By Dr. Jim Dahle, WCI FounderI received a question via email recently which made me realize that despite writing about Social Security multiple times in the past, there is still a lot of misunderstanding about how it works. I thought it would be useful to write a post about the basics of this important retirement income stream. Other posts about Social Security can be found at these links:
- The Consequences of Ignoring Social Security
- 10 Reasons Not to Take Social Security Early
- Social Security Bend Points – Maximizing Your Benefit
- What's the Best Age to Take Social Security?
- 5 Reasons to Not Give Up on Social Security
- The Two Best Books on Social Security
- When to Take Social Security: A Pro/Con
Here are the main parts of the email I received:
“My physician husband and I are 61, married 39 years. I have been a stay-at-home mom and thus have only 34 work credits. My husband intends to keep working until at least 67 if health holds. We may wait until 70 to kick in his Social Security benefits.
Is there any reason that I should try to work to pick up the missing six credits to be eligible for myself? I’m not entirely certain what my status is should something happen prior to his receiving any benefits. I understand there are reduced benefits at 62. He has his own disability insurance through his current employer, so I think we are more than covered there. He also has two term life policies totaling $3.5 million, so I could maybe live on that before tapping into Social Security.
He does have a MySocialSecurity account so I know the estimate per month for him each year as it is recalculated, but I don’t quite understand what I am eligible for. Would I be eligible for his entire Social Security benefit if he passed or a percentage? I am assuming even if not, it would still be more than what my own would be with just 40 credits? I currently have none. I have not been employed since 1988.
Am I fully eligible for Medicare at 65 if he should become disabled or pass before 65? If we are both living at 67 and start Social Security then, is there a monthly spousal benefit added in addition to his?”
8 Key Facts About Social Security
There are (at least) eight things that everyone should know about the Social Security program.
#1 Social Security Is Going to Be There
The first thing to realize is that despite the fear-mongering you hear from time to time, Social Security isn't going anywhere. Yes, the pot of government IOUs that make up the Social Security Trust Fund will eventually disappear IF there are no changes to how Social Security is taxed and distributed. What does that mean? That means that the program can only pay 77% of promised benefits using current revenues. What is the likelihood of that happening? Well, it's not zero, but it certainly rounds there. Go ahead. Show me 60 senators who are going to vote for a massive cut in Social Security (much less abolishing the program completely). I'll wait. Oh? You could only come up with four or five? Me too.
So, how will Social Security be fixed? It's actually not very complicated. It's just math. It will be a combination of some or all of the following:
- Higher Social Security tax rate
- Higher wage limit (i.e. the amount of income high earners pay Social Security tax on)
- Higher full retirement age
- Lower inflation adjustment
- More means testing on Social Security benefits
- Lower benefits
Not complicated, but there is a political fight there. The conservatives will argue for lower benefits while the progressives will argue for higher taxes. They'll wait until the last possible minute and then make some sort of compromise so it works out. I wouldn't spend any time worrying about it. If you want to worry about a government program for the elderly that could implode, worry about Medicare.
#2 You Get Either Your Benefit or 50%-100% of Your Spouse's Benefit
As the email above demonstrates, lots of people don't understand exactly how this complicated program works. Admittedly, there is plenty of complexity. But the basics aren't hard to understand. While you both live, you get either your earned benefit OR 50% of your spouse's earned benefit, whichever is higher. When one of you dies, the other is left with 100% of the higher of the two benefits.
#3 Most People Will Get Less Than They Think
The annual statement you get in the mail or by downloading from MySocialSecurity projects out what your benefit will be. This is what my most recent statement (and my wife's) showed:
As you can see, the projection now thinks my wife will be better off with her own benefit than half of mine. That wasn't the case just a few years ago. But that's not my point. My point is that most people misunderstand this chart. Most people think that this is the benefit they have now earned. That's not the case. If I quit working today, I would NOT get a benefit of $4,521 per month when I turn 70. That projection assumes that I will continue to work until age 70, earning at least as much in Social Security taxable income each year as I did last year (above the 2024 Social Security wage limit of $168,600). In reality, if I retired today, my benefit would be significantly less.
