About 90% of Americans over 65 collect Social Security retirement benefits, so they're a big part of most Americans' retirement planning. Because of this, it's important to know how Social Security works, how benefits are determined, and what to expect in the future.
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With that in mind, here's your 2017 guide to help you understand your current or future Social Security benefits.
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Are you eligible for Social Security?
To be eligible to collect Social Security retirement benefits, you need to be at least 62 years old. You'll also need to have earned 40 Social Security "credits" to collect a benefit on your own work record.
In 2017, one Social Security credit is equal to $1,300 in income, and this amount has increased over the years. You can earn a maximum of four Social Security credits in one year. In other words, to qualify for a Social Security benefit, you'll need to have worked for at least 10 years where you earned roughly the equivalent of $5,200 in 2017 dollars or more.
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Spouses have a special rule for eligibility. I'll discuss spousal benefits in more detail later, but if you didn't work much (or at all) but your spouse did, you can collect a spousal benefit equal to half of your spouse's full retirement benefit.
What changed for 2017?
Here's a thorough discussion of the 2017 Social Security changes, but the main points related to retirement benefits are:
- Social Security recipients get a 0.3% cost-of-living adjustment (COLA).
- The maximum taxable Social Security earnings are $127,200, up from $118,500.
- The thresholds for the "earnings test" have increased to $16,920 for beneficiaries who will reach retirement age after 2017, and $44,880 for beneficiaries who will reach retirement age during 2017. The earnings test is important for people who work and collect Social Security, and a full discussion can be found later in this guide.
How your Social Security benefit is calculated
Unlike most pension programs that consider just the last few years of earnings, Social Security considers your entire work record.
Specifically, your lifetime earnings, up to the Social Security taxable maximum for each year, are indexed for inflation. Then, your 35 highest-earning years are averaged together and divided by 12 to produce your average indexed monthly earnings (AIME).
This average is then applied to a formula to determine your Social Security benefit at full retirement age. For 2017, the formula is:
- 90% of the first $885
- 32% of the amount between $885 and $5,336
- 15% of the amount above $5,336
These amounts are added together to calculate your full Social Security retirement benefit, also known as your primary insurance amount, or PIA. If you choose to claim Social Security before or after your full retirement age, this benefit can be permanently reduced or increased, which I'll discuss later.
What is the largest possible Social Security benefit?
In 2017, the maximum Social Security benefit that can result from the formula I discussed above is $2,687 per month. In order to get this benefit, however, you need to have earned the Social Security maximum taxable wages or more in each of 35 different years.
Since your benefit is permanently reduced if you claim early, the maximum possible Social Security benefit at age 62 is $1,993 for 2017. Conversely, if someone waited until age 70 to claim benefits for the first time in 2017, the maximum possible benefit is $3,547 per month.
How much should you expect to get?
There's no 100% accurate way to estimate your Social Security retirement benefit if you're still working. However, the best estimate using your work history and age can be found on your Social Security statement, which is updated each year.
You can find your latest Social Security statement by creating an account at www.ssa.gov. Your statement contains a lot of valuable information, such as:
- Your estimated benefit amount at full retirement age
- A detailed history of how much you've earned each year
- Estimates for disability and survivors' benefits, should you need them
Data source: Social Security Administration.
Again, these figures are just estimates, and your eventual benefit amount could be quite different, especially if you're relatively young now.
What is your full retirement age?
This is more significant in 2017 than in recent years. Americans reaching the age of eligibility (62) is 2017 actually have a different full retirement age than people who have reached 62 in recent years. Here's how to determine your full retirement age.
For people born between 1943 and 1954, full retirement age is 66 years old. For those born after that time period, the full (or normal) retirement age gradually increases to 67 for those born in 1960 or later.
Here's a chart to help you determine your full retirement age for Social Security.
If you were born in...
Your full (normal) retirement age is...
66 years, 2 months
66 years, 4 months
66 years, 6 months
66 years, 8 months
66 years, 10 months
1960 or later
Your full retirement is useful to know, because your calculated Social Security benefit amount from the previous section (also known as the primary insurance amount) assumes you start collecting benefits at this age exactly.
Lower benefits for claiming early, larger benefits for claiming late
I mentioned earlier that you can claim Social Security as early as 62 or as late as age 70. If you claim before your full retirement age, your benefit will be permanently reduced, and if you wait until after your full retirement age to claim benefits, yours will be permanently increased.
The exact increase or decrease of your initial benefit amount is determined by the following percentages, which are applied to your calculated full retirement benefit:
- Your benefit will be reduced by 6 2/3% per year before your full retirement age (5/9% per month) for up to 36 months before full retirement age.
