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“Choosing what age to start collecting Social Security retirement benefits and which type of benefit to claim are extremely challenging and difficult.”

Social Security is a program managed by the federal government (Social Security Administration). The program works by using taxes paid into a trust fund to provide Social Security benefits to people who are eligible. It provides you with a source of income when you retire or if you can’t work due to a disability. It can also support your legal dependents (spouse, children, or parents) with benefits in the event of your death.

Understanding your Social Security benefits and when to claim those benefits can be challenging and complicated. “There are 2,728 rules in the Social Security handbook,” said Laurence Kotlikoff, Boston University economics professor and Social Security expert. “And then there’s literally hundreds of thousands of rules about those 2,728 rules. It’s the most complicated system I think mankind has ever developed.”

As a result of the program’s complexity, most Americans do not have a good understanding of Social Security, according to a Nationwide Retirement Institute® 2021 Social Security Survey. Moreover, many people don’t know what they don’t know:

Social Security is a “pay as you go” program; most of the Social Security taxes paid by today’s workers go straight to the benefit checks for today’s current retirees.
Only 16% know what age they are eligible for full Social Security benefits. For those born in 1960 or later, full retirement age is 67.
45% believe Social Security benefits will go up automatically when reaching retirement age after filing early. Filing early locks in a permanent reduction in Social Security benefits.
Half of U.S. adults (54%) don’t know what percentage of their income will be replaced by Social Security. It depends on lifetime earnings, but for middle-income individuals the replacement rate is usually around 40%.
55% believe or don’t know Social Security benefits are tax free. They are for low-income taxpayers, but for most people up to 50% of benefits are taxable.

How much you will receive from Social Security when you retire depends on how much you’ve earned and how long you have worked under the Social Security system. Your retirement benefit will be calculated by the Social Security Administration (SSA) based on your average lifetime earnings, but only your highest 35 years of earnings will count and only the years that you paid Social Security taxes.

The amount you receive will also be affected by whether you start collecting benefits early (you’ll get less), whether you collect benefits late (you’ll get more), whether you work after you retire, whether other family members receive benefits based on your earnings record, whether you collect certain other government benefits, and whether the cost of living rises.

It’s important to understand that Social Security is designed to provide a safety net of income for the retired, the disabled, and survivors of deceased insured workers. And, a key consideration for when you claim Social Security benefits is to maximize your income for a retirement that could last longer than 30 years.

The contributions you and your employers make during your working years provide:

Current retirees and other Social Security recipients with payments
A guaranteed lifetime income benefit when you reach retirement

Your base benefit or primary insurance amount (PIA) is calculated according to your “full retirement age,” or FRA, and your FRA is determined by your date of birth. If you claim Social Security benefits any time before your FRA, you lock in a permanent reduction in monthly income. Claiming at 62 translates to a reduced monthly income of 25% to 32%, relative to your FRA monthly benefit. That means you may receive less monthly retirement income, every year, for potentially several decades.

By waiting until age 70, you can lock in increased monthly benefits. If your FRA is 67, your monthly income would increase 24% by waiting. The facts are:

Age 62 is the earliest you can claim your benefit
Waiting to claim Social Security after age 62 results roughly in 8% increase in monthly income per year for each year you delay claiming (up to age 70).
If your FRA is 66, your monthly income would increase 32% by waiting.
If your FRA is 66 years and 10 months (if you turned 62 in 2021), your monthly income would increase 29.2% by waiting.

While the government does not have a specific account set aside just for you with your FICA contributions (the taxes for Social Security and Medicare paid by you and your employer), one of the most powerful features of Social Security is that it provides an inflation-protected guaranteed income stream in retirement, ensuring against the risk you’ll outlive your savings.

Even if you live to 100 or more, you’ll continue to receive income every month. And, if you predecease your spouse, your spouse also receives survivor benefits until their death.

“As of 2021, due to increased longevity and a decrease in the number of workers per beneficiary, and if changes are not made to the existing system, the Social Security Administration’s surplus fund will be depleted by 2034.”

Social Security is primarily financed through a dedicated payroll tax. There are also two other sources that fund this pool of money:

Taxes on some recipients’ benefits
Interest earned on the pool of money (Surplus Fund)

“As of 2021, due to increased longevity and a decrease in the number of workers per beneficiary, Social Security will have to tap the surplus fund to meet its obligations. And, if current projections are correct, Social Security will have enough reserves to pay out 100% of its promised benefits until approximately 2034”, according to The 2020 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds from the Social Security Administration.

Although there is time for Congress to fix the problem, if changes are not made to the existing system, the surplus fund will be depleted by 2034. The original pool of money will still be funded by payroll taxes, benefit taxes and interest, but beneficiaries would begin receiving reduced benefits. Which means that benefits will remain fully payable until at least 2034, with 79% of benefits payable through 2093 and 73% of benefits payable thereafter. These estimates assume that the existing system remains unchanged.

In general, you can cancel your Social Security claim if you do so within the first 12 months of receiving benefits. But, you must repay the full amount you’ve received, and the full amount a current spouse or family member received based on your benefit. Then, you’re eligible to claim again at a later date and will receive a larger monthly payment. Each individual can only cancel a claim once in their lifetime.

“Social Security can add certainty and stability to a retirement income plan, especially given the surprises that may come at retirement.”

Claiming Social Security is an important part of your retirement income plan, but it can be challenging to understand your options—and the implications to your savings. Social Security can form the bedrock of your retirement income plan. That’s because your benefits are inflation-protected and will last for the rest of your life in retirement.

While it’s true that your monthly benefit checks will increase if you delay retirement until FRA, you’re not likely to get more money altogether by waiting. The whole reason early retirees get smaller checks while those who delay benefits get larger checks is so that the average person gets the exact same amount of money from Social Security during their lifetime.

Most Americans claim their benefits at age 62 or just a few years later, according to SSA. That’s not always a mistake. If they have done a good job of analyzing their situation. Claiming at 62 would reduce your monthly checks, but you would have an additional four to five years of income before you reach full retirement age. Based on the Social Security Administration’s life expectancy tables and projected inflation rates, the lifetime expected total benefits are within a few hundred dollars of each other, regardless of when you claim.

If you have a robust retirement fund and don’t necessarily need the extra money from Social Security, there’s no harm in claiming early, according to Motley Fool. Moreover, if you have reason to believe you may not live very long in retirement, you may want to claim earlier to make the most of your benefits.

Bottomline, Social Security is part of the retirement plan for almost every American worker. It provides replacement income for qualified retirees and their families.

Your decision about when to file for Social Security benefits will affect your income in retirement. However, if you’re worried about outliving your savings, delaying benefits might be one of the best retirement decisions you’ll ever make.

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