Episode 49 – Social Security basics
Episode transcript:
[music intro]
Jenny
Welcome back to Fund Your Future with DRS. Today we’re diving into the wonderful world of Social Security benefits. And when people start to think about retirement, they usually think about how much money they might receive from Social Security. So, it’s no surprise that at DRS we get a lot of questions about Social Security, but we’re not the experts. So, we’ve invited Kirk from the Social Security Administration to come on the podcast and answer some frequently asked questions.
And this will be a two-part episode. This episode, we’re going to focus on some online resources and kind of the basics. And on the second episode, we’ll focus on some specific provisions of Social Security that may impact some public employees. So welcome, Kirk. We’re happy to have you on the podcast.
Kirk
Thank you. Thanks for having me here today.
Seth
Krik, so could you tell our listeners about why a person might want to create a My Social Security account? What information can a person find in their online account? And is it something that I should do, even if I’m, like, decades away from being ready to collect my Social Security?
Kirk
Yeah, certainly. So, Social Security has explored a number of different ways that we can get information out to people. You can walk into an office, you can go ahead and call our national 800 number. But some years ago, we were having people saying, you know, we want to be able to access information online, and we wanted to access information specifically about our individual situation, about my own personal benefits.
So, we created the My Social Security account, which will allow you to access online information about your own benefits. Now, if you’re not currently getting benefits, a number of different things you can do with it. You can go online and see what your future benefits would be. You can pull up your online Social Security statement through the My Social Security account, and it’ll show you what your future retirement benefits would be and show you what your disability benefits potentially could be if something happened.
Would show you what your survivors receive if you passed away. But there’s also some other interesting functions that you can use there. There’s some great planning tools that can give you estimates at different ages of what your benefits might be, and you can see what your possible spousal benefits would be, what you might be able to get on a spouse’s record.
You can also use that to request a replacement Social Security card. So, kind of an interesting feature. If you ever need to request a card and you have this online account, you’re not making changes to your card. You can just go into your account and request that card, and it’ll will send it right to you. Now, if you’re already getting benefits, you can also use the My Social Security account to manage your benefits.
So, if you need to change your address, change your phone number and get a replacement social Security card, get a replacement Medicare card. You can do all that directly right online. No need to call us, no need to go into an office. You can also opt out of getting mailed notices. So, if you don’t want to get any notices in the mail, which more and more people don’t want to get notices in the mail, you can do that.
And then you can just go into your online account and see if what type of information we’re sending you. So, whether you’re getting benefits or not, getting benefits, whether you’re a decades away from getting benefits, there’s some great planning tools, there’s some great things that you can manage your account with. So, when you start to get those benefits, you won’t have to go into one of our offices or call us.
Seth
That’s great.
Jenny
Yeah. That’s fantastic. So, Kirk, could you tell us a little bit about how a person qualifies for Social Security retirement benefits and kind of at a high level, how are the benefits determined? Maybe like what an average benefit amount might be?
Kirk
Sure. Common question I get is: how do you qualify for a retirement benefit? And I am really going to try to give this to you in the nutshell. I’ll assume all your listeners are not excited by mathematical formulas and numbers and all that good stuff. So, I’ll try to kind of boil it down here, but the real basics of it is this in order to qualify for a Social Security check, you need to have 40 work credits and you can earn up to four work credits per year.
So, in order to get a Social Security check, you actually don’t need to do a lot of work. You need to have about ten years worth of work, and that would allow you to earn the 40 work credits and earn one work credit. This year, for example, all you need to do is make $1,730. So, if you were to go out and make $6,920 this year, you would get your 4 work credits, accumulate 40 work credits over your lifetime, and you will qualify for a Social Security check.
Now, if you made just the minimum, you did 10 years making the equivalent of about $7,000, a year, you’re not going to have a very large benefit. You might get 150 to maybe $200 per month. So, the next stage of this is how do you calculate my benefit? And there we stop looking at credits. And now we look at your entire work history.
