Social Security: What everyone, from Gen Z to Boomers, should know

NEWS: Most Americans oppose cuts to Social Security according to an Associated Press-NORC Center for Public Affairs Research poll taken in March and released April 6.

WHAT IT MEANS TO YOU: Anyone who works puts money into the Social Security system and has the right to expect it to come back to them when they retire.

In a poll released Thursday, 79% said they oppose reducing the size of Social Security benefits, which go out monthly to about 66 million Americans.

If you’re younger, you may think of Social Security as something that you don’t have to worry about until you retire, and for now it’s just an annoying deduction from your paycheck.

If you’re nearing retirement age, you may have started worrying more about whether it will still be there for you, how it fits into your retirement plan and how it will work for you.

If you’re already retired and getting Social Security benefits, you may be wondering if you’ll keep getting them at the amount you are and whether you can pick up a part-time job to supplement it.

Today we’ll look at how it works and what everyone, no matter what age, should know about Social Security retirement benefits.

QUESTION: Ok, how DOES it work?

ANSWER: The simple answer is that every working American puts money into the system. Even people who work for themselves pay a self-employed tax, where the money goes in. Once you reach full retirement age, which is now 67 for anyone born after 1959, you receive benefits based on your highest 35 years of earning.

Q: So, how much can I expect to get when I retire?

A. The average monthly benefit in 2023 is $1,827, according to the Social Security Administration. Individually, the SSA uses a complicated formula that involves 35 years of income, and changes in general wage levels, to compute the “primary insurance amount,” which is the basis for individual payments. The higher your wages throughout your career, the higher your benefit will be.

Q. What’s the deal with collecting before reaching retirement age? Isn’t that just a way to lose money?

A. Most people are eligible to begin collecting Social Security five years before full retirement age. With full retirement age being 67 for most people nearing retirement now, that’s 62. While the monthly payment is less, you get it five years earlier, so you’re not really getting “less money.”

The decision to start collecting early is an individual one. If you’re fine with your income as it is, then it’s best to hold off. If the monthly payment will make a big difference, then do the math and see if it’s worth it. For instance, if you are self-employed and rely on clients to pay on time and the work to be consistent, but it isn’t, then knowing you have a definite monthly payment for your bills can make a big difference.

Q. So, you can still earn money while you collect Social Security?

A. Yes. Once you reach full retirement age, there are no limits to what you can earn outside of Social Security. In the five years leading up to it, there is an income cap, based on how much you get in Social Security, and if you exceed it, your monthly payment is reduced. The SSA only counts take-home wages, or net profit if you’re self-employed. It doesn’t count pensions, annuities or investment income.

If your payment is reduced, you don’t really lose money. What’s taken out is added on to what you’ll get once you reach full retirement age. For more on how this works, check out the SSA’s page on working while you collect benefits.

Q. Will I pay taxes on my Social Security monthly benefit?

A. If you have an income aside from Social Security, you may have to pay federal taxes that include taxes on your Social Security benefit. As with everything else to do with Social Security, there’s a formula for this. For tax purposes, Social Security looks at what it calls combined income. Combined income is your adjusted gross income (the income that shows up on your income tax return form after all your deductions), plus any nontaxable interest, plus half of your Social Security benefit.

The SSA estimates about half of the people who collect Social Security retirement benefits pay federal taxes on them. New Hampshire residents, who don’t pay a state income tax, don’t have to worry about state taxes being taken out, but residents of 11 states do. Keep this in mind if you’re planning on retiring to Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah or Vermont.

Other things you should know about Social Security and taxes:

• If you are married and filing jointly, there’s a formula for that, too, so you may want to consider how you file your taxes as a couple once you start collecting Social Security.
• You never pay taxes on more than 85% of your Social Security benefit.
• You can have taxes withheld from your SSA payments, or calculate how much you will owe and pay taxes quarterly to avoid a tax hit when you file.
• Supplemental Security Income and Social Security Disability Income are not taxed.

For more on how Social Security and taxes work, visit the SSA’s page on the topic.

Q. You mentioned “most people” reaching full retirement age at 67. What does that mean? There are different full retirement ages?

A. Yes. The age has crept up as benefits have been adjusted. Raising the age is one way to keep benefits at their full level for those collecting them. The levels are:

• Born 1943-1954, retirement age is 66
• Born in 1955, retirement age is 66 and 2 months
• Born in 1956, retirement age is 66 and 4 months
• Born in 1957, retirement age is 66 and 6 months
• Born in 1958, retirement age is 66 and 8 months
• Born in 1959, retirement age is 66 and 10 months
• Born in 1960 or later, retirement age is 67

If your birthday is Jan. 1, your retirement year is the year before. Raising full retirement age is one of the solutions offered to keep benefits at the rate they are.

Q. How long can I wait to collect? Do I get more if I wait until after full retirement age?

A. Yes, it keeps going up until you reach 70.

Q: You said there would be information for younger people, but so far this seems like it doesn’t pertain to us.

A. It’s never too early to consider where the money will come from when you retire, even if it seems like it’s so far in the future it’s another person’s life. Decisions you make even at the beginning of your career will have an impact on how much you’ll get in Social Security benefits, as well as how much you’ll have in retirement overall. If you’re in your 20s or 30s and don’t think it matters to think about it, look at it this way: Financial planners estimate you need between 70-80% of your annual working income to live on during retirement. Social Security will account for 40% or less than that. Where will the rest come from? On the other hand, the more you earn now and pay into the system, the more Social Security money you will get.

You may also need Social Security benefits long before retirement age. About 1-in-3 Americans collect early Social Security because of disability. If you die, your kids and spouse will collect your benefits right away as a way to make up for losing your income.

So, there are a lot of reasons to think about Social Security, and retirement in general, no matter how young you are.

Q. Will money I save for retirement, like the 401(k) at work, mean I’ll get less in Social Security?

A. No, not at all. Social Security retirement benefits are intended to be just one part of a retirement savings plan. Even if you start collecting Social Security before full retirement age, any income you get from a 401(k), IRA, pension or other retirement benefits doesn’t count as income that would affect your benefit.

And saving any amount, as early as possible, is a good idea. If you saved $6,000 a year in an investment account with a 7% return, you’d have $829,421 after 35 years. If you don’t have 35 years left in your career, it pays off even in the short run. You’d have $34,504 after five years, $150,774 after 15 and $379,494 after 25. Saving $6,000 is only an example to show how savings can grow exponentially. Even if you put $10 or $25 away a week and don’t touch it, it will grow and it’ll be money that won’t count against your Social Security benefit.

Planning right now means you’ll have more money in the bank when you retire, and then you’ll have Social Security on top of it.

Q. OK, Boomer. But it’s pretty obvious that Social Security won’t even be around when I get to retirement age, so what’s the point?

A. Ok, my young friend, here’s the point: that’s a huge misconception.

While the Social Security trust fund, as is, technically would not be able to sustain benefits at the level it pays now, solutions are being considered that include raising payroll taxes, increasing the maximum percentage people pay in (currently it stops rising at the $139,000 income level) so that people who make high wages are putting more money in, and possibility cutting some benefits. That said, Social Security will still be there when you retire.

Your role is to understand it enough to help decide how it will look. Who you vote for and legislative decisions they make will determine what happens with Social Security. You may not like “politics,” but government and how it operates directly affects your life and pocketbook. You’re either part of the solution, or part of the problem, as we Boomers like to say.

The SSA’s website addresses a lot of this in more detail, and has cool calculators to figure out answers to individual financial questions and much more.