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3 Things You Need to Know About Social Security


There are a number of reasons to be concerned about Social Security, including its pending budget shortfall and how the “debt panel” might cut benefits. But behind these larger issues lies a troubling trend on the individual level: Most people simply don’t understand their Social Security benefits, a new study finds — and that can be costly.

A new study by the Transamerica Center for Retirement Studies finds that while 21 million American workers (more than 27% of the workforce age 18 and up) plan to rely on Social Security as their primary source of income in retirement, 56% of them admit to not having a good understanding of how these benefits work. The reason: Most people cited either “not having a good starting point” or the fact that the educational materials regarding Social Security were “too complicated” as reasons that they didn’t know enough about the program. The problem with this lack of understanding is that it can result in workers taking their benefits too early or making Social Security-related tax mistakes.

SmartMoney.com talked to Catherine Collinson, president of the center, to get perspective on what workers need to know about Social Security.  Here’s what she told us:

Find a good starting point. Collinson says that one of the best starting points for educating yourself about your Social Security benefits is the Social Security Administration’s website, SSA.gov. Not only do they have “lots of information,” you can also “email them or phone them to ask them your questions,” she says. Here is a list of three other good Social Security information resources.

Understand eligibility. It’s also essential that you understand when you’re eligible for Social Security and what taking benefits later in life can mean for your bottom line, she says. First off, to be eligible, you must have worked for 10 years and be at least 62 years old. But for most people, taking benefits at 62 isn’t a good idea as your benefit will be lower than if you wait until you hit your full retirement age (usually between 66 and 67 depending on when you were born) to retire: Consider that filing for Social Security at 62 means your monthly payout will be reduced 25%, permanently, from what it would be at your full retirement age, which could cost you tens of thousands of dollars over a lifetime. Collinson adds that it may behoove some people to work longer as this can help increase future benefits (benefits are calculated using your highest earnings over 35 years).

Figure out the tax implications. Currently, one in five retirees is working for pay, and many more say they plan to do it going forward.  But for seniors who are collecting Social Security, working can have some significant tax consequences.  If you’re of full retirement age or older, you can keep all of your Social Security benefits no matter how much you earn.  But if you’re not yet of full retirement age, the Social Security Administration will deduct $1 from your benefits for every $2 earned above $14,160 you earn. So, let’s say you file for Social Security benefits at age 62, and your payment is scheduled to be $600 per month ($7,200 for the year). If you earn $20,480 ($6,320 above the $14,160 limit), the Social Security Administration would withhold $3,160 of your Social Security benefits ($1 for every $2 you earn over the limit).


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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.