Chock full of complexities, Social Security is an extremely dynamic program that changes constantly. This post will help you sort through the clutter by pinpointing 15 details to know about the program.

Payroll taxes finance Social Security

The federal government charges a payroll tax—FICA (Federal Insurance Contributions Act)—to fund Social Security (and Medicare) programs. This tax is levied on employees and employers, who each (currently) contribute 7.65% and 6.2% toward Social Security. Self-employed workers pay the full 15.3%, 12.4% of which is allocated towards Social Security; they can generally deduct half this rate (7.65%), however, when filing their tax returns.

An income cap for the Social Security portion of FICA ($168,600 in 2024), meanwhile, means any earnings beyond this threshold are not subject to Social Security tax.

You need enough Social Security credits to qualify

While most Americans qualify for Social Security benefits, you might not realize that some in fact don’t. Why? One must earn a minimum of 40 credits over the span of his/her working life in order to meet related requirements.

Based on 2024 laws, an individual will receive one credit for every $1,730 earned in income—with a maximum of four credits per year (that’s $6,920 earned). Forty credits is therefore roughly equal to 10 years of work.

To help illustrate this concept further, someone who earns a wage of $20 per hour must work 86.5 hours to receive one credit.

Finally, keep in mind that average earnings over your working years—rather than the number of credits earned—impacts your monthly benefit amount.

You’ll want to max out your Social Security earnings

Though calculated using a complex formula, Social Security benefits are generally based on your highest 35 years of covered earnings and the age at which you begin receiving benefits—with a maximum monthly payout of $4,873 (in 2024). Your covered earnings are wages on which you’ve paid Social Security or payroll (FICA) taxes.

If you lack a 35-year work history, your benefit calculation will still include non-work years; Social Security will simply enter a zero for each year with no earnings reported. It’s therefore important to raise your lifetime income average by replacing zero or low-income years with higher incomes until you start collecting; doing so will help maximize the benefit owed to you.

Also keep in mind that to compute your final benefit, the Social Security Administration factors in the national average wage index (NAWI) that tracks year-by-year wage trends. Without going into too much detail, the SSA indexes your earnings history in the year you turn 60 to adjust the same for wage inflation. Consequently, if the NAWI drops that same year (which is rare but does happen), your Social Security benefits can as well.

An exception to this calculation does exist, however; if you’re aged 60+ and still working, indexing ceases and your earnings flow directly into your earnings record—unadjusted—and can therefore boost the likelihood this time period will represent your new “top 35” years.

Finally, it’s good practice to check your Social Security statement every year rather than assume the numbers on there are accurate. After all, a miscalculation for even just a year or two can potentially impact your benefits for the rest of your life!

It’s important to know your full retirement age (FRA)

While you can begin receiving Social Security benefits at age 62, you aren’t entitled to 100% of them until reaching what’s known as your “full retirement age” (FRA)—which is based on your year of birth.

For example, the current FRA for those born after 1960 is 67. Note this metric is subject to change and may in fact gradually tick higher to accumulate additional Social Security reserves since the program is currently underfunded. In fact, the Social Security Board of Trustees projects program costs will rise by 2035 to raise taxes enough to pay for only 75% of scheduled benefits; it therefore seems likely the program will employ a gradual FRA increase for the next generation eligible to claim benefits.

The longer you wait, the larger your benefit

As the age at which you decide to collect Social Security determines the amount of your monthly benefit, choosing to receive benefits before you reach your FRA will result in a permanent reduction to the same.

More specifically, Social Security benefits rise by approximately 7% each year between age 62 and your full retirement age—followed by an approximate 8% annual increase between your FRA and age 70. Waiting to claim benefits beyond age 70 will not impact your benefits.

Payments don’t start automatically

When you decide to collect your monthly Social Security benefits (noting you can apply as early as four months before you turn 62 to start receiving benefits at that age), you must apply with the SSA either online, in person, or over the phone by calling 1-800-772-1213. Furthermore, Social Security payments lag by a month—meaning the earliest you’ll receive your first payment is at age 62 plus one month.

Your benefit amount increases alongside inflation

Laws dictate the Social Security Administration (SSA) prevent inflation from eroding the purchasing power of benefits paid to recipients, accomplishing this via a cost-of-living adjustment (COLA) based on the Consumer Price index (CPI-W). The CPI-W tracks retail prices as they affect urban hourly wage earners and clerical workers, and the SSA announces this cost-of-living adjustment every October.

Think of COLA like a raise in your annual paycheck. Although this “raise” only covers the cost of inflation, you’ll often see a corresponding increase in your benefits every year.

