A Guide to Social Security

Elizabeth Perry Hutton, CFP®, Vice President, Financial Planner and Portfolio Operations Manager

Now, to put it bluntly, nothing about Social Security benefits and how they’re calculated is particularly straight-forward or simple to understand, but we will cover each facet in depth to give you a better idea of the factors to consider when making decisions about Social Security.


Social Security: what it is, how it works, and when to claim it.

Part I: What is Social Security and how does it work?

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 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 $160,200 in 2023. To be eligible to receive Social Security retirement 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. Combined income is calculated as follows:

Taxation of benefits usually occurs when you have substantial income in addition to your Social Security benefits, including wages, self-employment, interest, and dividends. The largest amount of the benefits you receive that can be taxed is 85%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 – $34,000


Married Filing Jointly

$32,000 – $44,000



Part II: How are my Social Security benefits calculated?

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. In other words, those who presumably rely more heavily on Social Security benefits to live on are given a larger percentage of wage replacement in the form of their benefits. This is less true for higher earners. One question that might come to your mind is, Will working with a reduced salary reduce my benefits?” Well, it depends. If you have recorded 35 years of significant earnings, then it likely will not because it wouldn’t be part of the calculation. If you have not recorded 35 years of significant earnings, then it very well might have an impact on your benefits by dragging down your average earnings. You might also be wondering, What happens to my benefits if I stop working? Again, if you have recorded 35 years of earnings, nothing will happen. However, let’s say that you stop working after a recorded 30 years. You would have zero earnings recorded for years 31-35, and as such, your average earnings would be negatively impacted by those years of not working. If you’re not exactly sure where you stand with regard to years on record, you can check your status at ssa.gov.

Understanding the concept of Full Retirement Age

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 beginning at the age of 62. If you 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 delay collecting benefits until after your full retirement age, you will receive an 8% credit (or increase) for each year past full retirement age up to age 70. In essence, the later you claim, the more you get, but no additional credit is given after age 69, so the largest benefit you may receive is by delaying  collection until age 70.

Why wouldn’t I delay collecting Social Security benefits until age 70, then?

You may initially think then that delaying collection until age 70 is the most prudent thing you can do. And maybe it is, but that is not necessarily always the case. Because you likely require income to live on in those years, it is important to have a CFP® professional assess the impact of living on income from your investment portfolio or savings versus living on Social Security payments. A full Social Security analysis is often necessary to see the impact of collection on your overall portfolio assets year-by-year. Put another way, if delaying Social Security causes you to unnecessarily interrupt the compounding of your investment portfolio or unnecessarily withdraw income from a tax-deferred retirement account and incur an income tax hit, it may actually be more harmful to delay Social Security benefits to age 70. Suffice it to say, everyone’s situation is different and this decision is not as simple as it may look on its face. We will get into this a bit more below on the topic of assessing when to collect.

Understanding the Spousal Benefit

The worker’s spouse is eligible to collect the greater of the benefits he/she would earn on his/her own or 50% of their spouse’s primary insurance amount at full retirement age. This is particularly relevant when one party did not work outside of the home or worked outside of the home to a lesser degree. The spousal benefit allows that spouse to take advantage of his/her working spouse’s eligibility instead of being penalized for their contribution to their household in other ways, To become eligible to collect spousal benefits, he/she must be at least 62 years of age as well as the working spouse (meaning he/she cannot collect spousal benefits if their spouse is not yet eligible), unless they have a qualifying child under the age of 16 or are receiving Social Security Disability benefits. 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. If you are worried about whether your own benefit is higher than what your spousal benefit would be, worry not; the SSA is responsible for figuring this out for you, and you will receive whichever amount is higher. Claiming a spousal benefit instead of your own benefit does not impact the spouse’s (or ex-spouse’s) benefit at all. If you remarry, you are required to report this change in marital status to the Social Security Administration and are no longer eligible for collecting your ex-spouse’s benefits.


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 









66 and 2 months







66 and 4 months







66 and 6 months







66 and 8 months







66 and 10 months






1960 and later









What happens with Social Security if I’m still working?