If you really want to get into the nitty-gritty, you can download your complete Social Security earnings record from the MySocialSecurity website and then plug it into a great calculator like Mike Piper's OpenSocialSecurity or the SSAtools calculator and find out what your benefit would be if you quit working this year. I'm not sure why the Social Security statements don't just do this for you. Maybe the government doesn't want to encourage people to retire early. Or maybe it doesn't want people to know that their benefit really won't be going up all that much compared to how much they will pay in future Social Security taxes. I don't know, but what you need to know is that this is how the process works.
The longer the period of time between when you stop working and when you start taking your Social Security benefit, the less accurate this projection is. Also, the shorter the period of time you have worked, the less accurate this projection is—especially if you are now paying maximum Social Security taxes but have not been doing so for very many years (like an early-career doctor).
When I use the tools at SSAtools, I discover that if I quit working today, my primary insurance amount (what I would get at age 67) is not $3,611 but only $2,637. Big difference. That's 27% less. For Katie, it's not $2,943 but $1,464, 50% less.
#4 Social Security Is the Best Annuity Deal Out There
Delaying Social Security to age 70 is the right financial move for the vast majority of people who can afford to do so by living off of other assets until age 70 or by working until age 70. Obviously, there are exceptions—like if you're diagnosed with terminal cancer at age 62. The reason delaying is such a good idea is that your benefit payment will be higher. That makes sense. It should be higher since it won't have to be made for as many years since you're now older and will thus collect benefits for fewer years.
However, this ignores the insurance aspect of Social Security. Not only will it pay out every month until you die, but it is indexed to inflation. Since it includes everybody—not just the healthy people who buy annuities—it is also priced better than the annuities that you can buy from an insurance company (which won't sell you an inflation-indexed annuity these days anyway). Delaying Social Security is the best deal in annuities on the market. It's idiotic to take Social Security at 62 and then buy an annuity. You'd be better off living off the assets you're using to buy the annuity and delaying Social Security.
#5 Social Security Is More Than an Old-Age Pension
Social Security is more than just a retirement benefit. It also includes a disability benefit, although this is generally much lower (mine is $3,319 a month) than what most docs get from an individually purchased disability insurance policy. Social Security disability is also dramatically harder to qualify for than a good true own occupation disability policy since it requires the disabled person to not be able to do any work at all.
Social Security also includes a survivorship benefit. If you die, your heirs get a one-time $255 benefit plus a monthly benefit for any kids under 16 and your spouse caring for any kids under 16. In addition, your spouse is covered for a retirement benefit even if they never work a day in their life and even if the two of you divorce. Despite the fact that your Social Security statement talks about Medicare, the two programs are separate and paid for with different taxes.
#6 You Don't Always Need 40 Quarters
The emailer talks about getting six more quarters of work to qualify for her own benefit. As mentioned above, she doesn't have to do that to get a benefit. She qualifies based on her spouse's work for 50% of his benefit while he's alive and 100% of his benefit when he dies. You also don't need 40 quarters to get a survivor's benefit if your spouse qualifies. The younger the worker, the fewer credits that are needed to get a survivor's benefit. In fact, they can be had for as few as six credits in the previous three years. The disability benefit doesn't require 40 quarters either. The younger you are, the less credits that are required. If you're under 24, you only need six credits in the prior three years. Even a 41-year-old only needs 20 credits in the prior 10 years.
#7 Social Security Has Bend Points
Social Security is a really good “investment” in the beginning. You get a lot of bang for your buck for your Social Security tax dollars when you don't earn much and haven't been earning it for very long. That's why it is kind of a tragedy to see low earners working “under the table.” They wouldn't be paying much if anything in income tax, and their Social Security taxes would be a great use for their money.
Social Security subsequently transitions twice (technically three times) into a less and less attractive “investment.” These transitions are known as “bend points.” The SSAtools site provides a great demonstration of the bend points. Here are the charts it provides for me and for Katie based on our earnings records.
