10 Important Social Security Questions Answered

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Although Social Security was never meant to fully fund retirement for Americans, for about half of older adults, it still comprises more than 50% of their income. That’s why it’s so important to have an understanding of how Social Security operates.

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Although certain details about Social Security can get complicated, there are some basic principles that you should understand to ensure that you maximize your potential benefits. Here are the answers to 10 of the most commonly asked questions relating to Social Security.

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What Is the Average Social Security Benefit?

Although Social Security provides important retirement benefits to many Americans, you shouldn’t expect it to fund all or even most of your needs as you get older. For 2022, the average monthly Social Security retirement benefit is just $1,657, or $19,884 per year. That equates to less than $10/hour for a full work year of 2,000 hours. Although some with an extremely low cost of living may be able to survive on that, for most Americans, it would be nearly impossible. Knowing this early in life may prompt more Americans to begin their own retirement savings programs to supplement their anticipated Social Security earnings.

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What Is the Maximum Social Security Benefit?

Even the maximum Social Security benefit isn’t likely to give many Americans a comfortable retirement all on its own. For 2022, this maximum benefit amount is $4,194, or $50,328. While this is a sizable amount, it requires an extremely high level of earnings throughout your work career to qualify, meaning it would translate to a significant pay cut by the time you retire if used on its own. You’ll also have to wait until age 70 to claim Social Security in order to be eligible for the maximum benefit. So, similar to the average Social Security benefit, the maximum benefit isn’t likely going to be enough to fund the lifestyle of those who qualify for it.

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How Do I Qualify for Social Security?

You can qualify for Social Security by earning 40 “quarters of coverage,” which essentially translates to 10 years of working and paying into the Social Security system. For 2022, you can qualify for a quarter of coverage with $1,510 in taxable earnings. Technically, you can therefore qualify for four quarters of coverage each year after earning just $6,040. However, you can’t earn more than four quarters of coverage in any one year, so you’ll still have to earn over a span of 10 years to qualify for Social Security.

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Do Social Security Payments Adjust Every Year?

Social Security payments are subject to a cost-of-living adjustment every year, based on the current inflation rate. For 2022, Social Security recipients enjoyed a jump of 5.9% in their payouts, as inflation was on the rise in 2021. This amounted to the largest COLA since January 1983, as inflation has been relatively moderate over the intervening decades. While payments have never gone down, there have been a few years when there was no COLA at all, most recently in 2009, 2010 and 2015.

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How Much Are Benefits Reduced If I Claim at Age 62?

You can begin taking your Social Security retirement benefits as early as age 62, but your payments will be significantly reduced, as full retirement age for those born in 1943 or later is currently 67. According to the Social Security Administration, payments are reduced by 5/9 of 1% for each month before full retirement age, up to 36 months. Benefits taken more than 36 months early are further reduced by 5/12 of 1% for each additional month. Put it all together and it amounts to a permanent 30% reduction in your monthly payouts if you start your benefits at age 62 instead of 67.

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How Much Do Benefits Increase If I Wait To Claim Until Age 70

Although benefits are reduced if you take them before full retirement age, the opposite is true if you wait. The Social Security Administration allows you to defer payments all the way up until age 70 if you so desire. Delaying payments increases your monthly benefit by 8% for every year you wait between ages 67 and 70. Of course, many factors go into this decision, including your general health, life expectancy and other sources of funding, but the bottom line is if you can wait, you’ll earn a substantially larger monthly check if you can wait until age 70.

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Is Social Security Taxable?

Although Social Security is a benefit program, a significant portion of what you receive may be taxable. If you file your taxes jointly and have a combined income between $32,000 and $44,000 as a couple, 50% of your benefits may be taxable. If you jointly and have a combined income of more than $44,000, up to 85% of your Social Security benefits may be taxable. For single filers, the income range is $25,000 to $34,000, with earnings above $34,000 taxed at up to 85%.

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Do I Get Back More From Social Security Than I Paid Into It?

Every year that you work, you have to funnel 6.2% of your paycheck into Social Security taxes, up to certain limits. If you’re self-employed, that amount doubles, to 12.4%, as you’re paying both the employee and employer portions of the Social Security tax. The good news is that for the vast majority of workers, you’ll receive more in Social Security payouts than you pay into the system, according to figures computed by the Urban Institute. For example, a single male with average earnings retiring in about 35 years might expect to pay in about $463,000 in Social Security taxes and receive about $517,000 in Social Security benefits over his lifetime.

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Is Social Security Really Running Out of Money?

There have been widely publicized reports suggesting that Social Security is going bankrupt in about 10 or 12 years. While not accurate, the news is rooted in the fact that the Social Security Trust Fund will indeed become depleted in 2034. However, the primary source of Social Security funding is payroll taxes on active workers. The Social Security Trust Fund only supplements this revenue. So, as long as there are American workers, there will be revenue for the Social Security system. However, what is true is that unless changes are made, once the Social Security Trust Fund runs out, benefits are expected to drop to about 78% of current levels. Still, there is no need to panic that Social Security is running out of money. Even if no changes are made, the Social Security Administration estimates it can keep benefits at 74% of current levels all the way out until 2095.

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What Possible Changes Could Be Coming to Social Security?

Major changes to Social Security aren’t likely to come swiftly. It’s hard enough for legislators to come to a consensus on any issue, let alone one that may not impact the American people until 2034. However, various proposals about how Social Security will have to change have been tossed about for years, and some version of these proposals is likely to see the light of day at some point. While reducing benefits is not a popular option, it has been discussed, as has raising the full retirement age for beneficiaries. Other proposals include raising the Social Security wage base or increasing Social Security taxes. The bottom line is that the program needs to either reduce payouts or increase revenue, or both. At some point, you should expect changes that address either or both of these options.

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