If you decide to begin collecting Social Security benefits while you are still working and you are below full retirement age, your benefits will be reduced by $1 for every $2 of earned income above $21,240 in 2023. In the year you reach full retirement age, your benefits will be reduced by $1 for every $3 of earned income above $56,520 in 2023. Earnings are calculated up to the month before you reach your full retirement age. Once you have reached full retirement age, you will no longer receive reductions for earned income.  The SSA has defined earned income as wages earned for work done for others and/or net earnings from self-employment. Think of it as wages you’re actually working for, Any other forms of income such as interest, capital gains, investment earnings, government benefits, certain pensions, or annuities are not counted as 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. [2] 

Part III: When is the right time for me to claim Social Security?

Unfortunately, as I mentioned above, there is no simple answer. And we would always recommend having a CFP® professional do a full Social Security analysis to help this decision be an informed one for you. However, 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 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 be paying less in taxes as you won’t be paying payroll tax on income from social security, savings, pensions, etc.

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 (invested in the stock market, for instance) or left for inheritance. As you draw down your savings, the potential for upside gain through investing and compounding is significantly decreased. To illustrate this point further: when you spend $100 of your invested savings to live on, you’re not just spending $100. You’re spending more than $100 because you’re eliminating the ability of that $100 to compound for the next x number of years. If left invested, that $100 would likely grow at an annualized rate of anywhere from 3-10%.

On the other hand, 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. In other words, you don’t need the money right now, so why not delay for a greater benefit in the future?

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 collecting benefits 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.

There are many factors to consider in deciding when to begin collecting Social Security, and the decision is a highly personal one that is unique to your individual circumstances.

One of the more common questions we get is “When should I contact the Social Security Administration to claim my benefits?”. As discussed earlier, you can begin collecting your retirement benefits at any point between age 62 and 70. The Social Security Administration allows you to apply for retirement benefits up to four months prior to the month you would like to begin receiving benefits. To avoid a gap in income, it is important to know that your first check will not arrive the month you choose to begin receiving retirement benefits, but the month after. For example, if you select a May start date you can apply in January, February, March, April or May and your first check will not arrive until June. The Social Security Administration offers an easy-to-use online application for convenience.

Regardless of when you decide to begin collecting your Social Security retirement benefits, you still should sign up for Medicare three months before your 65th birthday. [2]

Part IV: What if I decide to collect Social Security early and then change my mind?

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. [2]

Part V: What if I worked for an employer who did not withhold Social Security taxes from my salary or wages?

If you worked for an employer who does not withhold Social Security taxes from your salary, you may be affected by the Windfall Elimination Provision (WEP).If you receive a retirement or disability pension from this employer, and also worked in any other job(s) that qualify you for Social Security benefits, these benefits may be reduced. 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. [2]

Part VI: But isn’t Social Security not sustainable? I heard Social Security is going to run out.

According to government reports, the Social Security Trust Fund will be depleted by 2035 if no changes are made. Depletion of the trust is mainly a product of an influx in the number of retirees from the Baby Boomer generation coupled with a declining younger working population to fund the current benefits. Of note, the projections in the 2022 Social Security and Medicare Trust Fund Report indicate that the COVID-19 pandemic and recession will have little effect on the sustainability of the Social Security Trust Fund, but this will continue to be monitored in future reports. [2]

If the trust were to be depleted in 2035, it is projected that there will be sufficient income to fund 80% of scheduled benefits [2]. 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 have historically increased, 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, wages subject to Social Security payroll taxes are capped at $160,200. The solution proposes that the earnings cap be elevated in the coming years, 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 percentage of recipients’ benefits unchanged.

Adjust the cost-of-living calculation. Currently, Social Security increases annually to account for increases in the consumer price index (in other words, it attempts to increase at the same or similar rate to inflation so that benefits still have the same purchasing power). 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%. [1]

Part VII: Conclusion

Though Social Security should only be expected to replace 40% of retirement income, deciding when to claim is still an important decision for retirees and 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 first visit ssa.gov or 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 work with a CFP® professional do a full Social Security analysis tosee how Social Security fits into your overall retirement planning and goals.


[1] ”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

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


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