As you can see, I am just about at the second bend point. Katie is not, as you can see below:
Before the first bend point, every dollar of SS taxed earnings increases your Social Security benefit by 90 cents. Between the first and second points, additional earnings increase the benefit by 32 cents per dollar. Between the second and third points, additional earnings increase the benefit by only 15 cents per dollar. At a certain point, additional earnings don't increase your benefit at all as seen in this generic (although slightly dated) chart.
Lots of people who are interested in FIRE figure there is little point for them to work beyond the second bend point. By the time you get there, you've certainly earned enough money to have saved up enough to live on for the rest of your life, and the Social Security Administration isn't going to reward you much for additional work. You can use this data in other ways, too. For example, once I hit the second bend point, all else being equal, it makes more financial sense (at least when applied to our personal lives) for WCI to pay Katie more and me less.
#8 You Can Get Medicare Based on Your Spouse's Work
Medicare and Social Security are separate programs with their own associated tax, but I thought this one was worth throwing in as a bonus (and in response to the emailer). Just like you can qualify for a Social Security pension based on your spouse's work, you can also qualify for Medicare based entirely on your spouse's work. If your spouse qualifies, there's a good chance you do too, even if your spouse has died. Here are the rules:
You must be 65 AND one of the following:
- You are currently married and your spouse is eligible for either Social Security retirement or disability benefits
- You are divorced and your former spouse is eligible for either Social Security retirement or disability benefits AND you were married for at least 10 years AND you are now single
- You are widowed, currently single, and were married for at least nine months
Social Security makes up a large part of the retirement income for most retirees (for 40%, it's the only source of income) and a substantial part even for high earners, like most WCIers. (Even if we quit working today, Katie and I would get $60,000+ a year from Social Security starting at age 70.) Make sure you understand how it works.
What do you think? Was any of this information new to you? What have you learned about Social Security that surprised you?
We are unfortunately in one of those complicated situations regarding social security benefits. I am married to a teacher who will receive a state pension. I am the primary breadwinner but terminally ill. We are pushing hard for me to make it until after our kids graduate and ironically, hopefully won’t qualify for survivor’s benefits for them. Using the GPO calculator, my husband’s survivor benefits will be fairly decreased. He might have enough to likely cover groceries for the month. We are just thankful that we never included potential social security benefits in our long term financial planning when we initially got married.
I am sorry that you are in a difficult situation. You should Google “Social Security Fairness Act “. The House just passed this bill which would eliminate the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO).
Sorry to hear about your illness. Thanks for your sharing your situation.
Great post! One additional comment which only applies to some folks but is of interest to people who spend time working outside the US.
The US has Totalization Agreements with many (but not all) countries which allow you to be exempted from paying into SS while working overseas if you are paying into the equivalent in your host country. (If you are self-employed or work for a US employer overseas you are otherwise supposed to be paying into SS.) A common feature of those agreements is that they will allow counting minimum eligibility for receiving SS, that is the 40 minimum quarters of substantial earnings, across borders. For instance, if you worked in the US only 32 quarters but worked in Japan for 120 quarters, you can meet the US 40 quarter threshold by referencing the time you worked overseas. This does not increase the average earnings which determine the monetary SS benefit but at least lets you qualify for a benefit based on those 8 years (32 quarters) of US earnings. The reverse can also be true (time working in the US can help count for the minimum time working required for a foreign SS equivalent) but this varies by treaty. This is an area of remarkable international coordination and for expats in Japan you actually make this SS benefit application at the Japanese national pension office.
Interesting. As usual, anything involving 2+ countries quickly becomes super complicated.
I spent nine quarters working in Switzerland which has a Totalization Agreement with the US. Do you know if claiming any pension from the Swiss system will impact my US SS amount? I am aware I will have to pay US income taxes on any Swiss pension.
I do not know for sure but in general the act of claiming a foreign pension is not what subjects someone to WEP; it is the years of employment without paying into SS while being covered by that foreign plan. I understand that the Swiss OASDI has an unusually low minimum working time requirement (it is so short that Japan does not even have a totalization agreement with Switzerland because there is no need to exchange time credits). You might look at the SS page on the US totalization agreement with Switzerland but my assumption is that you can claim this without hurting your SS benefit.
https://www.ssa.gov/international/Agreement_Pamphlets/switzrld.html
Many thanks for your response and the webpage link.
