20 Things Everyone Should Know About Social Security

Social Security is arguably our nation’s most important social program. Each month, it provides a benefit to more than 62 million people, many of which are retired. According to a 2016 analysis from the Center on Budget and Policy Priorities, this guaranteed monthly payout keeps an estimated 22.1 million beneficiaries out of poverty, including more than 15 million retired workers. It’s just that important.

Yet, in spite of its significance, Social Security knowledge is often lacking. Whether you’re a young worker who may not even be eligible for a Social Security retirement benefit for four more decades, or you’re a baby boomer nearing the eligible claiming age, there’s a pretty good chance you don’t understand the program as well as you should. And as the old adage goes: What you don’t know can cost you.

With that being said, there’s a pretty extensive list of things everyone should know about Social Security if they want any shot of maximizing what they’ll receive from the program. What follows are 20 of those must-know things.

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To begin with, Social Security isn’t an entitlement that you’re given just for being a U.S. citizen. If you want a benefit when you retire, you’ll need to earn it.

In order to qualify for a retired worker benefit, you’ll need 40 lifetime work credits, of which a maximum of four can be earned each year. However, the bar for earning these credits is set in such a way that most folks will have an easy time stepping over. In 2018, $1,320 in earned income (i.e., wages, interest, and dividend income) will earn you one credit, with $5,280 in earnings ($1,320 times four) maxing out your coverage for the year. Do this for 10 consecutive years, or build up your work credits throughout your lifetime until you hit 40, and you’ll guarantee yourself a retired worker benefit during your golden years. 

Much is made about the fact that Social Security helps keep millions of seniors from falling into poverty. But the program itself does much more than simply provide a guaranteed monthly benefit to qualifying retirees.

Based on the latest Social Security snapshot from July, approximately 10.2 million people were receiving a disability insurance benefit. A sliding work-credit scale, based on length of work and age, allows certain people to receive a disability benefit who may not have had an opportunity to reach the often prerequisite 40 lifetime work credits needed to receive a benefit.

Similarly, spouses and children of a deceased qualifying worker can qualify for a survivor benefit. In July, more than 5.9 million people, mostly nondisabled widows, widowers, and children, received a survivor benefit.

Today, an estimated 175 million workers are protected by disability and/or survivor’s insurance.

Ask yourself this question: Will I lean on Social Security as a major or minor part of my income during retirement, or not at all? Got your answer? Chances are that you’ll need your benefit check in some capacity to make ends meet.

According to the Social Security Administration (SSA), 62% of current retirees rely on their monthly check for at least half of their income, with 34% leaning on the program for virtually all of their income (90% to 100%).

Further, an April 2018 survey of nonretirees from national pollster Gallup found that a combined 84% expect to rely on their Social Security income during retirement. The data doesn’t lie: you’ll probably need Social Security income in retirement.

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Are you expecting to be among the majority of existing retirees that currently leans on Social Security as their major source of income? Well, that wouldn’t be a very prudent idea.

The SSA suggests that the average retired worker is going to see the program replace about 40% of their working wages. The key word in there being “average,” because most of us aren’t going to fit that mold. People who’ve averaged a lower income (relative to the average income) over their lifetime may see a higher percentage of their working wages replaced by Social Security during retirement, whereas someone with a higher lifetime income should see a lower percentage of replacement. The point being that Social Security isn’t designed to be a standalone, or even primary, income source.

In short, save, save, save, and invest, invest, invest for your future so you aren’t overly reliant on the program. 

Logically, one of the most important things to know is when you’re eligible to begin taking your benefit. For the vast majority of Social Security recipients, it’s going to be age 62, or any point thereafter. This means everyone born in 1956 has or will become eligible to claim their retired worker benefit this year, should they choose, as long as they have 40 lifetime work credits.

There are, however, exceptions to be made. For example, disabled workers, spouses, and children are able to receive Social Security benefits under certain circumstances before the traditional claiming age. As noted, disabled workers have a sliding scale that could allow them to receive benefits at a young age, despite having not reached the prerequisite 40 credits typically needed to qualify for a payout. 

Patience is a virtue when it comes to Social Security. Although workers have the option of claiming benefits at age 62, they’re incentivized to wait. For each year you hold off on taking your retirement benefit, your monthly payout will grow by approximately 8%.

But there is a limit to the SSA’s generosity. Although your patience will result in a higher monthly payout when you do decide to claim your benefit, this approximate 8% annual increase ceases once you turn 70. Nevertheless, the difference between your initial monthly payout at age 62 and at age 70 could be as much as 76%. 

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Another critical number you absolutely must know is your full retirement age.

Also known as your “normal retirement age,” this is the age at which the SSA deems you eligible to receive 100% of your retirement benefit, as determined by your birth year. If you sign up to receive your payout at any point before reaching your full retirement age, your monthly benefit could be permanently reduced by as much as 25% to 30%, depending on your birth year.

Conversely, claiming your benefit at any point after your full retirement age can actually increase your payout above 100% by as much as 24% to 32%, depending on your birth year. Your full retirement age is essentially the inflection point that determines whether your payout will be above, below, or right at 100%. For most folks, your full retirement age will be age 66, 67, or land somewhere in between.

