Social Security is largely a pay-as-you-go program. This means that today’s workers pay Social Security taxes into the program and money flows back out as monthly income to beneficiaries. As a pay-as-you-go system, Social Security differs from company pensions, which are “pre-funded.” In pre-funded retirement programs, the money is accumulated in advance so that it will be available to be paid out to today’s workers when they retire. The private plans need to be funded in advance to protect employees in case the company enters bankruptcy or goes out of business.
The exact amount you’ll get every month depends on how much you’ve earned over your lifetime and how old you are when you start collecting Social Security. You have several ways to get a more meaningful handle on how much will be coming to you when you start collecting benefits:
- Use a calculator. You can find Social Security’s online tools at www.ssa.gov/planners/benefitcalculators.htm. These tools include the Quick Calculator, which provides an instant but rough estimate, and the Retirement Estimator, which is based on your actual earnings record on file with Social Security. Other calculators, including AARP’s calculator (www.aarp.org/work/social-security/social-security-benefits-calculator) offer additional options, such as clarifying how earned income may affect your benefit before you reach your full retirement age and offering guidance for married couples..
- Look at your personal statement if you have one. Following a hiatus, the Social Security Administration plans to resume mailings of personal statements to workers who are 60 and older. It also plans to make personal statements accessible online. Your statement spells out how much you can anticipate getting at your current rate of earnings if you retire early, at your full retirement age, or at age 70.
- Factor in reductions for early retirement and credits for holding off your claim. You’ll get less if you start collecting early and more if you wait to collect. Social Security reduces your benefit in the range of 5 percent to 6.7 percent per year if you retire early (while your full retirement age is 66). It increases your benefit amount 8 percent per year up to age 70 if you wait past your full retirement age to begin collecting (and were born in 1943 or later). For more information on early or delayed retirement factors and an online calculator, check out www.ssa.gov/OACT/quickcalc/early_late.html.
- Consider whether you’ll continue to earn money when you collect benefits. Social Security withholds $1 out of every $2 you earn above a certain amount (revised annually) if you’re collecting retirement benefits but you haven’t reached your full retirement age. A different earnings test applies during the year you reach full retirement age. You get the withheld payments back after you reach your full retirement age. For up-to-date details, go towww.ssa.gov/oact/cola/rtea.html.
When a spouse dies, the benefit amount received from Social Security by the survivor will depend on three things: 1) whether the deceased spouse had begun to collect benefits prior to his death, 2) the time at which the deceased spouse first began to collect his Social Security benefits, and 3) the age of the surviving spouse when she begins to collect Survivor Benefits.
Typically, both spouses begin taking benefits at full retirement age (66 for those born between 1943 and 1954). After the first spouse dies, the survivor can then collect 100 percent of the deceased spouse’s benefit as long as she is also at full retirement age. The surviving spouse will not continue to receive the benefits she had previously received. Only one benefit amount will be paid, resulting in a reduction of benefits paid into the household after the death of the first spouse.
Full retirement age (also called “normal retirement age”) had been 65 for many years. However, beginning with people born in 1938 or later, that age gradually increases until it reaches 67 for people born after 1959.
The 1983 Social Security Amendments included a provision for raising the full retirement age beginning with people born in 1938 or later. The Congress of the United States cited improvements in the health of the elderly and the increases in average life expectancy as primary reasons for increasing the normal retirement age.