Just thought I’d complete the concept of #3. Social security benefit will be calculated fairly by converting an individual’s lifetime earnings to a monthly average based on the 35 years in which they earned the most, adjusted for inflation.
Early career earnings or retiring early drags the average down from peak annual earnings, especially if years of earnings are few. If you have less than 35 years of work, a Zero is added to fill the blank earnings.
It isn’t a game to win but a calculation to place you on a data sheet. I’ve heard to think of SS as a cherry on top of your retirement earnings due to its unfunded liability.
I’m not sure I’d call the only source of income for 40% of retirees (nor something projected to pay us something like $8K/month just a “cherry on top.” It’s great if you’re in a position where you can think of it that way of course, but that’s mostly just a function of being really wealthy.
If my husband and I are in our 50s. We both have always worked and will be eligible for social security. If he dies before age 65, would I be eligible for any of his social security and if so, at what age?
Thanks
No. You get either your benefit or half of his and if you’ve always worked, your full benefit is likely more than half of his. So neither of you would get any benefit if he dies before taking it. Note that he could start it at age 62, although most should wait until 70, at least if they’re the higher earner in the couple, even if that risks “not getting anything” if you die relatively young.
First, I appreciate the insights shared in the post. However, Jim’s response is not accurate. She is eligible to receive survivor benefits as early as age 60, though the amount will be reduced. If she waits until her full retirement age, she can receive the full survivor benefit.
As a survivor whose spouse passed before claiming Social Security benefits, I plan to begin receiving survivor benefits at 60 and will claim my own benefits at 70.
For more information, here’s a link to the relevant publication: https://www.ssa.gov/pubs/EN-05-10084.pdf
Good point about the survivor benefit. I was just talking about the retirement benefit. There’s a lot of moving parts when it comes to Social Security.
A couple of additional points: for people born in 1962 or later, you hit the full survivor benefit at the age of 67. (It’s 66 years and 10 months if the survivor was born in 1961; 66 and 8 months for survivors born in 1960; 66 years and 6 months for survivors born in 1959; 66 years and 4 months for survivors born in 1958; 66 years and two months born survivors born in 1957; 66 for those born in 1959, and for some period before that year.) You’ll not that these don’t match up exactly with your own full retirement age (67 if you were born in 1960 or later.) The size of full spousal benefit stops growing at the time the deceased spouse dies, so there’s no reason to delay once you reach the full survivor retirement age.
I’m retired, but not yet claiming Social Security; I’ve reached my full retirement age. The size of my benefit will increase 8% per year until I start claiming, even without additional wages, until my 70th birthday (exclusive of adjustments for inflation).
Thanks for the additional info.
Two things. First, my benefit is just short of the max and I considered it so valuable I waited until 70 notwithstanding my wife’s teacher’s retirement pension denies her any benefit due to the GPO. Second, the issue to prepare for is full tax exempt status. I have started modeling that and it affects everything. Jim, now that the election has passed you guys should work that.
In 2005, President Bush proposed a partial privatization of social security benefits. Benefits were cut under President Reagan by raising the retirement age for full benefits. No one knows what the future holds. What we do know, is that there is no bipartisan consensus unlike there was when Reagan and Speaker Tip O’Neill were in office; political opponents, they were friends and were able to turn off the clock, have a drink or play golf together.
Social Security isn’t terribly hard to fix. It’ll be fixed as soon as it has to be fixed. Raise the benefit age a little, raise the tax a little, bump up the wage limit, lower the benefits a little, change the inflation adjustment a little etc. It’s not complicated. Even Congress can figure it out. They won’t fix it until it has to be fixed though because that’s how Congress works. And there will be lots of fighting as far as which of those items makes the biggest contribution.
If you want a problem worth worrying about that doesn’t have easy solutions, look at Medicare.
The rise in income inequality has resulted in a fair increase in benefits for nearly all beneficiaries. The Turnpoints are adjusted based on the Average Salary and thus incomes above the Cap cause benefits for all to rise – despite the high earner not paying SS taxes on any income above the cap.
see https://shawnpheneghan.wordpress.com/2019/03/11/thoughts-on-the-social-security-actuarial-imbalance/
This unintentional increase in benefits is a major cause of the actuarial imbalance.