So basically, what we do is we take all the work you’ve ever done in your lifetime, and we lay it end to end, and then we adjust each year for inflation, and we bring your entire work record up to a more even playing field. And then the computer goes through and it’s not going to look for the high five, not going to look for the highest five year’s worth of work.
Not going to look for the Big Ten, your biggest ten year’s worth of work. It’s going to base your benefit on the average of your 35 highest year’s worth of work. So, this is very different on how your pension might be calculated. Social security does it on a much larger scale of what your benefits are going to look like for Social Security.
So, we take those 35 highest years after adjusting for inflation. Add that together. Divide by 35, and we come up with the theoretical average year over your working career. And then let’s take in the average worker somebody that for let’s say in that 35-year period in today’s dollars made about 50 to $60,000 per year for 35 years.
Mind you, that person would end up with a payment of about $2,000 per month at their full retirement age. Let’s say age 67. So that’s what the program was originally designed to do for the average worker to replace about 40% of what a person’s losing because they’re stopping work. That’s all the original program was designed to do. It was never designed to be a standalone program.
It was designed to give a person a solid base that they could rebuild their retirement future on. So that’s why it’s important to have other things such as savings, investments, other pensions that will provide additional income.
Jenny
That’s cool that they did the whole 35 years of work as an average.
Kirk
Yeah. So, and that can vary over time. And it’s also neat that they take the, adjusted for inflation because it would be unfair to look at how much you’re making today compared to 20 years ago, simply because of the effects of inflation. So, we’ve taken that into account and adjust each year, so that we’re looking more at today’s dollars when we calculate those numbers.
Jenny
Awesome.
Seth
Kirk, you mentioned that a frequent question that you get is around how to calculate your Social Security benefit. I think this next question is also probably one that you get fairly frequently, because there’s a lot of news articles, about Social Security running out of money in the next decade or so. How do you answer that question? What does that mean for a person who’s going to be retiring soon, but also for a person who’s much younger?
Kirk
Certainly. And that is a common question. It’s a lot in the media now, especially since we’re coming towards presidential elections. That’s discussed a lot more. Today, actually, Social Security is in pretty good shape today. We have about $2.7 trillion saved up in the Social Security Trust Fund. However, we are now in a time period where we are not bringing in enough money each year to fully fund the Social Security program.
So, the current workers that are left working, paying into the program, they’re not paying enough money to support all the workers that are retiring. And we have a lot more workers over the next roughly ten years that will be retiring and start to draw benefits. So, we are now liquidating the Social Security Trust Fund, that money that we’ve built up over time, that roughly $2.7 trillion. That will allow us to pay full benefits without any adjustments until the year 2035.
So, the reality is this where we are currently headed is that come the year 2035, our $2.7 trillion will be gone. And at that point, we will only be bringing in enough money to fully fund the program at a 83% level, meaning that come the year 2035, we will have to cut everybody’s Social Security payment by about 17%.
That’s everybody. That’s currently receiving benefits and everybody that would receive benefits from that point forward, that is the plan. That is the only plan that we have in place now. Now then, does this need to happen? The answer is no. And this is where everybody needs to get involved. Not just people getting benefits, but people that might be decades away from getting benefits.
You need to make your voice heard, and you need to, contact your congressman, your senator, your president, and encourage them to come up with a solution to meet this challenge. And I won’t kid you, it’s not an easy challenge that we face. Just like you as an individual, if you’re running out of money in your checking account and you’re busily handing money out to people, there’s really two ways to solve that problem.
You either figure out a way to bring more money in, and for Social Security, that’s to increase taxes and bring more money into the system. Or you figure out a way to send less money out. And for Social Security, that’s somehow to reduce or cut benefits. So, two basic concepts, but how you achieve them, that’s where the difficulty is.
And no matter which direction you go, increase taxes, bring more money in or decrease benefits. The decisions are going to make very large groups of people unhappy because nobody wants to pay more in taxes, and nobody wants to have their benefits cut. So that’s where the difficult part of this problem comes from. Is that unpopular or difficult choices need to be made.
And that’s why we have our elected officials to make those choices for us. So, you need to make your voice heard and encourage them to come up with a solution to meet that challenge.
