The Ultimate Guide to Social Security 
Social Security is a beast.
The Social Security Program Operations Manual System (POMS) is 27 chapters, nearly 3,000 rules, and the primary source of information used by the Social Security Administration.
One look through the POMS and you can understand why it can be so difficult to get a straight answer about social security. Why every time you call into a social security office, you get a different answer to your question.
No matter how you feel about the state of Social Security, it has become one of the nation’s most successful and effective government programs.
More than 1 in every 6 U.S. residents, collected Social Security benefits. Four out of 5 of those beneficiaries were older Americans with one-fifth of the beneficiaries receiving Social Security Disability Insurance or survivor benefits.
A new study, “The Retirement Solution Hiding in Plain Sight: How Much Retirees Would Gain by Improving Social Security Decisions,” quantifies how poorly retirees are doing at maximizing their social security benefits. U.S. retirees would be able to generate an additional $3.4 trillion in income, or $111,000 per household if they optimized their Social Security decision.
While this guide will not try to compete with the POMS, we will focus on the basics of Social Security, different situations to maximize your benefits, and advanced tidbits that you need to watch out for.
What is Social Security
Social Security is a government program put in place by President Roosevelt on August 14, 1935. Throughout your working career you will most likely pay into Social Security through your paycheck. You will contribute 6.2% of your payroll into Social Security, and your employer will match with 6.2% into Social Security for you. If you are self-employed, you will contribute the full 12.4%. The idea is that you pay into Social Security now and when you retire you can turn those benefits into a life-long income stream.
Once turned on Social Security benefits will pay out a monthly paycheck calculated based on your work history and inflation, until you pass away. Social Security was never meant to be a person’s sole retirement income. Its purpose was to replace 40% of your pre-retirement income and be paired with other retirement savings. As many Americans have found out, if they have not saved enough in other retirement accounts, Social Security is allowing them to live outside of poverty levels.
It is easy to think that money you send to Social Security is being placed in an account somewhere for you to later draw when you retire. But the money you send to Social Security now is being paid to current retirees. The money that is being paid by the generation behind you, is going to your future or current benefits. Every generation pays for the generations ahead of them. This can create issues when there is a large baby boom followed by a generation that has not produced as many individuals.
Most people think of Social Security as a retirement fund, but Social Security has become so much more than that. Social Security has gone on to help disabled workers, children, divorced spouses, and widows. When dealing with a loss of income, Social Security can step in and help make that transition easier.
How You Become Eligible for Social Security
As you work and pay taxes, you earn Social Security credits. You can earn one credit for every $1,360  of earnings, up to four credits per year. To be fully qualified for Social Security, you need 40 credits, or 10 years of qualified work.
There is no minimum age that you need to be to earn these qualified credits, if you make over the threshold amount from covered employment. You also don’t have to earn over the threshold in every quarter. You can make $5,440 in January and receive all four credits for the year. You won’t receive the credit until the first day in the quarter, so to receive all four credits, you must be alive on October 1st.
To be eligible for Social Security, you do have to work in covered employment. Covered employment means that your employer pays into Social Security. This is true of most employers but there are a few that offer pensions instead of Social Security. Government jobs and teachers are two that typically work in non-covered employment. These employers do not pay into social security but instead pay into a pension system. The government doesn’t want you to double-dip and receive a pension and social security. Just because your employer offers a pension doesn’t mean it is non-covered employment. A lot of big companies will fund a small pension for their employees as an added retirement bonus, but they still pay into Social Security.
If you don’t qualify for retirement benefits based on your own work record, you may still be eligible for benefits based on a spouse’s work record. This makes it “fair” for stay-at-home spouses and people who work in non-covered employment.
How Are Social Security Benefits Calculated
Social Security begins to calculate your benefits by taking your highest 35 years of earnings. Earnings are first limited by the maximum amount of earnings subject to payroll tax, this is called the wage base. In 2019, the wage base was $132,900. You do not pay social security tax on any amount of money that you make over that amount. Any amount over the wage base is also not considered for calculating your future benefit.
Social Security will also go through and adjust your earnings by inflation. Obviously, it is not fair to compare earnings today with earnings 35 years ago without an inflation adjustment.
If you have not worked 35 years, Social Security will replace those earnings with a $0. You will still qualify for Social Security if you have the 40 credits or 10 required years. For example, if you worked 20 years, you will qualify for Social Security, but you will have 15 $0 in your record.
Once you have all 35 years, you need to calculate your Average Indexed Monthly Earnings (AIME). This will serve as the basis for your retirement benefit. To calculate your AIME, add up your highest 35 inflation-adjusted earning years and then divide by 35 to get the annual average. Divide the annual average by 12 to get your monthly average or AIME.
