6 Things You Need to Know About Social Security Right Now

Social Security serves as a financial lifeline for countless retirees. Here are six things you absolutely must know about this crucial program.


1. You might pay more taxes this year because of it

Though lower earners won't notice a difference in their Social Security taxes this year, higher earners might feel a bit of a sting. It used to be that only your first $118,500 of income was subject to Social Security taxes, but this year, that cap has climbed to $127,200. If you earn $127,200 or more, you'll pay an additional $539 in taxes as a result of this change (double if you're self-employed and are therefore responsible to pay your Social Security tax in full). That said, Social Security taxes still heavily favor the wealthy -- if you earn $400,000 a year, you'll end up paying the same amount in total as someone earning $127,200.

2. You'll need to earn more money to qualify for benefits

To become eligible for Social Security benefits, you must accumulate 40 work credits in your lifetime, and you can earn a maximum of four per year. Last year, workers received one credit per $1,260 of income, but this year, the value of one credit has gone up to $1,300. This means you'll need to earn a little bit more money going forward to get your credits -- something part-time workers ought to keep in mind.

3. Claiming benefits early could hurt you

Your Social Security benefits are based on your top 35 years of earnings, and once you reach your full retirement age (which, for today's older workers, is 66, 67, or somewhere in between), you'll be eligible to collect those benefits in full. That said, many seniors jump to claim Social Security at 62 because it's the earliest possible age to collect benefits. Claiming early, however will reduce your benefits by 6.67% for up to three years, and then 5% per year thereafter. If your full retirement age is 67 but you start taking benefits at 62, you'll reduce them by 30%, and that reduction will remain in effect for the rest of your life.

On the other hand, if you delay Social Security past your full retirement age, you'll increase your benefits by 8% a year up until age 70, at which point you don't get any monetary incentive to hold off. And just as any reduction you might face is permanent, so too is any benefits boost you get to collect.

4. Your benefits might be taxed in retirement

Just because you're eligible for a certain amount of Social Security income doesn't mean you'll get to collect that money in full. If you have too much income outside of Social Security, you might pay taxes on a portion of your benefits. To see whether you'll face federal taxes on Social Security, you'll need to figure what's known as your provisional income. To do so, take your non-Social Security income (like investment income or retirement plan distributions), add in your tax-free interest income (which typically comes from municipal bonds), and then add in 50% of your Social Security payments. Then, use this chart to see whether your benefits will be subject to taxes based on your total:

Tax Filing Status

Provisional Income

Percentage of Social Security Benefits Taxed

Single or head of household

Less than $25,000



Up to 50%

More than $34,000

Up to 85%

Married filing jointly

Less than $32,000



Up to 50%

More than $44,000

Up to 85%


Your provisional income can help you determine whether you'll pay federal taxes on your benefits, but keep in mind that these states tax Social Security payments to varying degrees:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

While paying state taxes on Social Security isn't necessarily a reason to move, it is something to think about as retirement nears.

5. It's not enough for most seniors to live on

According to the National Academy of Social Insurance, a good 65% of beneficiaries rely on Social Security to provide the majority of their retirement income, and it's the only source of income for almost 25% of seniors 65 and older. While Social Security can help you cover your living costs as a senior, it's only enough to replace about 40% of the average worker's pre-retirement income. Most of us, however, need 70% to 80% of our previous income to pay our bills in retirement, especially given the projected cost of healthcare. That's why it's important to save independently and use Social Security to supplement the income you generate from your retirement plan and investments.

If you haven't started saving for retirement, now's the time to open a tax-advantaged plan, like an IRA or 401(k). Workers under 50 can currently contribute up to $5,500 to an IRA and $18,000 to a 401(k), while those 50 and older can contribute up to $6,500 and $24,000, respectively. The sooner you begin saving for retirement, the more time you'll have to grow your nest egg and avoid money problems in your old age.

6. Benefits may be cut in the future

Speaking of saving independently for retirement, another good reason to do so is that Social Security benefits may be reduced several decades from now if Congress doesn't step in to fix the program. Social Security's trust funds are set to run out in 2034, and when that happens, the program will only have enough money from incoming taxes to pay out about 75% of scheduled benefits. Without a solution, there may come a time when Social Security only suffices in covering 30% of the average American's former income, leaving individual savers with an even larger gap to fill. Because we don't know exactly what the future holds for Social Security, it's even more crucial to save independently from as young an age as possible.

Whether you're close to retirement or years away, it pays to read up on how Social Security works and understand the issues surrounding it. The more you know about Social Security, the better you'll be able to maximize your benefits when the time comes to collect them.

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