Four factors that impact Social Security benefits

Four factors that impact Social Security benefits


With over 2,500 rules enforced by the Social Security Administration and as many as 81 different potential strategies for collecting Social Security benefits, it’s no wonder pre-retirees and retirees alike often feel overwhelmed and confused when it comes time to claim benefits. What it comes down to, however, is that there are no one-size-fits-all solutions for collecting Social Security, and those of us without a basic understanding of how Social Security works are more likely to make uninformed decisions—which can lead to poor claiming strategies and overall reduced benefits. And the first step to making financially-responsible decisions regarding Social Security and in turn, the best plan of action for your individual situation, is to know your options.

What factors impact Social Security benefits?

Before you can determine when the best time is for you to begin collecting Social Security benefits, you need to know what factors impact the overall size of your benefit. Your monthly Social Security benefit is determined by four main factors: your work history, your earnings history, your birth year, and your claiming age. That’s a lot of mumbo-jumbo to non-industry insiders, so let’s break down each factor.

· Work history

When calculating your monthly Social Security benefit, the Social Security Administration will take your 35 highest-earning, inflation-adjusted years into consideration. But don’t worry if you took a few years off to care for the kids or were unemployed briefly; accumulating less than 35 years in the workforce doesn’t mean you’re destined to work forever. Each year fewer than 35 you worked will simply result in a $0 salary averaged into your earnings history.

· Earnings history

As mentioned under the previous bullet, your earnings over your highest-paid 35 years in the workforce will influence your benefit. Higher lifetime earnings often equate to a higher Social Security benefit, in terms of dollar amounts, but the actual percentage of pre-retirement income that’s replaced may be lower for higher income workers. According to the Social Security Administration, when retirees begin claiming benefits at full retirement age, as much as 75 percent of pre-retirement income may be replaced for very low earners, 40 percent for medium earners, and 27 percent for high earners [2].

· Birth year

Full retirement age is defined as the age that grants you 100 percent of your monthly Social Security benefit, which sounds simple upfront, but things get more complicated from there. For starters, your full retirement age varies based on the year you were born. Currently, the full retirement age for those born between 1943 and 1959 is 66 and some change, but if you were born after 1960, you’ll have to wait until age 67 to receive full retirement benefits. Use this resource from the Social Security Administration to help you determine your own full retirement age based on your birthdate [3].

· Claiming age

To make things even more confusing, you don’t necessarily need to wait until your full retirement age to begin claiming Social Security, but there are certain benefits for doing so. While retired workers can begin claiming benefits at age 62, your monthly benefit will be permanently reduced by one-half of one percent for each month you receive benefits before reaching full retirement age. While this may not necessarily seem like a big deal at first glance, the permanent reduction can add up to a large dollar amount over the course of a retirement.

Additionally, workers aren’t required to begin collecting Social Security benefits once they reach their full retirement age. In fact, you can wait until age 70 before being required to take distributions—and in return, the Social Security Administration will increase your benefit for each month you delay collecting benefits after full retirement age. And with a yearly benefit increase of about 8 percent for each year past full retirement age, a retired worker waiting to claim until age 70 can earn up to 76 percent more per month than a retired worker claiming at 62 [1].

Why is it important to have a Social Security claiming strategy?

Back in 2015, MassMutual quizzed over 1,500 adults on relatively basic Social Security principles that they deemed were important to know in order to make well-informed claiming decisions. And the results didn’t look good. Overall, 72 percent of adults failed the quiz. Even more alarming: 62 percent of those over the age of 50 failed.

With so much uncertainty regarding Social Security and different claiming strategies, it shouldn’t come as a surprise that just 7 percent of men and 6 percent of women wait to claim benefits until after reaching their full retirement age [4]. What’s more, only 2 percent of men and 4 percent of women wait until age 70 to collect Social Security distributions—which would maximize their monthly benefit.

So why is it that important to maximize Social Security benefits? Well, for starters, Social Security payouts account for more than half of all income earned by 62 percent of retirees. But hang on—it gets worse. Nearly 34 percent of retirees rely on Social Security benefits to account for 90 percent or more of their total retirement income [4].

As a society, we need to be more informed on basic Social Security concepts to help us safeguard our future. Although Social Security was never intended to be the sole source of income among retirees, the Center on Budget and Policy Priorities found that 15.1 million retired workers are kept out of poverty because of Social Security [4]. Its vital importance is clear, and having a well-thought-out Social Security claiming strategy will help you take your first step on the path to retirement readiness.