After you arrive at your AIME, you can use that number to calculate your Primary Insurance Amount (PIA). Social Security will base your benefits off your PIA, so it is a very important number.
Social Security was set up to benefit lower income earners more than higher income earners. They did this by weighting the lower amounts of earnings heavier than the higher amounts. Let’s look at the PIA formula to understand.
Add up the following amounts to calculate your PIA:
- 90% of the first $926 of your AIME, plus
- 32% of your AIME over $926 but less than $5,583, plus
- 15% of your AIME over $5,583
This amount is further rounded to the nearest multiple of $0.10 if it is not already a multiple of $0.10.
This calculation seems complicated, but you will not have to do these calculations to know your Social Security benefits. Luckily, Social Security does the hard work for you. Showing this calculation should help you understand exactly how your benefits are calculated by the Social Security Administration. They will not show you the actual calculation, just the PIA amount that they arrive at.
Accessing Your Social Security Benefits
The government has made it easy for you to see your Social Security benefits. You can create an account at SSA.gov/myaccount and you will have access to your benefits. Once you have an account you will receive a printout of your Social Security information.
You do not have to be ready to collect Social Security to create an account and to see your benefits. It is best to do this early on. For one, once you create an account online, nobody else can create an account using your social security number. This will cut down on identity theft.
Also, Social Security is not infallible, and neither are the companies that report your wages to them. In the benefit statement, you will see a list of every year you’ve worked and the amount of money that went towards Social Security. Keep in mind, there will be $0 for work that was with a non-covered employer. Also, remember that there is a maximum amount you can earn for Social Security. If you are a high-wage earner, you will not see all your wages on the record. For example, if you earned $150,000 in 2019, you will only see $132,900.
If you do find an error on your work record, it is up to you to get it fixed. It is best to have copies of your W-2 Statement and/or tax return for the years that are incorrect. Once you have that information, call the Social Security office to get it corrected. This is another important reason for checking your account statement often. If you do find an error, it will be much easier to track down the information if it was 5 years ago versus 35 years ago.
On the second page of your Benefit Statement you will see the various breakdowns of your Social Security payouts. The first payout is for your full-retirement age, this is your PIA. Full retirement age is calculated depending on when you were born. Full retirement age used to be 65 years old, but Congress felt the need to increase the full retirement age to save money in the Social Security fund.
If you were born before 1943 your full retirement age is still 65. Between 1943 and 1955, your full retirement age is 66. For every year after 1955, you add two months to 66 years old. For example, your full retirement age if you were born in 1957 is 66 plus 6 months. Born 1960 or later and your full retirement age is 67.
How does Social Security calculate your benefits if you haven’t worked the 35 years yet? Social Security projects your last year of income, forward, until you reach age 62. If you earned exactly what you did the last year until you turn 62, you will receive the benefit listed for full retirement age.
If you work until you are 60 and then retire early, the projections will be high because Social Security plans for you to work another two years. If you are going to stop working at your full retirement age, your benefit amount will increase if the earnings are high enough to make it into the top 35 years.
Social Security will continue to adjust your earnings record and social security amount, even if you’ve already started taking Social Security. If you begin taking Social Security at age 67 but work until age 70, Social Security will take those three additional years into consideration when doing its yearly calculations.
Along with your PIA, you will also be given the amounts if you take Social Security at age 70 or age 62. When you take Social Security at 70, you are delaying your benefits, so Social Security pays you extra. Social Security will give you approximately 8% a year in more benefits if you decide to wait past your full retirement age. You cannot claim additional benefits by waiting until after age 70. Benefits should always start no later than turning 70 years old. Waiting any longer is leaving free money on the table.
The earliest you can take Social Security on your own record and not being disabled, is age 62. By deciding to take Social Security early, you will permanently give up a portion of your benefits. By starting early, you can face a reduction in benefits up to 25-30%.
When you are ready to apply for Social Security, you need to do it three-months in advanced. It takes awhile for Social Security to process you and add you to the payroll.
Social Security Spousal Benefits
Through Social Security, you can collect benefits not only on your record but your spouses. This is handy if one spouse was a stay-at-home or didn’t have earnings as high as the other spouse. Even if the spouse never worked and never paid into Social Security, you can collect spousal benefits.
Spousal benefits can never be more than one-half of your spouse’s full retirement amount. You can qualify for spousal benefits if your spouse is already collecting their benefits, you’ve been married for at least a year, and you are at least 62 years old.
