Social Security provides income assistance to millions of retirees, survivors of deceased workers, and disabled people. As of June 2014, according to the Social Security Administration, some 58.6 million people received benefits on a monthly basis, amounting to more than $835 billion per year in disbursements.
Yet for all the assistance afforded by the Social Security system, many Americans have little understanding of how it actually works. With this in mind, we asked three of our top retirement analysts to discuss one Social Security fact that they believe every American needs to know. Here's what they had to say.
One aspect of Social Security pleasantly surprises those who have gone through a divorce: Many divorcees can claim Social Security spousal benefits based on their ex-spouse's work history. Even if your ex-spouse has remarried or previously been married, you're still entitled to spousal benefits so long as you qualify.
To qualify, you have to meet two primary requirements. First, you must have been married for at least 10 years before getting divorced. Secondly, you must not have remarried; if you have, you can only claim spousal benefits based on your current spouse's work history. Yet even in that case, there's a potential exclusion: If your later marriage ends either due to death or divorce, your right to spousal benefits based on that first marriage is reinstated.
Another positive surprise is that your spousal benefits are completely independent of whatever decisions your ex-spouse made with his or her own benefits. Most importantly, your ex-spouse need not have actually filed to receive benefits, which is a requirement if you're still married and want to collect spousal benefits. The only requirement is that your ex-spouse is eligible to receive those benefits.
Given how difficult divorce is financially, Social Security's rules give many divorced spouses an unexpected bonus at retirement. That's definitely worth knowing if you've gone through divorce.
If you're not too well-versed in the workings of Social Security, you may think you have little control over the monthly benefit checks you'll receive in retirement. That's not the case, though. You actually have a fair amount of influence, and by thinking strategically, you can make the most of your payouts. (As a side note, the average monthly benefit for retirees in 2013 was $1,294 per month, or $15,528 per year.)
For one thing, you get to decide exactly when to start receiving your benefits. According to the Social Security Administration, each of us has a "full" retirement age based on our birth year. For those born in 1937 or earlier, full retirement age is 65. But for those born in 1960 and later, the full retirement age is 67. However, you can choose to start collecting your checks as early as age 62 or as late as age 70. If you start earlier, your checks will be considerably smaller, while late starters will get much bigger checks. That said, the folks at Social Security say it all amounts to nearly the same thing in the end; if you start at 62 instead of 67, you'll get smaller checks, but you'll get 60 more of them.
Still, there's some strategizing to do. If your family is long-lived and you expect to die well into your 90s, it would be smart to delay your benefits if possible in order to maximize your eventual payouts. For each year beyond your full retirement age until age 70, your check will increase in value by about 8%. Delay from 67 to 70, and that's a 24% bigger check.
If you're not in good health and are pessimistic about your longevity -- or if you simply need the income sooner -- starting earlier might be best. There are also strategies related to spouses that allow you to increase your benefits by coordinating who starts receiving benefits and when.
If there's one aspect of Social Security that the American public needs to be made aware of, it's that the system is not going bankrupt.
Does the current Social Security system need change? Absolutely. Based on the current trajectory, the Old-Age, Survivors and Disability Insurance Trust Fund will completely exhaust its excess cash reserves by 2033. The reason for this cash outflow is a demographic shift in which baby boomers are retiring en masse and fewer young workers are taking their place, and people are living longer than ever, thus taking Social Security benefit disbursements for a longer period of time.
However, when the cash reserves for the OASDI are exhausted, it doesn't mean that Social Security benefits will simply stop. Assuming Congress institutes no changes to the system prior to 2033 (which is an unlikely scenario), benefits would simply drop by 23%. At this level, the amount of payroll tax revenue coming in from people still in the workforce would be enough to support paying retirees, survivors, and eligible disabled beneficiaries through the year 2087.
The key point here is this: Social Security will be there for you when you retire; it just may not pay as much as you had been expecting. It's therefore imperative that you look for additional ways to boost your income stream during your lifetime through tax-advantaged retirement accounts and other investment opportunities.