What it is, how it works, and when to claim it.

July 29, 2019
By Billy Cooper 


Established in 1935 by President Franklin D. Roosevelt’s New Deal, Social Security is a comprehensive federal program designed to provide American workers and their dependents retirement income, disability income, survivorship payments, and death benefits. The Social Security system is one of the world’s largest government run programs, paying hundreds of billions of dollars per year in benefits to retirees across the country. The system is funded by payroll Social Security taxes collected from companies and their employees, which are then placed into the Social Security Trust Fund to be managed by the Social Security Administration and Federal Reserve Board. The money that is collected through Social Security payroll taxes is used to fund benefits paid to current retirees. This means that the money you and your employers pay today will not be set aside in an account to be paid out solely to you throughout retirement.

 The Social Security system gives authorization to tax American workers 6.20% on earnings of up to $132,900. To be eligible to receive Social Security benefits you must be at least 62 years old and must be insured under the Social Security program. Insurance status is determined by the number of quarters of coverage, or “credits,” that you have earned for meeting the minimum work requirements. The minimum work requirement states that you must earn at least 40 credits to qualify for retirement benefits. As you may earn up to four credits per year, this equates to ten full years at a minimum level of employment as defined by Social Security law to become eligible.

Depending on you and your spouse’s combined income, your Social Security benefits may be subject to federal income taxes. Federal income taxes on Social Security are shown in the chart below:


  50% of benefit subject to federal income tax 85% of benefit subject to federal income tax  
Single, Head of Household, Qualifying Widow(er) $25,000 – $33,999 $34,000+  
Married Filing Jointly $32,000 – $43,999 $44,000+  




 To derive your benefits the Social Security Administration will first index your average earnings from the highest 35 years of your working life while adjusting to account for inflation and changes in average wages. The administration will then determine your “primary insurance amount” by taking your average indexed monthly earnings coupled with the age at which you begin collecting benefits. Social Security’s benefit calculator also incorporates a measure of progressivity to ensure that monthly benefits replace a higher percentage of preretirement earnings of low-wage earners in comparison to those of high-wage earners.

The age at which you may begin collecting your full Social Security benefits ranges from 66 to 67, depending on the year you were born. However, you are eligible to begin collecting Social Security early at the age of 62. If you were to begin collecting at age 62, you will incur a reduction in your benefits from each year you begin collecting before your full retirement age. On the other hand, if you were to delay collecting benefits until after your full retirement age, you will receive an 8% credit for each year past full retirement age.




In essence,
 the later you claim, the more you get. However, no additional credit is given after age 69, so the largest benefit you may receive is for retirement at age 70.

 As a spouse, he/she is eligible to collect the greater of either the benefits he/she would earn on his/her own or 50% of the spouse’s primary insurance amount at full retirement age. To become eligible to collect spousal benefits, he/she must be at least 62 years of age as well as the spouse (meaning he/she cannot collect spousal benefits if the spouse is not yet eligible). Just as it goes for normal benefits, the spouse will be penalized if he/she begins to collect before full retirement age. A surviving spouse may be eligible to receive 100% of the deceased’s benefits but may not receive both the deceased’s and their own benefits. An ex-spouse (divorced) may receive up to 50% of his/her ex-spouse’s benefits as long as the couple were married for at least ten years and divorced for at least two years.


Year of Birth Full (normal) Retirement Age Months between age 62 and full retirement age At Age 62
A $1000 retirement benefit would be reduced to The retirement benefit is reduced by A $500 spouse’s benefit would be reduced to The spouse’s benefit is reduced by
1937 or earlier 65 36 $800 20.00% $375 25.00%
1938 65 and 2 months 38 $791 20.83% $370 25.83%
1939 65 and 4 months 40 $783 21.67% $366 26.67%
1940 65 and 6 months 42 $775 22.50% $362 27.50%
1941 65 and 8 months 44 $766 23.33% $358 28.33%
1942 65 and 10 months 46 $758 24.17% $354 29.17%
1943-1954 66 48 $750 25.00% $350 30.00%
1955 66 and 2 months 50 $741 25.83% $345 30.83%
1956 66 and 4 months 52 $733 26.67% $341 31.67%
1957 66 and 6 months 54 $725 27.50% $337 32.50%
1958 66 and 8 months 56 $716 28.33% $333 33.33%
1959 66 and 10 months 58 $708 29.17% $329 34.17%
1960 and later 67 60 $700 30.00% $325 35.00%




If you decide to begin collecting while you are still working, your benefits will be reduced by $1 for every $2 of earned income above $17,640. The SSA has defined earned income as wages earned for work done for others and/or net earnings from self-employment. Any other forms of income such as interest, capital gains, investment earnings, government benefits, certain pensions, or annuities are not counted as earned income. Once you have reached full retirement age, you will no longer receive reductions for earned income. Also, the SSA does not simply cast away your “lost” benefits indefinitely, your benefits are only deferred. When you reach full retirement age, the SSA will recalculate your benefits encompassing the benefits you previously deferred due to earned income. [3]



 Unfortunately, there is no simple answer. To start breaking down the factors that come with making this decision we can first assume that to maintain your current standard of living you will likely not need as much as you are or once earned during the years that you were working. Generally, it is assumed that you will need roughly 70% of the income you earned while working, for which 40% is assumed to be Social Security benefits. This considers several factors:

  1. You are no longer saving for retirement
  2. Your mortgage will likely be paid off, or will be soon
  3. Your children will likely be out on their own, or will be soon
  4. You will also be paying less in taxes as you won’t be paying payroll tax on income from social security, savings, pensions, etc.
  5. And more…

As Social Security is assumed to replace a limited amount of pre-retirement earnings, it is important to understand the benefits and drawbacks of delaying your Social Security claim. The first thing to consider is whether it’s worth drawing down your retirement savings to supplement the loss in earned income that comes with retirement in exchange for delaying Social Security for larger future benefits. When making this decision it is important to keep in mind that your savings are a valuable reserve, which can be invested in higher return assets, or left for inheritance. As you draw down your savings, the potential for upside gain through investing is decreased.

