Social (in)Security is Complicated!

Many of my younger readers think they will not receive Social Security.  This is because the trust funds are predicted to be exhausted sometime around 2034.

There are many reasons the government will not allow Social Security to disappear.  Social Security payments keep about 35% of older Americans out of poverty and is the principle source of income for nearly half of this group.  It simply cannot go away without destabilizing our country.  Oh, and old people vote so it will never happen.

But things will definitely have to change. 

Payroll taxes collected will have to increase.  Currently employers and employees each pay 6.2% of wages as FICA taxes which fund Social Security.  This will have to go up as more Americans retire and there are fewer workers to support the retired.

The retirement age will have to increase.  Full retirement age has been increased from 65 to 67 and will need to continue to increase to reflect that we are living longer.

Benefits may need to be reduced and/or means tested.  Benefits may be reduced if the retiree has other sources of income (investment, pension etc.) in retirement.  Or (and this is the one that would really chap me) if other assets are available to support the retiree.

Here’s my rant–this would penalize those of us who prepared for our retirement and benefit those who did not.

Earning Social Security:

You must have paid into Social Security to receive it.  Some government jobs are exempt from Social Security (crazy huh!?) and no benefit is available for time periods when you did not pay in.

Your benefit is calculated based on your 35 highest earning years.  If you only worked 25 years, the benefit calculation would include $0’s for 10 of your years.  You must work 40 quarters (equivalent to 10 years) to qualify.

If you receive a government pension from a Social Security exempt job but also qualify for Social Security for a non-government job, your Social Security payments will be reduced by a portion of the government pension.

You can also qualify based on your spouse’s earnings if you are currently married to or widowed from someone who qualifies or are divorced from someone who qualified so long as your marriage lasted at least 10 years and you have not remarried.

Claiming Social Security:

Social security can be claimed as early as age 62 or delayed until age 70.  The benefit payment increases when you delay.

Early – Social Security can be claimed as early as age 62.  If you claim early, your benefit is reduced by as much as 30% below what you would receive at your full retirement age.

If you claim early and continue to work, $1 of your benefit is deducted for every $2 of wages over a limit ($15,720 in 2016).

Combine this penalty with the decreased payment for claiming early and the tax on your Social Security (see below) and it rarely makes sense for someone who is working to claim their Social Security early.  Extremely poor health combined with poverty is the only scenario I can imagine where this may make sense.

Full Retirement Age – When you reach full retirement age, you can receive your “normal” benefit.  Full retirement age is based on the year you were born.  Those born in 1937 or earlier – full retirement age is 65; those born between 1938 and 1959 – between 65 and 67; those born in 1960 and later – 67.  SS Retirement age calculator gives your retirement age based on your birth year.

Once you reach your full retirement age, there is no penalty for earning wages while taking Social Security.

Delayed – for each year you delay benefits beyond your normal retirement age, your benefit increases by 8% until age 70.  It does not increase after age 70 so we should all claim our benefit upon turning 70.

Spousal benefit – a spouse is eligible for their own benefit or 50% of their spouses benefit–whichever is larger.  Once the spouse has died, surviving spouse benefits are available–you can elect to receive your own or your spouse’s benefit, whichever is greater.

Divorced spouses can claim on their ex-spouses record so long as the marriage lasted at least 10 years.  This ability to claim on an ex-spouses’ record ends if you remarry and there may be a waiting period to collect after divorce.

Delay your benefit to maximize your payment:

If you live into your late 70’s, you reach the break even point for delaying your social security.  For married couples, there’s an 88% chance at least one of you will live to 80, a 72% chance at least one of you is living at 85 and at least a 45% chance at least one will live to 90.

If you and your spouse are in good health and have longevity in your families, there is significant benefit to delaying the Social Security for the higher earner in the couple.  This allows the higher earner to receive the maximum payment and provides the maximum payment to the surviving spouse.  Of course, this is only possible if you have the ability to support yourself with wages or investment income until you turn 70.

There used to be some crazy claiming methods allowing a spouse to claim and defer their benefits.  Congress closed this loophole recently.

Paying taxes on Social Security:

Taxes are paid on your “Combined Income” which is:

Your Adjusted Gross Income (includes wages, pensions, dividends, interest, capital gains etc.)
+ Nontaxable Interest
+1/2 Of Your Social Security Benefits
= Your “Combined Income”

Married filing joint – Combined income of more than $44,000 results in up to 85% of your Social Security being taxable; combined income between $32,000 and $44,000 results in up to 50% of your Social Security being taxable; Social Security is not taxable for combined incomes below $32,000.

Individual – Combined income of more than $34,000 results in up to 85% of your Social Security being taxable; combined income between $25,000 and $34,000 results in up to 50% of your Social Security being taxable; Social Security is not taxable for combined incomes below $25,000.

With required minimum distributions on IRA’s and 401k’s, most of us will be paying taxes on 85% of our social security payments.

Impact of early retirement:

I went to to estimate my Social Security benefits.  If I continued to work and earn what I earned last year, I would receive $3,660 a month at age 70; with no additional earnings, I will receive $3,100 a month.  So I’m losing $560 each month for retiring early.

This difference is because Social Security includes my highest 35 years’ earnings in the benefit calculation.  Because I retired early, several years of low earnings are included from high school and college jobs.  For each year I continued to work, $5,000 earnings would be replaced with earnings of over $100,000 in their calculation.

For me, the benefits of retiring early outweighed the costs, even taking this reduced social security into account.

What we plan to do:

Mr. Ms. Liz turned 60 last year (I’ll pause for you to gasp and mourn!).  So we’ve started to chat about his social security and what steps we could take to maximize the total payout.  Yep fun times at the Money Matters household for sure!

This is very complicated and is likely to change before Mr. Ms. Liz reaches his full retirement age at 66.  But with the current rules, we intend to delay his Social Security until age 70–increasing his benefit by 38%.  I will claim my social security at my full retirement age of 67.  Because he is older than me and men have a shorter life expectancy, he would be expected to predecease me and I’ll switch over to his, higher benefit.

We also intend to convert as much of our traditional IRA’s to Roth IRA’s as we can between now and when Mr. Ms. Liz turns 69 1/2 and has to take required minimum distributions from his IRA’s.  We will be able to convert these for little or no tax because we are keeping our taxable income very low.  Intrigued?  Here’s a great article from the Mad Fientist explaining why this is desirable and how to make it work.

Check your Social Security record:

You can get an estimate of your benefits and verify that your wages are correct on the website.  You’ll need your legal name, social security number and your social security wages (from your most recent W-2) to access your information on the site.

This stuff is super complicated and missteps can affect you for decades–consult an expert before doing anything with your own Social Security.


A must read for anyone wanting to get this right:   Get What’s Yours: The revised secrets to maxing out your Social Security

The other Liz–Liz Weston is an expert on Social Security.  She writes informative articles including an Ask Liz Weston section where you can get her advice.

Social Security website – and SS Retirement age calculator $40 one time fee that allows you to enter different scenarios and receive accurate estimates of your payments

AARP has many resources–some of the statistics in here came from this AARP fact sheet.


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Author: Ms. Liz

A CPA, I retired at 51 and I am helping people create their fantastic futures!

5 thoughts on “Social (in)Security is Complicated!”

  1. Thanks for the insightful information. It got us sharpening our pencils and strategizing our next steps.

    Okay looking at the Roth thing.

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