Social Security is a major source of income for most American seniors. However, many current and future Social Security beneficiaries don't know some important details about how the program works. With that in mind, here's your 2018 guide to help you understand Social Security benefits, how to claim yours, and what to expect going forward.
How Social Security is calculated
First of all, to be eligible for a Social Security retirement benefit, you need to have worked for a certain minimum amount of time.
Specifically, you'll need at least 40 Social Security credits to collect a benefit on your own work record. The amount of earnings that is necessary for one credit has increased over time, and is $1,320 in 2018. You can earn a maximum of four Social Security credits per year, so this means that you'll need to have earned $5,280 (inflation-adjusted) in each of 10 or more years.
Social Security card inserted in a stack of money.
Image source: Getty Images.
Assuming you're qualified, Social Security will evaluate your entire lifetime earning record to determine your initial monthly benefit. Each year's earnings, up to the Social Security taxable maximum, is indexed for inflation, and the 35 highest years are considered. If your work history has fewer than 35 years, the missing years will be counted as zeros.
The top 35 inflation-indexed years are averaged together and divided by 12 to produce your average indexed monthly earnings, or AIME. This average is then applied to a formula to determine your primary insurance amount, or PIA, which is your initial monthly benefit at full retirement age. For 2018, the formula is:
90% of the first $896
32% of the amount greater than $896 but less than $5,399
15% of the amount in excess of $5,399
Full retirement age and the effects of early or late Social Security
Depending on the year you were born, your full retirement age is between 66 and 67 years of age:
If you were born in...
Your full retirement age is...
1954 or earlier
66 years
1955
66 years, 2 months
1956
66 years, 4 months
1957
66 years, 6 months
1958
66 years, 8 months
1959
66 years, 10 months
1960 or later
67 years
Data source: Social Security Administration.
If you choose to start collecting your Social Security retirement benefit before or after you reach full retirement age, your PIA, which we discussed in the previous section, will be permanently adjusted to compensate according to these rules:
If you claim before full retirement age, your PIA is reduced by 6 2/3% per year (five-ninths of 1% per month) for up to 36 months.
Beyond 36 months early, the PIA is further reduced by 5% per year, or five-twelfths of 1% per month.
For delayed retirement, your PIA will be permanently increased by 8% per year, or two-thirds of 1% per month, until as late as age 70.
What if you're still working?
You can choose to start your Social Security benefits while you're still working. However, if you earn more than a certain amount, it can result in some or all of your benefits being withheld.
This is known as the Social Security earnings test, and there are two different "tests," depending on your age:
If you will reach full retirement age after 2018, $17,040 in earnings ($1,420 per month) will be excluded from consideration. Beyond this threshold, your retirement benefits can be reduced by $1 for every $2 in excess earnings.
If you will reach full retirement age during 2018, $45,360 in annual earnings ($3,780 per month) are excluded. Beyond this threshold, your retirement benefits can be reduced by $1 for every $3 in excess earnings. For this test, only the months before you reach full retirement age are considered.
If you have reached full retirement age, the earnings test does not apply to you. You can collect your entire Social Security benefit regardless of how much you earn in 2018. It's also important to mention that if your benefits are withheld because of the earnings test, it could permanently increase your benefit once you reach full retirement age, so this money isn't exactly "lost."
The 2018 COLA and how Social Security increases are determined
Each year, Social Security benefits for existing beneficiaries can be adjusted upward to compensate for inflation. This is known as the cost-of-living adjustment, or COLA, and is based on changes in the consumer price index (CPI). If there is no, or negative inflation, the COLA for that year will be zero -- in other words, even in a deflationary environment, Social Security benefits aren't adjusted downward.
For 2018, individuals who had already been collecting a Social Security benefit are receiving a 2% COLA. However, this may not turn out to be much of an increase for many retirees -- Medicare Part B premiums are set to increase, and since these are typically paid out of beneficiaries' Social Security checks, there may not be much of an increase at all.
How much can you get from Social Security?
According to the Social Security Administration, the average retired worker will receive a monthly benefit of $1,404 in January 2018. However, it's possible to get much more if you delay retirement or earn a relatively high salary throughout your career.
For 2018, the maximum monthly benefit payable to a newly retired worker at their full retirement age will be $2,788. In order to get this, the worker would need to have earned more than the taxable maximum earnings for at least 35 years. Furthermore, if a worker entitled to the maximum benefit chose to wait until age 70, it would produce a maximum monthly benefit of $3,680.
Check your Social Security statement for important information
To be clear, if you're still working and haven't claimed your Social Security retirement benefit yet, there's no way to tell you with 100% accuracy how much you'll get.
However, the best estimate of your future benefits can be obtained by viewing your annual Social Security statement, which is available by creating an account and logging in to www.ssa.gov. On your annual statement, you'll find a Social Security benefit projection based on your actual work history, in addition to other valuable information such as eligibility and estimates for disability and survivors benefits.
How to claim Social Security benefits
There are a few ways to claim Social Security benefits, but doing so online at www.ssa.gov is by far the quickest and most efficient way. The application should take about 15 minutes, and there are typically no additional forms to sign and no further documentation requirements.
Of course, you can also apply the old-fashioned ways. Social Security applications are accepted over the phone from 7 a.m. to 7 p.m., Monday through Friday. Or you can choose to apply in person at your local Social Security office, but making an appointment is strongly suggested in order to minimize your wait time.
Other types of Social Security benefits
Social Security isn't just retirement benefits. In fact, tens of millions of Social Security recipients get benefits under one of the SSA's other programs:
Spousal benefits provide retirement income to seniors who earned relatively little throughout their lifetime. In a nutshell, spousal benefits guarantee the lower-earning spouse in a married couple at least half of the primary earner's full retirement benefit, at their own full retirement age.
Survivors' benefits provide income to a deceased worker's spouse and dependents.
Disability benefits (SSDI) provides income to eligible workers who become disabled and can no longer work.
Supplemental Security Income (SSI) provides additional income to disabled or retired individuals with limited assets and income.
Social Security's financial condition
Finally, no discussion of Social Security would be complete without an update on the program's financial condition and what it could mean for current and future retirees.
The good news is that Social Security has plenty of money right now. The Social Security trust fund ended 2016 with $2.85 billion in reserves, and the program is expected to run a modest surplus in every year through 2022.
Unfortunately, the bad news is that after 2022, deficits are expected to begin and the programs reserves will start to be depleted. In 2034, Social Security's stockpile of reserves is expected to be completely gone.
If this happens, incoming payroll taxes will be enough to cover about three-fourths of promised benefits, so as a worst-case scenario, we're looking at a 25% cut. Of course, nobody wants that, so there's a strong possibility that a major change -- tax increases, benefit cuts, or a combination of the two -- could be implemented in the coming years to extend the program's solvency.