- Beyond 36 months, your benefit is further reduced by 5% per year (5/12% per month), as early as age 62.
- For delayed retirement, your benefit is permanently increased by 8% per year (2/3% per month) beyond your full retirement age, until a maximum of age 70.
How to claim your benefits
The easiest way to apply for Social Security benefits is online at www.ssa.gov. The application takes about 15 minutes, according to the SSA, and there are no additional forms to sign, and usually are no additional documentation requirements.
If you don't want to apply online, you do have other options. You can apply by phone from 7 a.m. to 7 p.m., Monday through Friday, or in person at your local Social Security office. If you choose to apply in person, the SSA advises that you should make an appointment. You can look up the SS office closest to you here.
Social Security isn't just retirement benefits
There's more to Social Security than retirement benefits. In fact, there are four other types of Social Security benefits to be aware of:
- Spousal benefits: If you and your spouse both file for Social Security at full retirement age, each spouse is guaranteed a minimum of half of the other's benefit. For example, if a retiree is entitled to a monthly benefit of $2,000, their spouse will receive at least $1,000, even if their own benefit amount would be much less.
- Survivors' benefits: If a worker dies, his widow, children, and other dependents could be eligible for benefits. Survivors benefits are an entire topic by themselves, so here's a full discussion of this feature of Social Security.
- Disability benefits: If you become disabled and can no longer work, your Social Security record could entitle you to benefits through Social Security Disability Insurance. You can find your theoretical disability benefit amount on your Social Security statement.
- SSI benefits: Supplemental Security Income, or SSI, is a need-based program that provides extra income to disabled or retired individuals with limited assets and income.
Can you claim Social Security if you're still working in 2017?
Yes, but your benefits could be reduced, depending on your age and income, according to the Social Security "earnings test." As I mentioned earlier, the earnings test limits have been significantly increased for 2017.
When it comes to working and collecting Social Security, the SSA considers three different categories of beneficiaries:
- For SS recipients who will not yet reach full retirement age in the 2017 calendar year, the first $16,920 in earnings is exempt ($1,410 per month). Beyond that amount, every $2 in earnings will reduce Social Security benefits by $1.
- For SS recipients who will attain full retirement age during 2017, the first $44,880 in annual earnings ($3,740 per month) are exempt, and the reduction is just $1 for every $3 in earnings beyond that. For this test, only the months before the month of your birthday count.
- Finally, SS recipients who choose to work past full retirement age will experience no benefit reduction, no matter how much they earn.
It's also important to note that any reduction in benefits isn't lost -- rather, a reduction will increase your future benefit amount. For a more thorough description of the rules about working and collecting Social Security, check out this article.
Is Social Security going broke?
If someone tells you that Social Security is broke or bankrupt, don't believe them.
The truth is that Social Security has money in the bank, and a good amount of it. At the end of 2015, the Social Security trust fund had reserves of about $2.8 trillion. Furthermore, for the time being, the program is taking in more money than it's paying out. In fact, Social Security's income is projected to exceed the program's costs through 2019; 2015's surplus was about $23 billion.
However, the bad news is that it's not expected to last. Excluding interest income, there is expected to be a deficit relative to collected payroll taxes going forward, averaging $69 billion per year through 2019 and rising sharply after that. Beginning in 2020, Social Security will begin running an overall deficit, and will need to tap into its reserves in order to meet its obligations to retirees. This is expected to result in complete depletion of the trust fund in 2034.
In a nutshell, Social Security won't run into serious trouble for almost two decades. Even so, it's important to clarify that after 2034, retirees won't just stop getting checks. In fact, the incoming payroll taxes will still be enough to cover about three-quarters of promised benefits. So, as a worst-case scenario, retirees would see a 25% pay cut from Social Security beginning in 2034.
What could change during the Trump presidency and beyond?
It's tough to say exactly what changes are going to happen, but something will need to be done to ensure the solvency of Social Security for future generations. There are several ways to fix Social Security, and there are reasons to believe each one could actually happen. Survey results show that the American public is generally in favor of increasing Social Security taxes, especially on high earners, if it means that benefits will be secure for future generations. On the other hand, with a Republican Congress, proposed solutions are likely to include benefit reductions, such as increasing the full retirement age or means-testing benefits.
Another unknown are the intentions (and willingness to compromise) of President-elect Donald Trump. During his campaign, Trump promised not to reduce Social Security benefits or raise taxes, so it will be interesting to see what changes take place, if any, over the next four or eight years.
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