Social Security benefits are not guaranteed

Though you might have assumed otherwise, Social Security benefits are in fact not guaranteed—with no contracts or special rights mandating such benefits. That said, it’s best to think of Social Security as a government spending program: one that Congress and the president may change, reduce, or even—though highly unlikely since payroll taxes are here to stay—eliminate at any time. It’s therefore now more critical than ever to seek out additional streams of income during retirement.

Social Security benefits are liable to taxes

Unfortunately, Uncle Sam doesn’t retire when you do. In fact, Social Security benefits are liable to federal tax depending on the earnings listed on your income tax return. If your total income exceeds $25,000 (for an individual) or $32,000 (for a married couple filing jointly) in 2024, you must pay taxes on your Social Security income. The specific benefit amount subject to taxation varies based on income level.

As some states also levy taxes on Social Security income, it’s critical to consider this when calculating your cash flow needs during retirement.

You can work and collect Social Security benefits simultaneously

If you work before hitting your full retirement age, the dollar amount of your monthly Social Security check is sometimes temporarily reduced if you earn more than the yearly earnings limit set by the Social Security Administration (SSA).

Based on 2024 limits, the SSA will deduct $1 from your Social Security benefit payments for every $2 you earn above the annual earnings limit if you fall below your FRA for the entire year. In this scenario, the current limit is $22,320; if you earn $25,000 annually, for example, Social Security will withhold $1,320 of your benefits (as you’re $2,680 above the earnings limit).

If you work during the year you’ll reach your FRA, Social Security will deduct $1 for every $3 you earn above the limit; the 2024 limit is $59,520 in this scenario and only includes earnings before the month you reach your FRA. If you earn $70,000 from January through October and don’t hit this age until November, for example, $3,493 is withheld. For those still working when they reach full retirement age, their earnings no longer reduce their benefits no matter how much they earn.

Keep in mind that withholding means the Social Security Administration will stop sending you a check until they recoup the amount owed. For example, if you owe $3,500 and your monthly Social Security check is $1,000, you won’t receive a check for four months—with the balance owed ($500) refunded to you at a later date.

It’s important to note that for each of the scenarios outlined above, you won’t lose your benefits: they’re technically just deferred and then credited when you reach your full retirement age.

Your spouse (or even your ex) can claim benefits on your record

If you’re currently married, divorced, or even widowed, you may be entitled to Social Security benefits based on your partner’s (or ex’s) work record: an advantage known as "spousal benefits."

You can qualify for this in many ways, such as if your spouse has already filed for Social Security benefits, you’ve been married for at least 10 years, and you’re at least 62 years of age.

If you decide to claim spousal benefits, your benefit amount is based on the age you retire and the amount your spouse qualifies for. Nevertheless, the most you can earn is 50% of his/her full Social Security benefit.

To receive the entire 50%, you generally need to wait until your full retirement age (FRA)—when you’re entitled to receive full Social Security benefits—to collect. This is currently age 67 for those born after 1960.

Social Security survivor benefits exist

When one spouse passes away before the other, the surviving spouse can receive what’s called a “survivor benefit” that allows him or her to collect a check or the check of the deceased—whichever is higher—regardless of whether the surviving spouse has earned enough credits.

While the monthly benefit is still reduced if taken at an early age, widows can begin taking benefits at the age of 60 rather than waiting until age 62.

Social Security offers do-overs

Social Security offers the chance for a “do-over”: meaning if you claimed your benefit and then regretted doing so for any reason, you can “withdraw the application” and restart the benefit at a higher amount (based on the age you reapply).

Keep in mind, however, that you can take this mulligan only once—within the first 12 months of claiming benefits—and you’ll need to pay back all benefits you and your family receive.

Social Security benefit suspensions are available

If you’ve reached your FRA and are under age 70, Social Security allows you to suspend your retirement benefits. In this scenario, there is no requirement to repay any of your benefits and you’ll earn credits of approximately 8% per year—resulting in a higher monthly payment. You can reinstate benefit payments at any time until the month you turn 70, which is when they’ll automatically kick in once again if you don’t take action otherwise.

Social Security pays benefits to children

Social Security pays benefits to unmarried children who either have a parent who is retired or has a disability and is entitled to Social Security benefits or one who passed away after paying Social Security taxes (and working long enough to do so). Furthermore, the unmarried child must be either younger than 18, between the ages of 18 and 19 and a full-time student (grade 12 or below), or age 18 or older with a disability since prior to age 22.

In sum: what you need to know about Social Security

Social Security is undeniably the most important social program our country offers, providing an estimated 50% of income for half of America’s seniors and at least 90% of income for about 1 in 4.

Nevertheless, the program is also filled with complexities and extremely dynamic. Hopefully this post provided clarity regarding key program elements to expand on your existing Social Security knowledge.

Have questions about Social Security? Schedule a FREE Discovery call with one of our CFP® professionals.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.