Social Security Explained
Al Waller: Social Security is a vital source of income for U.S. retirees. According to the Social Security Administration, more than 65 million people were receiving benefits as of mid-2022. But even so, there is still a lot of confusion about Social Security, how it works, the role of its Trust Fund, and what its future holds.
Welcome back to ClearPath – Your Roadmap to Health and Wealth SM. I’m your host, Al Waller. With me is Catherine Collinson, CEO and president of nonprofit Transamerica Institute®. Catherine is here to explain what Social Security is and what you need to know about it.
Before we delve in, I want to remind you that we would love to hear from you and learn what topics you would like us to cover. Please drop me or Catherine a note at [email protected].
Catherine, good to have you back – I’m really looking forward to sharing more about this important topic.
Catherine Collinson: It’s great to be back. This is such a vitally important topic – just to underscore what you said, 65 million people are currently receiving Social Security benefits.
According to the Social Security Administration, the average monthly social security benefit for retirees is $1,670 per month, as of July 2022. My team and I conducted a survey recently, and we found that 24 percent of workers – that is almost 1 in 4 workers – expect Social Security to be their primary source of income in retirement.
It is so important to so many tens of millions of current retirees, as well as future retirees.
Al Waller: So, what should our listeners know about Social Security?
Catherine Collinson: A concerning finding is that when we surveyed age fifty plus workers, only 21 percent say they know a “great deal” about it. So that is prompting me…let's start at the beginning and go through the basics. We'll start with the definition.
Social Security is a federal program that provides monthly benefits to retired or disabled workers and their family members, as well as family members of deceased workers.
For our discussion right now, I'm going to specifically focus on the system as it relates to retirees, and we're going to unpack it because there's 3 really big things that you need to know that are critical for your knowledge. The 3 big things that we're going to start with – one is eligibility. The second is how your monthly benefits are determined based on your earnings history, and the third is how the age that you start receiving benefits can actually impact the amount that you receive.
So, if you will indulge me, I'd like to break them down one at a time.
Al Waller: Well, it sounds like another packed agenda. So, we better get started – why don't we do that with eligibility. I know that I, along with millions of others, will qualify for Social Security retirement benefits. How does someone become eligible – is it automatic?
Catherine Collinson: Great question, Al, and even though it may seem automatic. It is not entirely automatic. You do have to become eligible to receive benefits.
Now nearly everyone who works pays into Social Security, although there are notably a few workers or a few fields in which workers pay into a different system other than social security – namely some teachers and government workers, but the vast majority of workers pay into Social Security.
So, what do you need to be eligible to receive retirement benefits? Social Security has what's called a credit system and you need 40 “credits” to become eligible. You receive these credits based on your earnings, and you can earn up to four credits per year. So, for 2022, one credit is $1,510 in earnings. Multiply that times 4 to get your 4 credits for the year. What that means is after your first $6,040.00 of income for a year, you will receive 4 credits. And something I want to point out is that the Social Security Administration sets this minimum earnings amount annually. So, it could be different in 2023 and 2024 and beyond.
Now, there is something that is good news to know – you don't have to work ten consecutive years. For example, you could work 5 years. Maybe you take time out to be a parent or caregiver. You can jump back in the workforce and start accumulating credits again. The important part is that you get to those 40 credits over the course of your working years. I just also want to point out there are some different eligibility rules for non-working spouses, widows, and widowers. But for our conversation we're talking about workers and how to get credits – so, 40 credits…the equivalent of 10 years will get you Social Security eligibility.
Al Waller: How does eligibility relate to the determination of benefits?
Catherine Collinson: Great question – and they are two entirely different things. We just talked about credits, which gets you eligible.
The next part of the equation is how much will you receive each month. That's based on your earnings history. Your Social Security retirement benefit – or payment – is based on your highest 35 years of earnings that were subject to payroll taxes.
