By Vladimir Kouznetsov
Social Security is one of the main sources of retirement income for most Americans. It is also one of the retirement systems which is least understood by many people. Part of it comes from the fact that complexities of the system do not show up for most of our lives.
You get a Social Security card by filing a simple form. Social Security contributions are easy to make: Payments come out from your paycheck before you even touch the money. Self-employment taxes are easy to calculate, and you report them on a separate tax form. You are paying into the system whenever you earn any wages or have self-employment income. The system looks simple and straightforward. You have very little control over these payments. A lot of people go through their whole careers without a good understanding of what exactly they are paying for.
However, when it comes to getting your benefits, things start to change. Now you have choices to make, and they can have a significant effect on your retirement income. How do you find your path through this system and get what you truly deserve?
A good first step on this road is to understand what kind of benefits you may receive from Social Security. Many people are still surprised to find out that retirement is only one of the benefits and there is more to the system than that. It is also common that a person may be eligible for more than one benefit.
Here are the kinds of benefits provided by Social Security:
Retirement is the benefit most people think of when they talk about Social Security. There are two requirements to receive retirement benefits -- earnings and age. A person needs to work and make Social Security contributions for at least 10 years to be eligible to receive retirement benefits.
The amount you receive for retirement benefits is calculated using 35 years of earnings history. If you have more than 35 years of Social Security earnings, the Social Security Administration will use the highest 35 years of earnings and adjust them for inflation. Those 35 years do not need to be continuous.
For those who have less than 35 years, the Social Security Administration will fill in the gaps with zeros and still average over 35 years. That can negatively affect those who spent part of their working career abroad or worked only sporadically over the years. For those who worked abroad, the U.S. has bilateral agreements with some countries that allow income earned there to be included in Social Security calculations. Check the Social Security website international programs page for the current list of agreements as it changes over time. The most recent addition to the list is Brazil, which was included as of Oct. 1, 2018 and became the 27th entry on this list.
If your Social Security earnings record does not have the full 35 years to use or has some years with small earnings, you may increase your benefits by adding a few more years of work. The work does not need to be full time.
If you are already retired, you may consider doing some part-time work, consulting, or other self-employment activity to earn income. Even if you have started your benefits, the Social Security Administration updates earnings records every year. Newly reported income can replace a zero in the calculation and increase your benefits in the following years.
Full benefits become available to you at your Full Retirement Age or FRA. Your Full Retirement Age depends on the year you were born.
Year of Birth
Full Retirement Age
1943 - 1954
66 and 2 months
66 and 4 months
66 and 6 months
66 and 8 months
66 and 10 months
1960 and later
Full retirement benefits are called Primary Insurance Amount, or PIA.
The earliest age at which a person can collect retirement benefits is 62 years old. At this age reduced retirement benefits become available. Reduction of the benefits is based on the number of months between starting benefits and full retirement age. The reduction is 5/9 of 1% per month for the first 36 months and 5/12 of 1% for each additional month. Claiming early at age 62 can cost you a permanent reduction of benefits of 25% if your FRA is 66, or 30% if your FRA is 67.
You can also delay your benefits until you are 70 years old. Delaying benefits would allow you to accumulate Delayed Retirement Credits and receive higher benefits for the rest of your life. For everybody born after 1942, the increase is 2/3 of 1% for every month benefits are delayed.
To give you a perspective, here is the difference between receiving benefits early or delaying them:
For every $1000 of your Primary Insurance Amount you will receive:
Age 62 Amount
Age 70 Amount
1943 - 1954
1960 and later
The difference in benefits between claiming as early as possible at age 62 versus waiting until you are age 70 is around 76%. Is it worth waiting? On the one hand, you can start to receive reduced benefits earlier and collect them for a longer period. Doing so will allow you to keep your other funds invested and grow. On the other hand, you can wait and receive higher benefits later. In this case, you need to either retire later or use other funds to support you while you are accumulating your Delayed Retirement Credits.
Which solution is best for you depends on your circumstances. Keep this in mind. Originally the formula was implemented to equalize the amount of benefits that people who retire early will receive over their lifetime compared with people who decide to delay their retirement. Since then, average life expectancy increased and now this calculation, on average, benefits those who decide to delay. You are not average and chances you are not going to live exactly an average life expectancy. Depending on your overall retirement plan one, solution or another or maybe something in between can make more sense.
If that decision alone is not complex enough, let's look at other Social Security benefits.
From the beginning, Social Security was designed to provide coverage to participant families as well. A spouse who decided to stay home, raise children and never worked may receive retirement benefits along with the working spouse. The benefit amount is based on 50% of the working spouse's primary insurance amount. Your working spouse needs to file for his or her benefit before you can receive yours.