Seth
Thanks. I appreciate that you address the elephant in the room there. So, we’ll get on to other questions.
Kirk
Okay.
Jenny
I don’t quite have a transition for that one. Getting back to some of the basics, we know that a person can start their Social Security retirement benefit as early as age 62 or as late as age 70, but really, is there a best age to start receiving your Social Security retirement benefits?
Kirk
There’s really no one best date to go ahead and do that. What you actually need to do is look at your individual situation, because your individual health situation, your individual financial needs, your individual family longevity will kind of point you in the right direction. Now then, many people don’t have a choice if they’re going to stop work, they need to activate their Social Security benefits because there’s no other way that they could retire.
It’s kind of a scary number here. About one third of all people reaching retirement age will depend on Social Security for over 90% of their retirement income. And another one third of people will depend on Social Security for up to about half of their retirement income. So those people, about two thirds of the population, really don’t have a choice.
If they’re going to stop work, they have to activate their benefits. Now then, what you need to look at, like I said, is how long (just looking at it this way) How long do you expect to live? And I always tell people that if you expect to live, beyond age 80, you should try to start your benefits as late as possible.
You should try to make them as large as possible, so that you’ll have extra money. Maybe not in your 60s and 70s, but when you’re in your 80s and maybe 90s, have that extra money there and Social Security will be paying you, a larger amount.
If, though you are not in a great health situation or people in your family die young, maybe it’s cancer, maybe it’s a heart condition and you don’t think that you’re going to live beyond the age of 80, starting your benefits at age 62 make complete sense. Individual choices for individual people.
You need to look at your financial situation first, but also then look at your individual health situation and your individual family longevity. Now than that having been said, it’s actually quite easy to understand what happens if you file early so most people today can get their benefits 100% of their benefit at age 67.
If you’re born 1960 or later, you get 100% of your Social Security benefit at age 67. So, you need to make a choice. You know you’re going to get 100% at age 67. Do you file early or not? And here’s the simple guide to help you understand what’s going to happen if you elect to file early. For each and every month you file early, your benefit is reduced by about one half of 1% per month.
So, if you said, “hey, I can get 100% at 67, I’m going to go ahead and file at age 62” — 60 months early, 60 times half a percent — that’s 30%. You’ll take a 30% cut to your payment. So, if your benefit was going to be $2000, you’re going to get $1400.
But I’ll give you another example. Let’s say you just said, “hey, I’m going to retire at age 66 and ten months.” You’re just going to file two months early. Well, you’re still filing early, but you’re not going to take as large a reduction: two times half a percent is 1%. You’d only take a 1% cut. And if your payment was, $2,000 a month, you’d take a $20 a month decrease for the rest of your life by filing those two months early.
One other thing with this, and not a lot of people take advantage of this, only about 10% of the population or less actually take advantage of this. If you wait beyond your full retirement age, beyond, let’s say, age 67, we will give you bonus credits. This doesn’t mean that you’re working necessarily. This just means that you’re waiting and you’re going to take your benefits later on.
So, let’s say you could have gotten 100% at age 67, and you wait till age 68. Every month you delay past your full retirement age, we’ll give you a bonus credit. And while we’re going to reduce you at half a percent if you file early, the bonus credits going up the other side are worth .66 percent per month that you delayed taking your check, or 8% a year.
So, if you came in at age 67, let’s say, and you said, “hey, I’m going to wait, I’m not going to file.” It’s up to you. And why, maybe you’re still working, maybe you’re just living on other incomes, pensions, whatever it may be. You elect not to file. Automatically one year later, if you decided to file, you’d get an 8% increase for the rest of your life.
So, you’d go automatically from, let’s say, $2,000 a month to $2,160. You get that 8% bonus for the rest of your life. We will give those bonus credits all the way until age 70. So, if you wait until age 70, just a hint here, don’t wait beyond 70 because you stop earning bonus credits. In that example, your benefit original benefit had been $2,000 a month that you would have gotten at 67. If you waited till age 70, three extra years, you’d get 124% of your benefit. Your benefit would be $2,480.