Your work and earnings history are yet another key cog to determining your monthly retirement benefit (we’ll get into the specifics of how to calculate your Social Security benefit in a moment).

When calculating your monthly benefit, the SSA will take into account your 35 highest-earning, inflation adjusted years. If you didn’t work 35 years, the SSA will average in a $0 for each year less of 35, which can really bring down your average. This is why it’s recommended that you work at least 35 years, if not longer, if you want to improve your chances of maximizing your payout.

Plus, working into your 60s may have its perks. Namely, you’ll have built up a lifetime of work experience and skills that could command a higher wage or salary which, in turn, could end up replacing a lower-earning, inflation-adjusted year from when you were younger. 

Although it’s not exactly a well-known formula, it helps to understand exactly how to calculate your Social Security benefit, which the SSA refers to as your primary insurance amount, or PIA.

After taking your 35 highest-earning, inflation-adjusted years into account, the SSA determines your average indexed monthly earnings (AIME). The SSA then plugs this figure into its formula to determine your PIA. In 2018, the formula is:

•          90% of the first $895 in AIME
  
•          32% of the amount of AIME greater than $895 but less than $5,397
  
•          15% of the amount of AIME above $5,397
  

For instance, if your average indexed monthly earnings were $3,000, you’d receive a retired worker benefit of $1,479.10, based on the formula above.

It’s also worth pointing out that the bend points (the $895 and $5,397 figures above) used to calculate your benefit will be based on the year you first became eligible for a benefit (i.e., turned 62). Therefore, you’ll want to locate the bend points that matter based on when you turn 62 when calculating your PIA, which may or may not be the same as the formula for the current year. You can find the bends points for any year using the SSA’s website.

If you qualify for a retired worker benefit, you should be aware that there are maximum and minimum monthly payouts.

As of 2018, the SSA won’t pay out more than $2,788 a month at full retirement age. This means that if you averaged $5 million a year in income over 35 years, and you began taking Social Security at your full retirement age, $2,788 is the most you can hope to expect per month in 2018.

At the other end of the spectrum, the SSA also implements a special minimum PIA, depending on your years of coverage. For example, someone with 15 years of coverage would receive $210.50 a month, as of 2018, whereas 30 years of coverage would net a retiree $848.80 a month.

What’s interesting about the special minimum PIA is that it’s a price-indexed, rather than wage-indexed, measure. Since wages usually grow quicker than prices, the special minimum PIA’s usefulness and importance to new beneficiaries has declined over time.

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It’s also important to realize that your claiming decision may not be only about you. Although your claiming decision is personal -- after all, it’s based on your earnings and work history, birth year, and claiming age -- it can impact the people you care about most.

For example, if you’re married, claiming benefits before reaching your full retirement age would reduce the survivor benefit that your spouse is eligible to receive if you pass away first. If you happen to be a significantly higher lifetime earner than your spouse, an early claim could leave your surviving partner on shaky financial footing.

If you’re married or have young children, your Social Security claiming decision becomes just as much about them as it does about you. 

So, when should you begin taking your Social Security payout? As noted, waiting longer can boost your monthly payout, so you might be inclined to think that waiting is the best option. But, in reality, there is no perfect claiming age.

Despite taking into account factors like our health, marital status, and financial needs, the one factor we’ll never know (thankfully!) is our expiration date. Without knowing how long we’ll live, we can never be assured that our claiming decision will net us the maximum possible lifetime payout from Social Security.

What should you do then? The best suggestion is to take what clues we can from our health, financial needs, and marital status, and apply those to our claiming decision with the intent of generating as much as possible over our lifetime from Social Security. For some folks, this might mean waiting and allowing their benefit to grow over time. For others, claiming earlier might make more sense. 

Did you know that Social Security has a do-over clause built into it? Known as Form SSA-521 (officially, Request for Withdrawal of Application), beneficiaries who regret an early claiming decision can request the SSA undo their claim. If approved, your monthly payout will again grow at approximately 8% per year, and it’ll be as if you never received a benefit in the first place.

However, there are two really big catches to the SSA approving your request. First, you only have 12 months to file Form SSA-521 after first receiving your entitlement. That’s not a lot of time to consider undoing your claim. But it’s something to consider if you took your payout early because you were struggling to generate income, yet wound up landing a well-paying job shortly after enrolling for benefits.

Secondly, you’ll have to pay back every cent in benefits you’ve received from the program. This also includes spouses or children who may have received benefits based on your claim. Assuming you meet these two criteria, this mulligan is always in your back pocket for the first year following your claim. 

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Are you planning to work and collect Social Security benefits at the same time? Then pay attention, because you might be subject to the retirement earnings test (RET).

The retirement earning test is nothing more than a pair of earnings thresholds at which the SSA can begin withholding some, or all, of your retirement benefit. What’s important to note is that the RET only applies to people who haven’t reached their full retirement age yet. If you have, the RET doesn’t apply to you.