On the other hand, as life expectancy continues to increase it may make sense that you delay claiming Social Security if you need to ensure that you and your spouse receive a higher inflation-proof basic income for the rest of your lives. Further, if you and your spouse have thoughtfully saved for retirement and have enough savings for “rainy day” emergencies while still funding your current lifestyle it may also make sense for you to delay claiming Social Security for greater benefits in the future.

Below is a chart to illustrate life expectancy percentage of a married individual, currently age 62:

 Source: Center for Retirement Research at Boston College


Additionally, as monthly Social Security benefits are calculated so that lifetime benefits are equivalent no matter when the average person begins to collect benefits, your health plays an important role in making your decision. For instance, if you are in poor health, and do not expect to live as long as the average person, you will likely receive less over your lifetime the later you claim. As such, if you are in poor health you may consider to begin collecting early. Conversely, if you are in good health, it is likely that you will outlive the average person, and therefore, it would make sense for you to consider delaying social security to receive a greater monthly benefit over your longer than average lifetime.

Another strategy that may be utilized by married couples to increase benefits comes from the Bipartisan Budget Act of 2015, which states that those who turned 62 before January 16, 2016 are eligible to use “Restricted” filing. Filing restricted uses a two-step claiming process and is often utilized by couples who both have substantial earnings records. If the first spouse claims benefits from their own record, and the second spouse has reached full retirement age, then the second spouse may claim spousal benefits (50% of spouse’s benefits) while deferring the second spouse’s full benefit, earning the 8% annual credit per year until age 70. [1]



If you made the decision to claim Social Security and wished you had waited, you may withdraw your Social Security claim and re-apply at a later date. However, if you change your mind after the one-year mark has passed, you cannot withdraw your application.

If you change your mind within one year of claiming, you may fill out the Social Security Form SSA-521, including the reason you want to withdraw the application on the form. Further, you must repay all benefits you and your spouse received based on your application. All applicants are limited to one application withdrawal per lifetime. [3]



 If you worked for an employer who doesn’t withhold Social Security taxes from your salary you may be affected by the Windfall Elimination Provision (WEP). The WEP reduces benefits so that people who worked primarily in non-covered jobs (though they may have some Social Security credits) do not get the same advantage as long time low-wage earners from Social Security’s progressive benefit calculation.

If you were to receive pensions from a federal, state, or local government based on work that you did not pay Social Security taxes, your spouse’s/widow(er)’s/ex-spouse’s benefits may be reduced by two-thirds by the Government Pension Offset (GPO). In the case of a large pension, the GPO may reduce spousal benefits to zero. [3]



According to government reports, the Social Security Trust Fund will be depleted by 2034 if no changes are made. Depletion of the trust is mainly a product of an influx in the number of retirees becoming of age from the baby boomer generation coupled with a declining number of younger working population to fund the current benefits.




If the trust were to be depleted in 2034, it is projected that there will be sufficient income coming in to fund 79% of scheduled benefits [1]. However, through the years there have been several proposed solutions to keep the Social Security Trust Fund solvent:

Raise the full retirement age beyond 67. As life expectancies continue to increase, coupled with a working population that is retiring later and later, many argue for a solution that indexes the full retirement age to increases in life expectancy as opposed to a set schedule.

Raise the cap on wages subject to Social Security payroll taxes. Currently, with the earnings cap of $132,900, approximately 85% of all wages are subject to Social Security payroll taxes. The solution proposes that the earnings cap be elevated in the coming years to encompass 90% of all wages, creating an influx of taxes to fund the trust.

Raise the Social Security payroll tax. The most obvious of the solutions requires an increase in the Social Security payroll tax to be paid evenly by both workers and employers (currently 12.4% total – 6.2% paid by employees and 6.2% paid by employers).

Reduce benefits for certain income brackets. The solution looks to adjust Social Security’s progressive nature, which replaces a higher proportion of income for long time low wage earners than high earners. More specifically, further reduce the benefits of high earners while leaving the lower 30% of recipients’ benefits unchanged.

Adjust the cost of living calculation. Currently, Social Security increases annually to account for increases in the consumer price index. With the goal of reducing the rate of annual adjustments in benefits, the solution argues for benefits to no longer be adjusted for increases in the consumer price index, but the chain-weighted consumer price index instead. The chain weighted consumer price index considers product substitutions made by consumers and any additional changes to their spending habits, which many believe to be a more accurate depiction of consumer responses to price changes. According to the American Academy of Actuaries, the switch to chain-weighted consumer price index would lower the annual increase in benefits by 0.3%. [2]



Though Social Security should only be expected to replace 40% of retirement income, deciding when to claim is still an important decision for retirees, or those nearing retirement. In making this decision you should think about your financial needs and objectives through retirement while also taking into account your current health and overall life expectancy. You should then get in touch with an agent from the Social Security Administration to receive an accurate estimate of the benefits you are eligible to receive. Once you have both an estimate of your benefits and your total retirement income you may more easily see how Social Security fits into your overall objective.



[1] “The Social Security Claiming Guide.” Center for Retirement Research at Boston College. 2016. Accessed April 25, 2019. https://crr.bc.edu/special-projects/books/the-social-security-claiming-guide/

[2] ”Six Ways to Fix Social Security.” Kiplinger. Accessed April 25, 2019. https://www.kiplinger.com/article/retirement/T051-C000-S002-ways-to-fix-social-security.html

[3] Social Security Administration Website: www.ssa.gov