So, the longer you can wait, the higher your benefit will be. Not a lot of people take advantage of that, usually about by the time people reach their full retirement age, age 67, for example, about 90% of the population has activated their benefits. Only around 10% or less, actually take advantage of that bonus situation.
Jenny
And so, Kirk, you mentioned in that My Social Security account, you can run an estimator. Can you see if you can qualify for those bonus credits?
Kirk
Yes. So, it’ll actually typically give you three numbers. So right off the top when you go into your Social Security statement, the first thing I’m going to tell you with that Social Security statement, remember it is an estimate. And the younger you are of course, the more it’s based on an estimate. So, for example, if you were 50 years old and you were looking at your Social Security statement and your My Social Security account in order to come up with that estimate, the computer has already made one very large assumption.
It’s going it’s assuming you’re going to work till at least age 62. So, if you’re 50 years old, automatically built into that estimate is the assumption you’re going to work another 12 years making whatever you’re making today. So, if you were to stop your work early, you were to stop work before age 62 or cut back your work activity.
Those numbers will not be very accurate because you’re automatically pulling money out that the computer has already assumed that you’re putting in. If you then look at those numbers, and once again, assuming you’re going to at least age 62, the computer will show you what you would get at 62, what you’d get at your full retirement age, show you the reduced benefit at age 62, which gives you maximum reduction.
It’ll show you what you get at your full retirement age, let’s say age 67. And then it’ll show what you would get at age 70 with your maximum bonus. So, it is kind of important to understand, you know, how the things fall in between. So, in this example of a person that can get $2,000, let’s say at age 67, it would show you three numbers off the bat.
It would show you age 62, you would get $1400 if you filed at 62. Age 67, you’d get your $2,000. Or, if you waited till age 70, you’d get $2,480. And whatever you do in between, you’d have to individually figure out.
Seth
It’s a really interesting fact that only about 10% of the population delays beyond their normal retirement age. I think one of the things we hear from folks semi frequently is that they’re using their deferred comp or their additional savings to kind of bridge that gap from when they retire; they start collecting their pension, but they’re going to delay collecting Social Security for a few years because they want that higher amount that they’re going to receive at age 70.
So yeah, I really appreciate what you said. It is very much an individual personalized strategy on how you’re going to make all these different pieces of your retirement plans fit together.
Kirk
Exactly. And you really do need to take Social Security into consideration about what it’s really is. It’s an important part [for] most retirees and people that are probably listening to your podcast to hear. They probably have other resources. You know, maybe you’re earning a pension, maybe you put money aside into an IRA or 401(k) or Deferred Compensation.
And so, the people that are probably listening to this do have some other options as opposed to unfortunately, a lot of people that don’t have other options. And so, there are people that can say, you know, I’m going to stop work at age 62, but I’m going to wait until age 67 to draw my Social Security because I want that higher benefit.
So, it’s all in the planning. If you can get to age 62 and you’ve put aside some other resources or you have some other plans or, other money that you can live on, and then that gives you the ability. And so, you were talking about, you know, what can I do if I’m two decades away from filing for retirement?
You’re playing the long game. It’s a big plan. And, you know, retirement just doesn’t happen at 62. In order to have that successful retirement, you got to plan and it’s a plan that can work over 20, 30, 40 years of your working career.
Seth
That’s really helpful. And Kirk, can I go on to My Social Security account and run variations on those scenarios? You mentioned that it’ll give me an estimate at 62, 67 and 70. Could I also say, “hey, Social Security, what would happen if I stop work at 55?” And, you know, because I might start collecting my pension at 55.
Seth
We’ve talked about early retirement. I’m going to stop work at 55. That’s going to stop accruing Social Security credits. But I’m going to wait until age 70 to start my Social Security benefit. Can I run that kind of level of detailed scenario in the calculator on the page?
Kirk
You can. You can run a number of “what if” scenarios using that. Now, it depends on how close you are. You say 55. It’s not sophisticated enough to say, hey, I’m 50 years old, I’m going to work five more years. And then at 55, I’m going to stop work early and then, I’m going to activate at age 62.
