The Social Security program was established in 1935 by President Roosevelt in order to improve financial security among Americans and it continues to do so today. As of 2022, nearly nine out of ten Americans over 65 collected Social Security benefits, and those payments play a significant role in helping families maintain financial stability and well-being.¹ Given the importance of Social Security in so many Americans’ lives, it’s no wonder that people have questions about how the system works.

In the interest of helping you navigate Social Security, we’ve provided the answers to some important questions.

How Does Social Security Work?

In the most basic terms, Social Security can be thought of as a type of insurance program that exists to support Americans who aren’t able to work due to factors like age or disability. It does this by pooling together the contributions that workers make over the course of their careers and then paying out benefits to those who qualify for them.

While you’re part of the workforce, Social Security contributions are mandatory and, in most cases, don’t require any action on your part. A portion of each of your paychecks is automatically set aside for Social Security, and your employer is required to contribute, too. Employers and employees must each contribute 6.2 percent of the latter’s salary (for a total of 12.4 percent) up to the taxable limit, which is set each year by the Social Security Administration SSA . If you are self-employed, you’re responsible for paying the full 12.4 percent on your own.

All of these contributions are consolidated into conservatively-administered trust funds. These funds are composed entirely of US Treasuries (bills, notes, and bonds), which makes them low-risk but also low-yield. The result is a modest – but predictable – stream of income in the form of monthly payments for Americans who qualify.

Who Gets to Collect Social Security?

Generally speaking, Social Security is available to Americans over the age of 62 or those who qualify for survivor or disability benefits. Additionally, taxpayers must have worked and contributed to Social Security for at least 10 years in order to receive checks. Keep in mind that you don’t have to be retired in order to receive Social Security benefits – you just need to meet the other requirements.

To earn Social Security income before you reach 62, you must qualify as a survivor or someone with a disability that prevents you from working. To be classified as a survivor, you must have lost a spouse or parent who was eligible for Social Security. Survivor benefits tend to be paid to widows, widowers, and dependents of qualifying workers. The amount survivors receive is a percentage of the original beneficiary’s Social Security benefit and depends on your particular circumstances.

The Social Security Administration enforces strict guidelines for what qualifies as a “disability” and applicants are subject to a rigorous (and potentially lengthy) disability determination procedure. If you’re found eligible, you may be able to start receiving benefits even if you haven’t met the 10-year working requirement.

When Should You Consider Claiming Social Security Benefits?

It may not be in your best interest to start claiming Social Security benefits as soon as you become eligible. In fact, the longer you delay your collection of benefits, the bigger your payout might be.

It could be advantageous to delay claiming your benefits until you’ve reached at least “full retirement age,” which is specified by SSA. If you wait until this point – age 67 for those born in 1960 or later – then you’ll receive 100% of your primary benefit amount. Opting to receive Social Security payments before you’ve hit full retirement age could result in a smaller payout. On the other hand, each year that you wait to claim beyond your full retirement age will increase the size of your monthly benefit.

To illustrate, let’s say your full retirement age is 67 as determined by the SSA. If you start claiming Social Security immediately upon turning 62, you will only receive about 70% of your benefit amount. On the other hand, if you wait to claim benefits until you’ve turned 70, you will receive close to 125% of your benefit.² Note that your benefits cap out at age 70, so there may not be a compelling reason to postpone your benefits beyond that point.

How Much Can You Receive From Social Security?

The amount you receive from Social Security each month is a function of how much you earned during your career and how old you are when you start collecting benefits. The SSA averages your 35 highest-earning years, adjusts for inflation, and then uses this figure to determine your primary benefit amount. For more information on how benefits are calculated or for help handling yours, think about working with your financial advisor.

This year, the maximum monthly amount you can receive is $3,627  and that’s only if your earnings reach or exceed the maximum taxable income amount during your working years and you delay receiving benefits until you reach full retirement age.

By comparison, the estimated average payout (in other words, what the average American is likely to receive) is expected to be $1,827, or roughly half of the maximum.³

What Does All of This Mean for You?

With Social Security payments accounting for about 30% of all income generated by the elderly, it’s an important system to understand.⁴ Furthermore, eight out of ten people over the age of 65 depend on their monthly benefit checks to cover at least 50% of their living expenses.

To learn more about maximizing your Social Security benefits, reach out to one of our financial advisors. Our team of retirement professionals stands ready to answer your questions and help you achieve the future of your dreams.

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.

Not associated with or endorsed by the Social Security Administration or any other government agency.

Maximizing your Social Security Benefits assumes foreknowledge of your date of death. If as an example you wait to claim a higher monthly benefit amount but predecease your average life expectancy, it would have been better to claim your benefits at an earlier age with reduced benefits.

Endnotes

^1,4 “Social Security Basic Facts.” Social Security Administration.
https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf.

² “FAQ What Is the Maximum Social Security Retirement Benefit Payable?” Social Security Administration.
https://faq.ssa.gov/en-us/Topic/article/KA 01897.

³  Konish, Lorie. “Social Security Benefits Are Set to Rise by More than $140 per Month in 2023. Here’s How to Find out How Much More Money You May Receive.” CNBC, October 21, 2022.
https://www.cnbc.com/2022/10/21/social-security-benefits-to-go-up-by-more-than-140-per-month-in-2023.html .