Claiming a spousal benefit at age 62, permanently reduces your benefit. By claiming your spousal benefit at your full retirement age, you will receive the maximum, and there are no additional benefits for waiting longer than your full retirement age. Remember, the spousal benefits are determined at the age you, as a spouse, files.
If you were born after January 1, 1954 you can no longer claim only spousal benefits and not your own benefits. Now, when you claim spousal benefits, you are also claiming your own benefits, this is known as the “deemed filing rule”. That means if 50% of the benefit received from your spouse is not more than your own benefit, you will only receive your own benefit.
Example. Your spouse files for their retirement benefit at age 63, this benefit will be less than their PIA because they are filing early. You decide to file for your benefit and spousal benefits at your full retirement age. The spousal benefit you will receive will be 50% of your spouse’s PIA amount, not the reduced amount they are collecting.
Example. Let’s say your PIA is $1,250 a month and your spouse’s PIA is $2,000. If you file for Social Security benefits at full retirement age you will only receive $1,250. Your spousal benefit would be $1,000 but since that is not over $1,250, the max you will receive is your own PIA.
Instead of $1,250, let’s say your PIA is $800. Now when you claim Social Security benefits at your full retirement age, you will receive $1000. The benefit will consist of $800 from your own benefit plus $200 from your spousal benefit. They do not add the $1,000 spousal benefit to your own benefit amount. Instead, they take 50% of your spouse’s PIA and fill up your benefit until you reach that amount.
Social Security Benefits for a Divorced Spouse
The government does not punish you, in terms of Social Security benefits, if you were married and now divorced. If you had a marriage that lasted for at least 10 years, you may be eligible to claim spousal benefits on your ex-spouse.
For this to work, you and your ex-spouse need to be at least 62 years old, and you cannot have remarried before the age of 60.
The spousal benefit for a divorced spouse is unique because your ex-spouse does not have to be actively receiving social security. Nothing your ex-spouse does can affect the way you claim on their record. It doesn’t matter if they wait to claim or get married. You do not have to talk with them about claiming, they will not know if you have claimed on their record and claiming against their record in no way reduces their record going forward.
Claiming Survivor Benefits
What happens if your current or ex-spouse passes away? If you and your current spouse are receiving Social Security benefits, when one passes away, you will lose the lowest benefit amount. Social Security will only pay one benefit going forward, but it will be the highest amount, no matter if it was from the person that passed away or not.
If the person passed away without already collecting their Social Security benefits, you will receive the amount that they would have received if they claimed on the day they passed away.
A benefit to survivor benefits is that you can claim them at age 60 instead of the standard 62. You will still face the reduction in benefits if you claim before your full retirement age. Claiming at full retirement age or beyond will get you 100% of the survivor benefits.
The other benefit of survivor benefits is that they are not tied to your record like a spousal benefit. You can choose to receive survivor benefits, let your benefits grow until age 70, and then switch to your own benefit and shut off survivor benefits. You cannot flip-flop back and forth, once you decide to switch off survivor benefits and switch on your own, you are done with your choices.
Example. Your deceased spouse died claiming $2,000 a month in Social Security benefits. You are at full retirement age but haven’t turned on your benefits yet, your PIA is $1,700. You can claim survivor benefits to receive the $2,000 from your deceased spouse. While receiving this money, you can forgo claiming your benefit and let your Social Security accrue delayed retirement credits (8% a year). Once you hit 70, your Social Security benefit should be around $2,141, and you can now switch from survivor benefits to your own benefits.
If you get married before the age 60, you lose survivor benefits. If you get married after the age of 60, you can still claim survivor benefits on your ex-spouse.
Paying Taxes on Social Security Benefits
The taxation of Social Security benefits began in 1984 by President Reagan. It was started because the government saw a need to help replenish the Social Security fund. The taxes paid on Social Security were automatically routed to the fund. In 1984, up to 50% of your Social Security benefits were taxable if you made more than $25,000 as a single filer or $32,000 as a married filer. In 1984, these income levels were large amounts. The amendment even stated that this additional tax should only affect 10% of the Social Security beneficiaries. These threshold amounts were not indexed for inflation, so they would not grow on their own. Congress intended for this to pull more Social Security beneficiaries into the taxation.
Fast forward to 1993, and we will see the second increase on Social Security taxes. By 1993, the 10% of beneficiaries affected by the tax thresholds had already grown to 18% due to inflation. Under this legislation we saw the maximum rate to tax Social Security rise from 50% to 85%.
The threshold levels in 1993 were set at $34,000 for an individual filer and $44,000 for a married filer. Even now, in 2019, those original tax thresholds remain because they were not indexed for inflation.
