to make your monthly checks permanently larger.
If you haven't reached full retirement age yet and are still working, be sure to learn the ins and outs of the earnings test.
Social Security considers all of your earnings
If you have a defined benefit plan (pension) from an employer, it will generally consider just a few years of your earnings. Some will take the highest few years of your earnings record, while others base your benefit on your last few years of compensation.
On the other hand, Social Security looks at your entire earnings record and uses the 35 highest years (inflation-adjusted) to calculate your benefit. This can be particularly useful to know if you've worked for 35 years, but some of those years were relatively low earning. And if you've worked for fewer than 35 years, zeros will be used in the formula when calculating your lifetime average. In other words, if you have 33 or 34 years on your work record and are considering retirement, working for an extra year or two could have more of an impact on your Social Security than you think.
There's a lot to learn about Social Security
As far as retirement programs are concerned, Social Security is a rather complex one, and there are plenty of rules, features, and other things to know. By learning as much about Social Security as you can before you retire, you'll not only know what to expect, but you'll be in a better position to make smart financial decisions for you and your family.