Something that's really important with these 35 highest years – if there are years that you are not working, those years count as zeros towards your benefit calculation. So, if we think about our working years – if you start working – if you're 16 or 18, those years could possibly count all the way up to when you retire, which could be in your 60’s, as well. So, you've got a large span of potential working years. They look at your highest earnings for the top 35 years.
Al Waller: Just to back up, it sounds like retirement benefit varies depending on the age when someone starts receiving social security, right? And I know that this can be kind of complicated. So, could you walk us through the basics?
Catherine Collinson: Absolutely, I just want to highlight this is the third big thing that I mentioned that can impact your benefits, your eligibility, your earnings history and the age that you start receiving your Social Security benefits.
I'm concerned that many people may not understand the implications of the age to which they start receiving their benefits. Societally, many people think of age 65 as the “retirement age” and for good reason. It's traditionally been 65, but for people in the workforce today, full retirement age as defined by Social Security is age 66 or age 67, depending on the year that you were born. And at this age, you'll receive your full benefit.
So, it is not age 65 and what may further add to the confusion is Social Security allows for people to start receiving benefits younger than their “full retirement age”. You can do so starting at age 62, or you could delay receiving your benefits all the way up to age 70.
For example, if you start receiving benefits as early as age 62, you will see a reduction in your monthly benefits of 30%. If you delay receiving benefits up to age 70, you could get 30% more in your monthly benefits. Let me do the math to help illustrate exactly how big this difference can be. Earlier in the show, I mentioned that the average monthly Social Security benefit in 2022 is $1,670.00 per month. If somebody were to start claiming their benefits at age 62, they would only get $1,169.00 a month, whereas somebody who waits to age 70, would get $2,004.00 a month. That range is a whopping $835.00 a month difference.
Al Waller: Well, those are some pretty compelling figures. So, what does your research tell you in terms of what folks are doing in terms of claiming their benefits – is it sooner or is it later?
Catherine Collinson: Our research has yielded some concerning findings. The median age that retirees are starting to receive their benefits is age 63. So, they are not waiting till their full retirement age, and they're seeing a steep reduction in their monthly benefits. At the same time, I highlighted how much more somebody could receive if they wait till age 70, and our survey of retirees finds that only 4 percent waited until age 70.
This is an area where doing your homework can make a tremendous difference. This is monthly Income you'll be receiving for the rest of your life, so, it is really important to have a good plan in place.
I also want to point out that there are specific Social Security claiming strategies based on your own individual facts and circumstances. It relates to your marital status, if there are two working spouses, if there is a non-working spouse when one or the other starts receiving their benefits – there are things to consider there.
Also, if you plan to continue working in retirement, there could be some tax implications. So, there's all these intricate details that you really need to think through based on your own situation.
Al Waller: Now, if we could, I'd like to talk about the Social Security Trust Fund and its current status. I mean, with talk of it actually running out – that can't be good! For that reason, I think many people may be taking the money and running while they can. So, what should people know about this as they plan for the rest of their lives?
Catherine Collinson: This is a big issue on a lot of people's minds. In fact, our survey found that 7 in 10 workers, actually 71 percent, are concerned that Social Security will not be there for them when they're ready to retire. So, with this in mind, I want to do some myth busting right now and that is – Social Security is not going bankrupt.
We hear a lot about the Trust Fund in the news. So, what I'd like to do is describe the implications of the Trust Fund.
Overall, Social Security is what's called a “pay-as-you-go” retirement system where today's workers are paying for today's retirees.
During times when there is more money being paid out to retirees than is coming in from workers, to cover the gap, there is a special reserve of excess funds called the Social Security Trust Fund, which can help fill those gaps. The challenge right now is the Trust Fund is projected to be depleted by 2034 in large part due to what's called population aging.
People are living longer than ever before. We have baby boomers who are retiring, and there are fewer workers to step in and take their place and pay into the system.
What happens if the Trust Fund runs out – and Congress does not take action? …because that's a big consideration as well.
