Will Social Security Run Out of Money? And What Else Do I Need to Know About Social Security Benefits?

August 14 marks the 88th anniversary of the signing of the Social Security Act, and in recognition of the event, we wanted to review some of the most common questions we receive about the program.

Almost every American worker participates in Social Security via payroll tax deductions, and 97 percent of older Americans (aged 60 to 89) either currently receive Social Security or will begin receiving it soon. It is, therefore, an important component of a sound financial plan, and like other sources of retirement income, you should understand your options and develop the right strategy for drawing down your Social Security benefits. 

When should I start receiving Social Security benefits? 

This is one of the most frequently asked questions we receive, and in some respects the answer is straightforward. You can start taking your Social Security benefits as early as age 62 or as late as age 70. However, deciding when you should start taking your benefits depends on your individual situation.  

Generally, the longer you wait to begin receiving your benefits, the larger your Social Security benefit will be. The amount of this initial benefit sets the basis for any future cost of living adjustments and, therefore, the benefits you’ll receive for the rest of your life. For these reasons, many Americans opt to delay their benefits, but you should consider many factors when weighing your options. 

It may make sense to receive your benefits early if you are concerned about not living long enough to take full advantage of them. You might also want to start receiving your benefits early if you want to wait to tap into your investment portfolio and give it more time to grow.  

As you consider your approach, keep in mind that earning even a small amount of income can reduce your Social Security benefit. The 2023 income limit is $21,240, so if you earn any more than that, your benefit will be reduced. (Once you reach your Full Retirement Age, the age when you have qualified for your full retirement benefit, your benefit will not be reduced for earning supplemental income.)  

For those with other resources—including an investment portfolio, a pension, or other sources of income—it may make sense to delay taking Social Security benefits in order to increase your benefit amount. This also gives you more time to implement various tax planning strategies, such as making Roth conversions. Also, consider that up to 85% of your Social Security benefit is taxable, depending on your income level, and delaying benefits pushes that income out further. 

Many variables factor into the decision of when to begin your Social Security benefits—your financial situation, life expectancy, and personal goals. Devising a solid financial plan can help you make the right decision for your unique situation. 

Will Social Security run out of money? 

Clients are often worried that Social Security will no longer exist when it’s time for them to retire. While it’s true that it’s been 40 years since Social Security was last reformed and steps will need to be taken to keep the OASI Trust Fund from running out, the likelihood that Social Security will go away completely is very small. As long as people keep working and paying Social Security taxes, they are paying into the trust fund that provides the current benefits. Plus, about one in every five Americans currently receive Social Security benefits—and millions more are factoring the benefits into their retirement plans. 

How can my pension affect my Social Security benefits? 

If you receive a retirement or disability pension from a federal, state, or local government based on work you didn’t pay Social Security taxes on, then your Social Security benefit may be reduced. The Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) determine how these reductions are calculated for the benefit owner and/or their spouse. One common example of people who may face this issue are teachers who receive a state pension at retirement. The following documents provide more details about this scenario:

When does a non-working spouse qualify for spousal benefits? 

A non-working spouse can only begin benefits once the working spouse claims theirs. So, if a working spouse delays their benefit, then the non-working spouse also has to wait to claim. However, this delay does not mean the non-working spouse will also receive a larger benefit. The spousal benefit amount will only ever be 50% of the working spouse’s Primary Insurance Amount at their Full Retirement Age (FRA), and that percentage will not increase even if the working spouse delays until age 70. On the flip side, if the working spouse starts taking their benefit early and therefore receives a reduced amount, then the non-working spouse will only receive 50% of that reduced benefit.  

Please note that a non-working spouse also has their own FRA. If a non-working spouse is younger than their working spouse, they may have the option to begin receiving benefits before they reach their own FRA. This means that their spousal benefit will be reduced further for starting early. Couples in this situation should pay careful attention to when the working spouse begins receiving benefits.  

What is the difference between spousal benefits and survivor benefits? 

Spousal benefits are available to a current spouse or a former spouse whose marriage lasted for at least 10 years. Spousal benefits provide a maximum benefit of 50% of the other spouse’s Primary Insurance Amount (PIA). Spousal benefits can begin as early as age 62. 

Survivor benefits provide a maximum benefit of 100% of the deceased spouse’s retirement benefit. So, if the deceased spouse delayed their benefit to age 70, allowing it to increase, the survivor benefit would equal 100% of that delayed benefit amount. Survivor benefits can begin as early as age 60. 

Social Security is a complex and important program, governed by multiple rules and requirements. Every individual’s financial situation is unique, even though on paper they might seem similar, and so an approach that works well for one may not be suitable for the next. That’s why we suggest talking with your financial planner so that you can understand how your options will impact your long-term goals and make the right choice for you. 

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & Form CRS filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

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