Interesting.One more thing that can be adjusted to help solve the issue with SS.
A couple of comments.
1. I don’t think spousal benefits are paid until the earner files and begins collecting their earned benefit.
So, I think there would be some benefit to accruing additional work credits to allow the poster to collect their own benefits.
2. Survivors benefits totally different game
And, I’m definitely going to have to hit Mike Piper’s website again and compare the results\advice with that of the SS product. I’m not in a career that allows continuing to work to 70, so the numbers I’ve thrown into my spreadsheet are based upon my expectation of “retiring”, living on other income, and then filing to begin collecting SS at 70.
The best over all advice seems to be for my much lower income Spouse to file early, 63’sh, and collect on her benefits until I file and she can begin collecting spousal benefits. (Worth noting, filing prior to 67 impacts on both of those benefits)
1- Can a spouse swap from their own to the spousal benefit now? Thought that option ended for those of us under 65 or so.
2- IIRC spousal benefit maxes out at half of what primary would get at 67, doesn’t rise as the primary’s does waiting until 70, and one can’t start it until primary starts, at 70 perhaps?
Not an issue for us so I’m not tracking down the answer but it wasn’t terribly obvious in any case.
From Mike Piper’s book SS made simple
“It’s important to note that you cannot claim spousal benefits until your spouse has filed for his/her own retirement benefit.“
There are a plethora of strategies, and a few websites out there to aid in the strategy.
In our situation, very disparate potential benefit levels.
From the book, to max out benefits while both of us are alive, it’s better for the lower income spouse to file early. Even though that will have an impact on spousal benefits, once the higher income earner files.
The way I understand it, spousal adds a top off to your benefits.
Also from the book
EXAMPLE: Catherine’s primary insurance amount is $800. Her husband Michael’s primary insurance amount is $2,000. Catherine files for her own retirement benefit five years prior to full retirement age. She later begins to receive a spousal benefit, when Michael files for his retirement benefit. If Catherine has already reached her FRA as of the date that her spousal benefit begins, her total monthly benefit would be $760, calculated as follows: Catherine’s own retirement benefit of $560, calculated as $800 x 70% (due to claiming five years prior to FRA), plus Catherine’s spousal benefit of $200, calculated as 50% x $2,000 — $800. Note that Catherine’s total monthly benefit is $240 less than 50% of Michael’s PIA. That’s because her retirement benefit is reduced by $240 due to early filing, and that reduction continues to be relevant even after her benefit as a spouse has kicked in. Another important point is that if Catherine’s spousal benefit began before she reached her full retirement age, we would have to multiply her $200 spousal benefit by a reduction factor due to early entitlement (e.g., multiplying by 75% if it began 36 months prior to FRA).
You mentioned the spousal benefit to claim Medicare based on the married partner,
even if that spouse has not qualified for social security benefits based on employment. In our personal experience, this is something that is not clearly understood by many at Social Security local departments.. We never got a clear answer to this, until we set up a phone appointment for my wife’s Medicare application.
Also, WEP and GPO would be a great follow up topic on this discussion. It is poorly understood. It’s not only an issue for the one who falls into this category, but can adversely affect the surviving spouse’s own social security payments in the event of a premature death. This issue was briefly brought up in an earlier comment.
Good ideas. It was supposed to be a post about the basics and not sure WEP and GPO qualify, but they would make for interesting posts.
Since I started working as a resident in 1990, I’m just about to the 35 years of earnings with no zeros being in the mix. My wife will get half of my benefit at FRA.
My current understanding is that she should file at 62 for her early benefit and take that until I retire at FRA and her benefit will adjust upward to half of mine? For these 7-8 years, she would get about $10,000 a year and not be locked into this lower benefit?
She has been retired since age 50, so she has a very low personal benefit and it won’t be going up based on earnings.
If your wife starts social security before her FRA she will receive less than half of your FRA benefit.
