Social Security can be a complex topic, so it pays to ask questions and understand the answers.
Here are some of the more common ones.
1. Who's eligible to receive Social Security benefits?
To qualify, you or your spouse must have worked in jobs covered by Social Security and paid the Social Security payroll tax for at least 10 years (those years needn't be consecutive). A nonworking spouse is potentially entitled to up to half of the working spouse's benefit. To collect benefits, you must generally be age 62 or older, disabled, or blind.
2. How are benefits calculated?
There are two formulas at work: one based on your 35 highest-earning years indexed for inflation and another that transforms that calculation into the monthly benefit estimates we understand. The bottom line is the more you earn over your lifetime, the more you can expect to receive from Social Security. Higher earnings in the years just prior to retiring may increase your benefit, too.
That said, there's a limit to the amount of annual income that qualifies for the Social Security calculation. The taxable maximum is $142,800 for 2021 and $147,000 in 2022.1 If you earn more than the annual maximum in a given year as an employee, the income above that threshold won't be subject to the 6.2% Social Security payroll tax (for the self-employed, the rate is 12.4%).
3. How can I increase my benefit?
Although there's nothing you can do to revise your earnings history, there are other steps you can take to boost your Social Security payouts.
- Work longer: If you don't yet have 35 years of income history, every additional year you work replaces a zero-income year. And if you're currently earning your peak income, every additional year you work could replace a year in which your earnings were lower.
- Wait to collect: Although you can start collecting Social Security as early as age 62, waiting to collect will boost your monthly check. Receiving your benefits before full retirement age—which is between 66 and 67, depending on your birth year—will reduce your payment between 5% and 7% each year. If you can afford to wait, every year you delay past retirement age will increase your annual payout about 8% until age 70, when the benefit increases stop. You'll receive from 24% to 32% more than if you had begun collecting at your full retirement age—and roughly 76% more than if you had begun collecting at 62.
Of course, it's not always possible to work longer or wait to collect. Those in poor health or who need the income to make ends meet, for example, might decide to take Social Security as soon as possible.
When waiting pays off
Hypothetical cumulative benefits assume the retiree was age 62 in 2022, age 67 in 2027, and age 70 in 2030 and began collecting a monthly benefit in January of each year. Monthly benefit for starting at age 62 would be $2,364 compared to $3,751 at age 67 and $4,953 at age 70. Benefits increase by 2.12% annually to account for inflation.
The example is hypothetical and provided for illustrative purposes only. Monthly benefit at any age varies widely by individual based on their earning history.
4. What's a good strategy for spouses?
A lot of couples want to start collecting both spouses' Social Security right away, but doing so may not be the best choice if one of you earned significantly more than the other. It often makes sense for the higher-earning spouse to wait as long as possible—up to age 70. Depending on health and finances, the lower-earning spouse can collect benefits earlier.
After the death of one spouse—regardless of whether it was the lower- or higher-earning one—the surviving spouse receives the larger of the two benefits for the remainder of his or her lifetime.
There are other factors and strategies to consider when filing for benefits as a couple. A financial planner or National Social Security Advisor can help you weigh your options.
5. Can my kids inherit my Social Security benefit?
In addition to your spouse, dependent children and even grandchildren may be eligible to receive benefits when you die, become disabled, or retire. To qualify, your dependent must be unmarried and meet certain age requirements:
- Be under age 18;
- Or under age 19 and attending a primary or secondary school full time;
- Or any age if they were disabled before the age of 22
For minors, payments stop when they turn 18. For students, payments end when they graduate or two months after their 19th birthday, whichever comes first. For dependents with a disability, payments continue until they marry.
"The rules are complex, especially around disability," cautions Rob Williams, CFP® and managing director of financial planning, retirement income, and wealth management at the Schwab Center for Financial Research. He recommends consulting the appropriate benefit specialists at the Social Security Administration (SSA).
6. Is Social Security going to run out of money?
According to the SSA, the surplus in the two Social Security trust funds—the Old-Age and Survivors Insurance Trust Fund, which pays retirement and survivors benefits, and the Disability Insurance Trust Fund, which pays disability benefits—will be exhausted in 2034.2
However, "exhausted" is a relative term. It doesn't mean that benefits are projected to stop. As of August 2021, Social Security would still be able to pay out 78% of current and future benefits.3
"We believe, as do most analysts, that Social Security will continue to pay—but there may be changes, depending on action from Congress," says Rob. That could mean later retirement dates for future recipients, reduced benefits for retirees who can afford it, or increases to the Social Security payroll tax to raise more money.
"Lawmakers may well do something in each of those three categories," adds Rob, "though it's unlikely that benefits would go away entirely." Of course, if you're worried about potential changes, there's one sensible way to try to hedge against that risk: save more.
"Today, there's a greater individual burden than ever before to save for retirement," says Rob. "It's important to fully understand and plan for your Social Security benefit but just as necessary to understand that it was never intended to be your sole source of retirement income."