You can’t run too many things like that, but you could say, yeah, okay, let’s try age 55. Here I am at 50, so the computer will assume you’re going to work till 55, making whatever you’re making today. And then at age 55, it goes to zero. And then it would show you what your benefits really would look like at age 62.
Because basically what it’ll do is, it will strip out those last seven years where it had originally assumed you’re going to work. It’ll strip out those last seven years and give you some more accurate number. You can use our retirement estimator, which will give you those numbers and help you understand. And you can do a number of other scenarios too.
Maybe you’ll say, hey, at age 50, I’m going to go to part time work. I’m going to go from making, you know, $80,000 a year down to making just $30,000 a year. What would my benefits really look like then at age 62 or at my full retirement age? So, yeah, it’ll let you run some of those.
But real complicated, you know, “I’m going to go to part time work for five years, and then I’m going to stop work at age 60” and things like that. It’s not sophisticated enough to be able to do that, but there are some pretty good bits of information that you can glean off of it by running a number of “what if” scenarios.
Seth
That’s really helpful. As we wrap up, can you remind our listeners where they would need to go to create this account and start to do this sort of future planning?
Kirk
Yeah. Actually, if you go to our website at www.ssa.gov that’s ‘S’ as in Sam, ‘S’ as in Sam, ‘A’ as in apple .gov — don’t go to .com or .net — those are those are fake sites, so you got to be careful. Go to .gov and you’ll be up on our front page.
And right at the top of it there is a section that says, “prepare for benefits.” And there you can use our online estimators and calculators to get a better idea of what your benefits will look like. There’s also another section that talks about applying for benefits. So, if you’re getting ready to apply what you need to do. And then there’s a section that says after you apply. You know, if I need to make changes to my cards, if I need to file for another benefit of some type, what can you do there.
Also, up on there is the portal, the My Social Security portal that you can get access to. So you can look at your individualized benefits. So, some great planning tools right at our website, that will answer questions. Also, if you’re on there and you want to get information about our programs in Spanish, we have our mirror site in Spanish.
Now you can look at our search function, I always encourage people to type in “frequently asked questions” and we have a list of our 200 most frequently asked questions that you can access. And if you don’t want to look at all 200 of them, you can get to the Frequently Asked Questions section and say, show me your top questions about retirement, or survivor, or disability benefits, and it’ll kind of break it down. And then you can look at the questions that way.
Jenny
That’s really great that they offer so many tools and resources as well as questions online.
Kirk
So last thing I want to say about that is, just as a reminder, Social Security is an important part of your overall retirement, but it’s also important to get other advice. We encourage people to speak to financial representatives that can help you design a retirement program. We don’t recommend any particular one, but we do encourage people to seek out financial advisors and help you plan that overall retirement strategy, where Social Security will be a big piece of it.
But it’s certainly not the only piece of your retirement strategy. It’s important to understand how all the different parts your pensions, your investments, your Social Security benefits, how they’re going to work together to get you through that, 20 or 30 or 40 years of retirement.
Jenny
Excellent. Yeah, obviously the same thing that we promote at DRS, as well as working with a financial advisor and looking at all those different pieces of your retirement blueprint.
Kirk
Exactly.
Seth
We mentioned at the start of the episode that this is going to be a two-part episode. So, we’ll, follow up with Kirk, on some additional, more specific scenarios in our next episode. So, thanks, Kirk, for joining us. And we’ll, hopefully have listeners join us for the next episode as well.
Kirk
Thank you so much.
Jenny
Yeah. Thank you.
[music outro]
Disclaimer
Thanks for listening. And now we’d love to hear from you. What topics would you like to hear about? What questions do you have for us? Send an email to drs.podcasts@drs.wa.gov that’s drs.podcasts@drs.wa.gov. The Department of Retirement Systems provides this podcast as a public service, but it’s neither a legal interpretation nor a statement of DRS policy.
References to any specific product or entity do not constitute an endorsement or recommendation. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Views and opinions expressed by DRS employees are those of the employees and do not necessarily reflect the view of DRS or any of its officials.
