Understanding Social Security

Are You Ready For Social Security Benefits? How much will Social Security Provide?

Understanding Social Security

     Social Security is a key component of most people’s retirement income plans. For average wage earners, it replaces around 40 percent of income after retiring, thereby helping maintain their basic standard of living during retirement. For others, Social Security is even more important: around one in four married couples and nearly half of unmarried persons rely on Social Security for 90 percent or more of their income.

     At a time when many individuals are living well into their 80s and 90s and traditional pensions have largely disappeared, Social Security has become an important component of many retirees’ overall financial plans. Given the increased financial risks that retirees now face—including the likelihood of spending more years in retirement and potentially outliving their assets—it is critically important for retirees to understand how to maximize the benefits that Social Security offers.

One of the most significant decisions that individuals approaching retirement must make is when to start collecting Social Security benefits. Should they collect before or after full retirement age or somewhere in-between? Are they eligible for a spousal benefit or will their own benefit be higher?

     Social Security provides the economic foundation for millions of Americans, including retirees and disabled individuals, as well as the spouses and families of covered workers who are retired, disabled, or deceased. In fact, around 167 million people work and pay Social Security taxes and about 60 million people receive monthly Social Security benefits. The majority of Social Security recipients are retirees and their families, about 42 million people.  The rules governing Social Security are complicated. Numerous contingencies, exceptions, and conditions can frustrate individuals’ ability to make informed decisions about claiming benefits. Consumer surveys confirm this fact: more than a third of individuals agree that claiming Social Security retirement benefits is more complicated than they thought and around 80 percent acknowledge that they would welcome help from an advisor in making this decision.

How Earning’s History is calculated

     Social Security retirement benefits are computed using a worker’s average indexed monthly earnings(AIME) which summarizes up to 35 years of a worker's indexed earnings.  Earnings for the highest paying 35 years are added together and then divided by the number of months in 35 years (i.e. 420 months) to arrive at a person’s AIME. If the worker does not have 35 years of income history, the Social Security Administration assigns each missing year an income value of zero.  The AIME accounts for wages on which FICA taxes have been paid and adds a weighting factor for inflation and cost-of-living increases over those years. From the average indexed monthly earnings (AIME), the primary insurance amount (PIA), which is the monthly amount a worker would receive as a retirement benefit at full retirement age, is determined.  The worker’s primary insurance amount (PIA) is the figure from which almost all Social Security cash benefit amounts are derived, including monthly benefits for workers, their dependents, and their survivors. The PIA is based on an individual’s taxable earnings averaged over the working lifetime to yield a monthly benefit that partially replaces the earned income lost because of retirement, disability, or death.  The higher the average indexed monthly earnings (AIME), the greater the PIA and other benefits.

     The Social Security Administration sends a Social Security Statement to workers age 60 and older who are not yet receiving retirement benefits (workers age 18 and older can obtain a statement online). This statement provides an estimate of retirement, disability, and survivor benefits that could be paid. A person can go to http://www.ssa.gov/mystatement to create an account and view his or her benefits statement.  A person can also call Social Security at 800-772-1213 and ask for a Request for Earnings and Benefit Estimate Statement. Once the request is completed and returned, he or she will receive a statement of their earnings history and estimates of retirement, disability, and survivor benefits. There is no charge for obtaining this information.  If a person notices that the earnings statement is incorrect, it’s important to contact Social Security to resolve the issue. A worker will have to provide proof of his or her earnings, such as a tax return, a W-2 form, or pay slips, before Social Security will correct the record.


When do I claim my Social Security Benefit?

The factor that affects the amount of a person’s Social Security retirement benefit is the age at which benefits begin. A worker has three options:

1.  Elect to start receiving retirement benefits as early as age 62

2.  Delay receiving benefits until age 70

3.  Take benefits at some age in-between

Electing to take early benefits decreases the amount the worker would otherwise receive; delaying benefits results in a larger benefit that’s payable, as shown below. 

Age 62 = 75% of Full benefit

Age 66 = Full benefit

Age 70 =132% of Full benefit

As shown above the reduction and increase that apply when benefits are claimed at ages 62 and 70, assuming full retirement age (FRA) is 66.  Example if at 66 you were slated to draw $2000 full benefit, if you took at 62 then you would receive $1500 for rest of your life.  If you waited until you were 70, you would receive $2,640 in benefits.

Until recently, the age at which a person could expect to receive full (100 percent) retirement benefits under Social Security was 66. However for those who were born in 1955 or later, this age has will be increasing. Full retirement age (FRA), or the age at which one can receive his or her full benefit, is now age 66 (for those born after 1942) and is gradually increasing to age 67, as shown in the table:

Scheduled FRAs

Year of Birth Full Retirement Age

1943–1954 66

1955 66 and 2 months

1956 66 and 4 months

1957 66 and 6 months

1958 66 and 8 months

1959 66 and 10 months

1960 or later 67

The Social Security Administration also refers to FRA as “normal retirement age,” or NRA.


Others Eligible for Benefits

     Spouses are also eligible for Social Security benefits by virtue of their own earnings history or as a spousal benefit, based on the earnings of their husband or wife. Under the spousal benefit, the spouse of a fully insured worker is entitled to a benefit equal to 50 percent of the worker's PIA, if the spouse claims benefits at the spouse’s FRA. Dependent children of a retired worker can also receive a benefit based on 50 percent of the greater of either parent’s PIA. Eligible children generally must be under age 18 and unmarried (unless they are disabled).

To find out how much you will receive from SSA, you can go to www.ssa.gov/mystatement.  This will allow you to create an account. It will ask you information (name, birth date, social security number, etc.,) and require you have an email for a verification code.  Once you type in verification code you can get your current benefits at age 62, your full retirement age, and age 70. 


Applying for Social Security Benefits

     No matter what age a person decides to begin receiving Social Security, benefits will not start until a person actually files an application with the Social Security Administration (SSA). In other words, Social Security benefits do not automatically begin when a person retires or reaches FRA. Individuals can apply online at the Social Security Administration’s Web site (www.ssa.gov) or they can apply by calling its toll-free number. Individuals can also walk into a Social Security office and apply in person.

     The earliest age at which individuals can receive retirement benefits is 62; the earliest that they can apply is three months before they reach age 62. All other applicants should apply for retirement benefits no more than four months before the date they want their benefits to start because the Social Security Administration will not process applications that have later starting dates. After submitting an application, a person’s benefits will be paid the month after they are due. For example, if a person’s benefits will start in April, he or she will not receive a first check until May.

For further information on Social Security Benefits or additional links go to www.franksinsurancegroup.com/resources