If you’re currently receiving benefits, and you won’t reach your full retirement age in 2018, the SSA can withhold $1 in benefits for every $2 in earnings above $17,040. If you will hit your full retirement age this year, but have yet to do so, the SSA can withhold $1 in benefits for every $3 in earnings above $45,360.

What happens to these withheld benefits? The good news is you get every cent back in the form of a higher monthly payout once you reach your full retirement age. The downside is that early claimants often aren’t able to “double-dip” by collecting wage income and their Social Security benefit at the same time.

Yes, I did just say the evil “T” word: taxes. Whether you’re aware or not, depending on your earnings, your Social Security benefits may be taxable.

In 1984 (following passage of the 1983 Amendments), the Reagan administration introduced the taxation of benefits to raise additional revenue for the program. It allowed up to half of an individual’s benefits to be taxed if their adjusted gross income (AGI) plus one-half of their benefits exceeded $25,000. For couples filing jointly, this figure is $32,000.

Then, in 1993, during the Clinton administration, a second tier was added allowing 85% of benefits to be taxed if an individual’s or couple’s AGI plus one-half of benefits exceeded $34,000 or $44,000, respectively. Since these thresholds haven’t been adjusted for inflation once since they were enacted, more than half of all senior households pay some federal tax on their Social Security benefits today.

What’s more, 13 states tax Social Security benefits to some varying degree. While some states, like Rhode Island, Missouri, and Kansas, have high income-exemption levels, others, such as Vermont and West Virginia, which mirror the federal schedule, aren’t as forgiving. 

In a perfect world, Social Security would pass along a cost-of-living adjustment (COLA) each year that accounts for the inflation (i.e., the rising price of goods and services) beneficiaries have faced. Unfortunately, we are not living in a perfect world, and Social Security’s inflationary tether doesn’t do a particularly good job of factoring in the expenditures that matter most to seniors.

Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been Social Security’s inflationary tether. But, as the name suggests, it tracks the spending habits of urban and clerical workers, who spend their money very differently than seniors. This results in important costs, such as medical care and housing, being underrepresented, and ultimately means that seniors are seeing the purchasing power of their Social Security income decline over time. 

No discussion of Social Security is complete without mentioning that the program is in some pretty deep trouble as the result of a number of ongoing demographic shifts. According to the latest Trustees report released in early June, Social Security is expected to expend more than it collects in revenue for the first time in 36 years in 2018. That’s not good!

What’s more, this net cash outflow is expected to really pick up in 2020 and beyond. Although Social Security has nearly $2.9 trillion in its asset reserves today, it’s been estimated that this excess cash will be completely exhausted by the year 2034. If lawmakers don’t find a way to raise any additional revenue, the report predicts that an across-the-board cut to benefits of 21% may be needed to sustain payouts through 2092, without the need for any further cuts.

The possibility of a reduction in benefits 16 years down the road is certainly something current and future retirees would want to consider when making their claiming decision. 

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Yet, for all the trouble Social Security may go through over the next 16 years, it’s vitally important that the public understands it’s in absolutely no danger of going bankrupt. If you’ve hit the 40 work credits required to receive a benefit, you’ll be getting a benefit. Plain and simple.

Even if the program exhausts all of its excess cash, it has two sources of noninterest income that’ll ensure money continues to flow in: the 12.4% payroll tax on earned income, and the taxation of benefits. As long as the American public continues to work, and Congress doesn’t change how the Social Security program is funded, there’s absolutely no chance it’ll go bankrupt. Though future benefits could still be cut, Social Security is expected to be around for many more generations. 

Though it’s a lesser-known fact, it’s worth pointing out that the Social Security program is arguably one of the most efficient social programs in the federal government.

Last year, $996.6 billion was collected, with $952.5 billion of that being expended. In total, just $6.5 billion went to pay for administrative fees, with $941.5 billion being paid out in benefits. The SSA has consistently cost the program far less than 1% of its aggregate annual expenditures, which means that virtually all of the money flowing out of the program is winding up in the hands of qualifying beneficiaries. That’s great news! 

Lastly, it’s important that Americans put aside a number of rumors about Social Security that simply aren’t true.

For example, one of the longest-running misconceptions about the program is that Congress has stolen or raided its $2.9 trillion in asset reserves. Of course, there’s no truth to this. Instead, the SSA is required by law to invest the program’s excess cash into special-issue bonds and certificates of indebtedness. This nets Social Security interest income, while giving the federal government a source to borrow from. Every cent that should be in Social Security’s asset reserves is fully accounted for.

Likewise, don’t believe for a moment that Social Security’s issues are related to immigrants. Legal immigrants, who are often younger, are a vital source of payroll tax revenue for the program. Also, only citizens and those on the legal path to citizenship have an opportunity to be paid a retired worker benefit later in life. The idea that immigrants are hurting Social Security simply isn’t true. 

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This may seem like a lot to digest, but its purpose is simple: to make you more informed. With a better understanding of how Social Security operates, what its challenges are, and how it can impact your retirement income, this information should allow you to make a smart claiming decision. 

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