For a single filer, if you make under $25,000, you will not pay taxes on Social Security. Between $25,000 and $34,000, you will pay taxes on up to 50% of your Social Security. If your income was more than $34,000, you will pay taxes on up to 85% of your Social Security.
For a married filer, if you make under $32,000, you will not pay taxes on Social Security. Between $32,000 and $44,000, you will pay taxes on up to 50% of your Social Security. If your income was more than $44,000, you will pay taxes on up to 85% of your Social Security.
Social Security will be taxed at ordinary income rates.
To find out where you are in those thresholds, take your adjusted gross income, add nontaxable interest, plus ½ of your Social Security benefits. That will give you your combined income where you can compare it with those threshold levels to see how much of your Social Security benefits are taxed.
The rates quoted above, were up-to rates. Just because you break the threshold amounts with your income, it doesn’t automatically subject you to the maximum tax rate. Figuring out exactly how much of your Social Security will be taxed is quite cumbersome. Lucky for us, the IRS has a worksheet that will help take you through the steps, IRS Pub 915.
Watch Out for the Earnings Test
A lot of people will consider taking Social Security early while they are still working. Maybe the job they have at 62 isn’t earning quite the income they deem necessary, so they are considering starting their Social Security early to make up the difference.
Or, maybe they plan on retiring early and starting their benefits, but they won’t retire until the end of the year.
If you have made or are making money from employment and plan to start your Social Security benefits, you could be subject to the Social Security earnings test. If you are already at your Full Retirement Age (FRA), you will no longer be subject to the earnings test, no matter how much income you earn.
Social security is always trying to find a way to reduce your benefits. They figure if they can harbor more money now, they may not have to pay you as much later.
This becomes apparent if you are currently receiving an income and want to claim your social security benefits early.
In this scenario, social security will subject your benefits to an earnings test. If you make more than $17,640, they will withhold $1 for every $2 you are above that limit. For example, if you made $40,000 then they would withhold $11,180 or $931 a month from your benefits. As you can see, you can quickly earn too much and wipe out all your benefits.
In the year you turn your full retirement age, the income limit increases. If you make more than $46,920, they will withhold $1 for every $3 you are above the limit. Not only did they increase the income limit, but they reduced the benefit reduction. For example, if you make $70,000 in the year of your full retirement age, they would withhold $7,693 or $641 a month. That stings a little bit less.
Once you reach full retirement age the earnings test is gone. You can still work and make an income but none of your benefits will be reduced because of it. It doesn’t matter how much you earn or how long you decide to work for.
What counts as income for the earnings test?
According to AARP, “In general, the Social Security Administration defines “earned income” as “income from wage or net earnings from self-employment.” For example, earnings may include bonuses, commissions, and severance pay. Investment income, pensions, capital gains, and inheritances are not considered wages.”
What happens to all the money they withheld?
Money withheld is not money gone.
No, you will not receive a lump sum payment for all the money that they withheld. What will happen is a recalculation of your benefits. Social security will total all the money they withheld and figure out how many months of benefits it adds up to. Once they have this number, they will add it to the date you decided to file to get a new filing date.
For example, you retired at 62 while still earning an income, and they collected 1 years’ worth of benefits from you. Once you hit your full retirement age, they would recalculate your benefits as if you retired at the age of 63, not 62. This would allow social security to give you the money they have withheld by increasing your benefits.
Deemed Filing Rule
In the past, it was an effective Social Security strategy to file a restricted application so you can unlock spousal benefits while letting your own benefits grow.
Unfortunately, this rule no longer exist. The only people that are still allowed to take advantage of this rule is if they were born before January 2, 1954. If that is the case, that person can still file a restricted application to unlock spousal benefits while watching their benefits grow.
To combat this strategy, Congress created the deemed filing rule in the Budget Act of 2015. The rule states that if you begin Social Security benefits, either your own or spousal, you will be considered deemed filing for all benefits.
Once you apply for benefits, Social Security will turn on your benefits (“deemed filing”) and if your spouse is already receiving their benefits they will see if you receive any spousal benefits on top of your own.
How to Suspend Your Benefits
Choosing when to start Social Security is a key financial decision that will last the rest of your life. As the study shows, $111,000 is being left on the table due to improper Social Security filing.
Social Security used to let you do a file and suspend strategy. This strategy said that you were going to file for your benefits but immediately suspend them. Why would you want to do this?
Well, this let your own benefits grow and receive delayed retirement credits, but this also unlocked the potential for other people to file against your record, as in spousal benefits.
Even though Congress removed the file and suspend strategy, they still left the suspend part.