It does not mean people would stop getting their benefits. But this is still concerning. If Congress does not take action, then the Trust Fund would be depleted, and people would see a reduction in their scheduled benefits. When we think about a 20% to 25% reduction in benefits, that could be pretty painful.
Just putting it in numbers – somebody who is expecting to receive $2,000.00 a month in benefits might only get $1,500.00 or $1,600.00 a month and that's a really big difference for a retiree who's living on a fixed income.
So, hopefully, we will see some reforms – and sooner than later – to address the Trust Fund because people really need time to adjust their plans accordingly if there's going to be any impact, especially a negative impact on their benefits.
Al Waller: I'll say – I mean a 20% to 25% reduction is big any way you slice it, and I think most people don't necessarily tend to live within their means. So, you take a whack like that and there is going to be some serious pain.
So, let's switch gears. Maybe you could explain how the “pay-as-you-go” system works.
Catherine Collinson: As I referenced earlier, nearly all workers pay what's called a “payroll tax”. It comes out of your paycheck. If you have an employer, the employee and employer each pay 6.2 percent of the employees’ wages up to a taxable maximum of $147,000 in 2022. Self-employed workers – since they don't have an employer – have the burden of paying the combined 12.4% of their wages up to that same maximum income amount.
While these payroll taxes, the 6.2% and the 12.4% have been consistent since 1990, the taxable maximum income is set annually by the Social Security Administration's average wage index, and it’s been steadily increasing over the years.
Al Waller: So, without any changes to the program, benefits will be less starting in the year 2035, which is a mere chip shot of only 13 years from now. But, before we hit the panic button, I believe our policymakers can make changes to eliminate or at least, reduce those shortfalls right, Catherine?
Catherine Collinson: Yes, they can. Hopefully the sooner the better. The sooner policymakers can implement changes to help address this, the sooner people will be aware of what those changes are and can adjust their plans accordingly, especially if their benefits are going to be negatively impacted.
Al Waller: Well, this is some very valuable – and I might add, very sobering – information. To your earlier point, there is no time like the present to make these kinds of changes. Is there anything else you would like to add before we wrap things up today?
Catherine Collinson: I'm going to leave you with a few quick tips. We talk about doing our homework. Hopefully, I've made the case for getting educated about Social Security. Check out Social Security’s website, ssa.gov. They have terrific resources written in plain English and without a lot of jargon.
I also encourage you to go to the section of the website, My Social Security and set up your account. From there, you can look at your full earnings history – make sure that it's correct – and you'll also see what your expected benefits will be. They even have a calculator that can help you do some modeling, looking at, for example, when you plan to retire and when you plan to start receiving those benefits. Terrific resources.
Another area I would suggest you check out is AARP. They have all sorts of information about Social Security at aarp.org. Both the Social Security Administration and AARP's websites have information in both English and Spanish.
Then lastly, there's actually a lot of books written on the topic, and you know I love books. I encourage listeners to check those out, as well.
Al Waller: Catherine, thank you for laying out all these details.
I want to remind listeners that the full transcript of this and all past episodes are available on wypr.org. There you can also check out episodes, “Interest Rates Explained” and “Unretirement – Retirees Returning to Work.”
Don’t forget that we want to hear from you with ideas for future episodes, comments, or feedback. Email me or Catherine at [email protected].
Until the next time, I’m your host Al Waller. Stay safe, be well and thanks for listening.
ClearPath – Your Roadmap to Health & Wealth is brought to you by Transamerica Institute, a nonprofit private foundation dedicated to identifying, researching, and educating the public about health and wellness, employment, financial literacy, longevity, and retirement. You can find our weekly podcast on WYPR’s website and mobile app, wherever you get your podcasts, and at transamericainstitute.org/podcast.
ClearPath – Your Roadmap to Health & Wealth is produced by the Transamerica Institute with assistance from WYPR.
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