How much less? Say, for instance, that my wife’s benefit at 62 would be $1000/mo and my benefit at age 70 would be $4000/mo. My understanding was that she could start claiming at 62 and make $1000/mo for eight years, and then when I started claiming at age 70 her benefit would increase to $2000/mo. From what you are saying, I would conclude that her benefit at age 70 would be less than $2000/mo but still significantly more than $1000/mo. Is this correct?
This sort of situation probably applies to a significant number of readers of this blog (i.e., one very high earning spouse and one relatively low-earning spouse such that the low-earning spouse’s benefit is less than half of the high-earning one). Might be a good subject for a post on its own.
EXAMPLE: Catherine’s primary insurance amount is $800. Her husband Michael’s primary insurance amount is $2,000. Catherine files for her own retirement benefit five years prior to full retirement age. She later begins to receive a spousal benefit, when Michael files for his retirement benefit. If Catherine has already reached her FRA as of the date that her spousal benefit begins, her total monthly benefit would be $760, calculated as follows: Catherine’s own retirement benefit of $560, calculated as $800 x 70% (due to claiming five years prior to FRA), plus Catherine’s spousal benefit of $200, calculated as 50% x $2,000 — $800. Note that Catherine’s total monthly benefit is $240 less than 50% of Michael’s PIA. That’s because her retirement benefit is reduced by $240 due to early filing, and that reduction continues to be relevant even after her benefit as a spouse has kicked in. Another important point is that if Catherine’s spousal benefit began before she reached her full retirement age, we would have to multiply her $200 spousal benefit by a reduction factor due to early entitlement (e.g., multiplying by 75% if it began 36 months prior to FRA).
If anybody understands SS well, it’s Mike.
It’s amazing that what one would think would be a very simple, straightforward thing can be so complicated strategy wise. Kind of like student loan management right now. Maybe we need to start a Social Security advice company too.
Mike Piper’s free advice website
https://opensocialsecurity.com/
Just a quick comment on point #5. The disabled person can actually work and not lose their disability benefits. There are programs that allow you to work part-time as a form of rehab. Great post!
Thanks for the correction/clarification!
Excellent post! This was the most useful discussion of social security I have ever read. I have a feeling you are right about the manner in which social security will be fixed. We should probably all ignore the fear mongering and hand wringing until it actually happens. As a military physician I have gotten pretty used to the “you might not get paid next week” routine, yet after 17 years I have always been paid. It’s just not politically popular to not pay the military and it’s political suicide to suddenly cut benefits to seniors.
Glad you enjoyed it.
Might’ve missed it in the article, but fairly sure you’ve posted it in the past when recommending Mike Piper’s book.
This is his free website, that will make the math easy
https://opensocialsecurity.com/
I feel very fortunate considering Social Security will provide right at $85,000 in income when I start to draw it at the age of 70. That’s only a year away in our case. That’s including the amount my wife will get when she switches from her lower benefit to a spousal benefit based on my FRA benefit divided by two. Considering we have a considerable seven figures of retirement investments and no debt or mortgage, its strange to realize that most of our expenses will be covered just by SS benefits. We spend about $100K annually, and though we could double that, safely, we feel like we lead rich lives now. We have travelled to both ends of the globe in the last twelve months as well as all over the US and have built a vacation cabin in a wilderness setting with cash. I agree that people are overly pessimistic when it comes to this government program. Its going to benefit our three kids eventually just by the way in will increase their inheritance. Great comment section, I just learned that my wife’s spousal benefit will possibly be reduced by 2/3 of her teacher retirement pension. Fortunately that’s only $300 a month, so I think we can live with a $200 reduction.
There are thousands of possible combinations of income and age differences of a married couple that affect when they should each begin taking Social Security. But it’s important to remember that the goal is to maximize a couple’s total benefits over their lifetimes. This is explored in a thorough article called “Which Social Security Claiming Strategy Generates the Highest Legacy Value” published in The Journal of Financial Planning in January 2023. Not exactly light reading! But it made me feel a little better knowing that the decision is inherently challenging due to the complexity of Social Security and not just because I need my wife to help me complete the New York Times crossword puzzles.
Many times the answer is very, very simple though. Definitely more complicated when there are two people, but the vast majority of the time the right answer is still the higher earner waiting until 70.