Social Security may very well be the most important social program in this country: It is tasked with providing a financial foundation for tens of millions of seniors. Yet many retirees, and probably a good portion of working Americans, don't truly understand how the program works -- and that could cost them valuable income in retirement.
There are a number of things that working Americans and pre-retirees should fully understand before they take the plunge and enroll for Social Security benefits. Here are 16 of them.
1. The data suggests you'll be at least partially reliant on Social Security
Chances are, you're going to need Social Security to some degree in order to meet your monthly expenses during retirement. Current data from the Social Security Administration (SSA) shows that 61% of seniors rely on their monthly check to account for at least half of their income. Meanwhile, a separate poll from Gallup found that 79% of non-retirees expect Social Security to be a "major" or "minor" source of retirement income.
2. Social Security was never meant to be retirement plan A
What Social Security's founders never designed the program for was to be a sole source of income during retirement. Social Security, per the SSA, was designed to cover about 40% of the average American's salary in retirement. For the more well-to-do this figure could be a bit lower, and for lower-income folks it might even be a bit higher than 50%. However, the key point here is that Social Security isn't a program you should rely on to fund the bulk of your retirement income.
3. Social Security isn't an entitlement
Social Security also isn't an entitlement. You have to earn retirement benefits by working. If you earn 40 lifetime work credits, you'll qualify for Social Security benefits. A maximum of four work credits can be earned annually, with every $1,300 in earned income (as of 2017) counting as one earned work credit. In other words, 10 years of part-time work should allow you to earn enough work credits to collect a benefits check when you retire.
4. Disabled workers and survivors of deceased workers benefit, too
Social Security isn't just a program that protects retired workers, even if 41.8 million of the 61.5 million beneficiaries as of May 2017 were elderly retirees. The program also provides benefit payments to workers who have to leave the workforce due to a disability, as well as to survivors of deceased workers.
5. Your work and earnings history are very important
There are three factors you control that help determine what you're paid by Social Security when you retire. Two of those factors are interconnected: your work and earnings history. The SSA factors in your 35 highest-earning years when calculating your payment. This means it's not only in your interest to land a well-paying job and earn as much as you can each year, but that you also work at least 35 years, if not more. If your total number of working years is less than 35, every year in which you didn't work will result in $0 getting averaged into your annual earnings.
6. Everything revolves around your full retirement age
You need to know your full retirement age (FRA) before you consider signing up for Social Security benefits. Your FRA is the age that the SSA deems you eligible to receive 100% of your monthly benefits. Your FRA is a dynamic number that's based on your birth year. You can use this handy table from the SSA to help locate your precise full retirement age. In a moment, you'll see why knowing your FRA is so important.
7. You can enroll as early as age 62
Social Security allows eligible retirees to begin receiving a benefit check as early as age 62, or at any point thereafter. This claiming decision is the third variable you control. According to the Center for Retirement Research at Boston College, 45% of seniors begin taking Social Security at age 62, as of 2013. The simple math you need to be aware of is this: Claiming before you reach your FRA means taking a permanent reduction in your monthly benefit, while waiting until after your FRA will lead to an even larger monthly payout.
8. Waiting can yield up to a 76% higher monthly payout
How much of a reduction could you see if you claim early, or how big a benefit if you wait until after your FRA, you ask? Your benefits grow by 8% annually from age 62 until age 70. All things equal, it means someone claiming at age 70 could have up to a 76% higher monthly payout than a senior signing up for benefits at age 62. Depending on your full retirement age, claiming at age 62 could permanently reduce your payout by 25% to 30%, while waiting until age 70 could increase it by 24% to 32%.
9. The average retiree nets about $16,411 a year
According to data from the SSA's May 2017 snapshot, the average retired worker is bringing home $1,367.58 per month, or about $16,411 a year. That may not sound like much, but it's enough by itself to push the average senior above the poverty level. Once again, it's also worth the reminder that Social Security isn't designed to be a primary income source.
10. There's a maximum monthly benefit
It's also worth noting that you're not going to get rich from Social Security, even if you've done well financially throughout your career. Social Security does indeed have a maximum monthly benefit (at full retirement age) of $2,687 in 2017. This figure, which works out to $32,244 a year, is often adjusted more or less in step with inflation. The gist here is that Social Security is a foundational program for low-income and some middle-income retirees. It's not meant to be a piggy bank for the wealthy.
11. Your claiming decision can impact your family
For some of you, your claiming decision will be wholly personal. But for many, your claiming decision could impact your spouse or your children. If you happen to be the breadwinner of your family, claiming early could adversely impact your spouse's survivor benefit if you pass away first. The same can be said of benefits your children may be able to receive based on your work history. Before claiming Social Security, take the time to understand how your enrollment decision could impact those around you.
12. Benefit cuts may be coming
Now for some bad news: Social Security benefit cuts may be in the program's future. According to the 2016 report from the Social Security Board of Trustees, the program will begin paying out more in benefits than it's generating in revenue by 2020, leading to the expected depletion of its $2.85 trillion in asset reserves by 2034. The trustees have forecast that a benefit cut of up to 21% may be needed across the board if this excess cash is completely exhausted. That's something you should definitely take into account when deciding when you should claim benefits.
13. COLAs regularly underperform medical care inflation
Another reality check is that Social Security's cost-of-living adjustments, or COLAs, typically don't keep pace with the actual inflation that seniors are dealing with. For instance, in 33 of the past 35 years, medical care inflation has been higher than the "raise" seniors received from Social Security. In short, the purchasing power of Social Security benefits is constantly being eroded by the rising cost of medical care, housing, and a handful of other expenses.
14. Your benefits are probably taxable
Here's another surprise: Your Social Security benefits are probably taxable at the federal level. According to The Senior Citizens League, a social welfare nonprofit, over half of all retirees paid at least some tax on their Social Security benefits in 2015. Amendments passed in 1983 exposed 50% of a senior's Social Security benefits to federal taxation if recipients earned more than $25,000 as an individual or $32,000 as a couple. When instituted, these thresholds had an impact on about 10% of households. However, because they haven't been adjusted for inflation in 34 years, they now affect more than half of all seniors receiving benefits.
15. You can undo a filing claim
If you ever realize that you regret filing early for Social Security benefits, there is a solution. Form SSA-521, known officially as Request for Withdrawal of Application, allows you, within 12 months of first receiving benefits, to "undo" your request. As long as you pay back every cent you've received from the SSA, your claim will be undone and your eventual payout can continue to grow at 8% per year. This mulligan is an especially useful tool if you've struggled to find work but wind up landing a job shortly after you've enrolled for benefits.
16. Social Security can never go bankrupt
Last, but not least, it's imperative that you understand Social Security can never go bankrupt. Social Security is predominantly funded by the payroll tax -- a 12.4% tax on workers that's often split between employers and employees. In 2015, 86% of Social Security's revenue was generated by the payroll tax. As long as people keep working, the payroll tax will provide revenue for the SSA to distribute. This doesn't mean benefit cuts aren't possible, but it does mean many generations to come will receive a monthly check from the SSA.
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