If you make a mistake, claim your benefits, and then decide that you shouldn’t have done that, there is a way to reverse the action. Social Security gives you 12 months after you originally file, to go back and withdraw your application. By doing this, you are telling Social Security that you made a mistake and you would like to hit the undo button. Now, they are going to expect you to pay back all the money they have given you.
If you’ve gone outside the 12 months and over your full retirement age, you can suspend your benefits. All this does is shut down your benefits where they are at. You do not need to go back and repay any benefits already paid to you. This will allow your benefits to grow with the delayed retirement credits, even though it will be reduced if you filed for your benefits early.
If you are expecting a large windfall of money in the next couple of years, you can suspend your benefits and let them grow. This will give you more money once you turn your benefits back on plus you won’t have to subject your Social Security to taxation.
Social Security and Pensions – WEP and GPO
Pensions created from non-covered employment means you paid into a pension system and did not pay into Social Security. Obviously, Social Security is not going to give you the same benefit as someone who paid into Social Security during their working career.
Even if you opt not to take your pension, and instead take a lump-sum benefit. Social Security will go back and figure out what your pension would have been, using their formula, and reduce your earnings going forward. There is no way to trick the system here. If you delay your pension payout, then Social Security will delay the WEP reduction, but once you kick your pension on, the reduction will come into play.
The Social Security Administration has come up with two ways to limit your benefit amount. Windfall Elimination Provision (WEP), will limit your benefit if you have a pension from non-covered employment. Keep in mind, you still need your 40 credits to be eligible to file for Social Security. If you have only worked in non-covered employment, then you will not receive a Social Security benefit on your own record, so you will not have to worry about WEP.
The way Social Security determines your WEP reduction is by using a different formula to calculate your PIA. Instead of using the 90% of earnings before $926, that percentage can be as low as 40%. What they won’t do is reduce your Social Security benefit by more than half of your pension.
If you have over 30 years of substantial covered employment earnings to go along with your pension, you will be exempt from WEP completely. This will allow you to receive your full Social Security benefit and pension.
The WEP is used to reduce your own benefit due to your pension, but they also have a way to reduce your spousal benefit due to your pension.
When dealing with spousal benefits and pension, the Social Security has the Government Pension Offset (GPO). This formula is a lot easier to manage, Social Security will reduce your spousal benefits by two-thirds of your pension. If two-thirds reduction is more than your spousal benefits, you will receive no spousal benefits.
When you are over Full Retirement Age, you get the ability to file retroactive benefits. Retroactive benefits allow you to go back six-months or to your full retirement age, whichever is less and begin your benefits on that date.
If you are now Full Retirement Age plus six-months, you can tell Social Security that you wanted to file at Full Retirement Age and then will send you a lump-sum payment for the six months in between. This is good for people who intend to start Social Security but have forgotten or didn’t get processed in time.
You do lose those delayed retirement credits you have picked up for waiting, but you will be rewarded with a quick lump-sum payment.
Filing Strategies and Social Security
Optimizing your filing strategy can get complicated the more moving pieces that are involved. If you have multiple incomes, pensions, disabilities, ex-spouses, or children, finding the right strategy can be difficult.
It is best to talk with a financial planner to decide on the best strategy to optimize Social Security. They typically have tools and software that allows them to plug the information in and get a result.
If you need the money to survive as Social Security is your only form of benefit, you will usually take your benefit early. There is no point in trying to accumulate delayed retirement credits if you can’t afford to live without the benefit.
In general, if there are two spouses earning Social Security, delaying the high-income earner is typically best. You want to delay until age 70 to allow that benefit to grow the most. When one spouse passes away, you will only be left with one Social Security so maximizing the high-income earner is usually ideal.
As you can see, Social Security is a beast. It can be difficult if not impossible to know all the rules and how best to use the system to maximize your benefit. The amount of money left on the table because retirees do not plan for the handling of Social Security is astounding. Every dollar given to the government is one less dollar you get to spend on you and your retirement.
Unfortunately, simply consulting the local Social Security office isn’t good enough. Even the people trained to answer questions and follow computer prompts get it wrong, that is how difficult the system is. It is against the Social Security rules for them to offer strategies. They can tell you what you can and can’t do and run numbers for you, but they cannot tell you the best way to maximize your benefit.
When trying to maximize Social Security, it is a good idea to consult an outside second opinion to run an analysis for you. Once you have your plan in place, you can take it to the Social Security office to get it executed.
Social Security is meant as longevity insurance. It is for you not to run out of money no matter how long you live. Don’t lose sight of that fact by focusing on trying to get money early and quick even if it is a reduction. Sometimes you must take the money early, but don’t take it early thinking you can invest the money and do better than what Social Security can offer. That is not the point of the program, and it adds additional risk into your life.