Social Security is so important that financial professionals used to think of it as one leg of the three-legged stool that funded retirement, along with personal savings and pensions. As pensions have disappeared in recent decades, Social Security has become even more vital to retirement preparedness.
For an income source that’s so vital to so many Americans, however, Social Security is also often misunderstood. Here’s a rundown of what you need to understand about the social security safety net that will very likely help fund your golden years.
1. The Social Security safety net.
In some ways Social Security is similar, in concept, to a pension. In exchange for the money that has been paid in over time, you get a guaranteed, monthly stream of income, that will last from the time you start claiming until you die.
You can get bigger Social Security payments by holding off on your claim. Here’s how claiming ages affect benefit amounts. Social Security starts by taking into account your 35 years of highest wages, and translates this into something called the primary insurance amount (P.I.A.). If you wait until the current full retirement age of 66, you will receive 100 percent of P.I.A. If you start at 62 (the earliest opportunity), you will receive a reduced benefit for the rest of your life — 25 percent lower. By waiting past full retirement age, you would get the delayed retirement credit, which is 8 percent for each 12-month period that you delay. The credits are available until age 70.1
“Essentially what you’re doing by waiting to claim is giving up some money now in exchange for a larger stream of income later,” says Mike Piper, author of Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less.
2. Don’t count on the SSA for strategy help.
While it generally makes sense to hold off on claiming Social Security for as long as you can (for those higher payments mentioned above), the decision on when to claim is not as simple as it seems. In addition to the benefits you’ve earned based on your own income, you may also be eligible for spousal benefits, survivor’s benefits, or even benefits based on the earnings of an ex-spouse. Married claimants who are eligible for more than one benefit, might take one and then switch to another.
The decision on which benefit to take and when can mean the difference of tens of thousands of dollars over the course of your retirement. However, the Social Security Administration itself isn’t a reliable source of help with the decision. Workers there often provide incorrect or incomplete information to would-be claimants. A 2018 report by the Social Security Office of the Inspector General, for example, found that more than three-quarters of widows and widowers could have received more valuable Social Security benefits, but hadn’t been informed of all their options by SSA workers.2
Instead of relying on the SSA for advice, consider working with a financial professional or Social Security consultant who can help you figure out the best strategy for your situation.
3. The longer you live, the more valuable your Social Security income becomes.
Worrying about the payments you’re missing out on by waiting to claim your benefits until 70 is the wrong way to look at your benefit, experts say. Social Security is a safety net meant to protect you in old age, guaranteeing income no matter how long you live. As Americans continue to live longer, the risk of running out of money in old age grows, and Social Security represents a reliable hedge against that risk, especially because it’s adjusted for inflation every year.
“From a personal perspective, dying early may be the worst-case scenario,” says Laurence Kotlikoff, an economics professor at Boston University and author of Get What’s Yours: The Secrets to Maxing Out Your Social Security. “But on a financial level, dying early is a blessing. Living late is a curse, because you have to keep paying for yourself.”
Even if you’ve diligently saved for retirement, living into your nineties—or older—poses a risk that you’ll last longer than your savings will. Strategizing early so that you’ve put yourself into a position to receive a higher Social Security payment can make those savings last a little bit longer.
4. Your retirement gig might reduce your payments.
It’s increasingly common today for retirees to dip in and out of the workforce, taking on consulting or part-time work, either to keep busy or for the financial benefit. That’s why it’s worth keeping in mind that doing so could have a (short-term) impact on your Social Security payments, if you claimed benefits before your full retirement age.
If you earn more than $18,240 in 2020, the Social Security Administration will reduce your check by $1 in benefits for every $2 you earn above the limit.3 However, when you reach full retirement age, the administration will recalculate your benefit factoring in the additional working years, and increase your monthly benefit accordingly.
5. Your Social Security payment won’t disappear.
About 40% of Americans expect that by the time they retire the Social Security Administration will not have enough money to provide any benefits at all.4 It’s easy to see where that fear comes from. Social Security has been paying out more than it’s collecting, and under the current plan design it would deplete its reserves entirely by 2034.5
But what does that actually mean? Not that Social Security will be out of money but, without changes, funding will be sufficient to pay only 80 percent of currently scheduled benefits.6 Or, things could change that would allow the SSA to keep pace with it’s current rate of payments. Congress could alter the benefits formula, raise payroll taxes, or increase the retirement age in order to keep Social Security solvent.
Amid that uncertainty, the best plan for younger workers is to save as much of your own money to fund your retirement, to look into other retirement options that would provide a lifetime income and to be smart about when you begin claiming benefits. After all, if the payments are lower to begin with, it’s even more important to make sure you’re maximizing the amount that you receive.
With reporting by Beth Braverman
1 “7 Of Your Most Burning Questions on Social Security (With Answers)” New York Times, August 2019.
2 “Higher Benefits for Dually Entitled Window (er)s Had They Delayed Applying for Retirement Benefits,” Office of the Inspector General, February, 2018.
3 “Getting Benefits While Working,” Social Security Administration, February, 2020.
4 “About Four-in-Ten Americans Say, By The Time They Retire, Social Security Won’t Have Enough Money to Provide Benefits,” Pew Research Center, March 2019.
5 “The 2018 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds,” OASDI Trustees, 2018.
6 “7 Of Your Most Burning Questions on Social Security (With Answers)” New York Times, August 2019.
Investing involves risk including possible loss of principal.
The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.