You need to wait until FRA to receive the full benefit amount. Reduced benefits become available at age 62. The reduction is 25/36 of 1% per months for the first 36 months and 5/12 of 1% for each additional month. Claiming early at age 62 can cost you a permanent reduction of benefits of 30% if your FRA is 66 and, 35% if your FRA is 67. Unlike retirement benefits, there is no reason to wait any longer than full retirement age as there are no Delayed Retirement Credits for the spousal benefits.
Spousal retirement benefits are also available for those who worked and can receive Social Security retirement benefits using their personal earnings record. If your spouse's earnings were much higher, the retirement benefits you receive as a spouse may be higher than your own. In this case, the Social Security Administration will pay the highest of the two amounts. Technically you will receive your own retirement benefits and additional spousal benefit equal to the difference between two, so the total benefit received will be highest of the two amounts.
If you were born before Jan. 2, 1954, you have an option to file what is known as a restricted application after you reach your FRA. Restricted application means you can file and start to receive spousal benefits without receiving your retirement benefits. It will allow you to delay your retirement benefit and let you accumulate Delayed Retirement Credits. Later you can switch to your increased retirement benefits.
This strategy is not available for those who were born on or after Jan. 2, 1954, due to recently updated "deemed filing" rules. Based on the new rules, a person filing for either retirement or spousal benefits is deemed to be filing for both benefits at the same time. Claiming one of the benefits will make another benefit start at the same time or as soon as it becomes available. The person will receive the highest of the two benefits.
Divorced spouses can also collect retirement benefits on the ex-spouse's earnings record if they were married for at least 10 years. You cannot collect these benefits if you remarry unless you divorce again. Unlike current spouses, if you are divorced for more than two years you do not need to wait until your ex-spouse files for his or her benefits to receive your spousal benefits. The benefit amount will not reflect any Delayed Retirement Credits accumulated by the ex-spouse.
Interesting fact: When Social Security was first created in 1935, only women were covered under the spousal benefit. Men were not able to collect retirement benefits on their wives' records. These rules were changed in 1950 to cover both genders.
Children who are younger than 18 (19 years old if they are a full-time high school student) or who are disabled may receive Social Security benefits if one of their parents is disabled or retired and is eligible to receive Social Security benefits.
Social Security can provide survivor's benefits for family members based on a deceased person's work record. Family members who can qualify include spouses, ex-spouses, children who are under the age of 18 or disabled. Eligibility requirements and benefit amounts depend on specific circumstances and in these situations multiple family members may be receiving benefits.
For example, if you were married and your spouse passed away, you may be eligible to collect benefits based on your deceased spouse's earnings record. To be eligible, you should have been married for at least nine months unless your spouse's death was caused by accident. If you have children under the age of 18 or disabled, they may receive benefits as well. Reduced benefits become available at age 60, and full benefits become available at Full Retirement Age.
Deemed filing rules do not apply to the survivor benefits. If you are receiving survivor benefits, you can switch to your retirement benefits as soon as you turn age 62 or you can wait until you are age 70.
The benefit amount is based on the amount the late worker was receiving or was eligible to receive. That amount may reflect any reduction of benefits for starting early, or delayed retirement credits the deceased spouse accumulated. Keep this in mind when you are deciding when to claim your retirement benefits as this decision may affect your family members as well.
Social Security can provide benefits for participants who became severely disabled. By "severely disabled" the Social Security Administration means "inability to engage in any substantial gainful activity," not just unable to work in your own/primary occupation.
Disability is the benefit that sometimes gets overlooked. Sometimes a person may retire early not only because it is time but also because of a health reason. When this happens at the age of 62 or later, it may seem easier to apply for the retirement benefits from the beginning. Starting retirement benefits between age 62 and your FRA also means agreeing to receive reduced benefits for the rest of your life. It may be more beneficial to apply for disability benefits first and switch to retirement benefits once you reach your full retirement age. This will allow you to receive full retirement benefits unaffected by the benefit reduction.
Putting it All Together
Depending on your circumstances you may qualify for different benefits at different stages of your life. You may also qualify for several different benefits at the same time. If this is the case, you also need to look at the rules that describe how these different benefits are combined and how to switch from one benefit to another. Sometimes filing for one of the benefits can permanently affect your other benefits. Sometimes you can start collecting one of the benefits and let another benefit grow.
It may seem complex to understand what are the benefits and rules that may apply to your situation. Please remember, you will be receiving some of these benefits for the rest of your life. Your family members may be able to receive benefits based on your payment record even after that. Understanding how to maximize these benefits may make a big difference both in your life and in the lives of your family members. In the end, it may be very well worth the effort you put into this process. Consulting with a financial adviser who specializes in Social Security may help you to get what you deserve.
About the author: Vladimir Kouznetsov, CFP, is a fee-only independent financial adviser and founder of Retegy, LLC. Kouznetsov specializes in retirement accumulation and distribution planning and advanced tax strategies. He is a member of Ed Slott's Master Elite IRA Adviser Group.