10 Things Everyone Should Know About Social Security

Nearly every working American pays into the Social Security program, but not everyone understands the benefits they qualify for due to their contributions. And most workers will no longer get paper statements that explain how much they have paid into the system and what benefits they are likely to receive in retirement. Here are 10 things everyone should know about Social Security:

You contribute 6.2 percent of your income. Workers pay 6.2 percent of their earnings into the Social Security system, up to $113,700 in 2013. Employers pay a matching 6.2 percent for each worker. Self-employed workers must contribute 12.4 percent of their income annually.

How your benefit is calculated. Social Security payments are calculated based on your 35 highest-earning years in the workforce, and are also adjusted for inflation. If you don't have 35 years of earnings, zeros are averaged in for the years you didn't pay into Social Security.

Your full retirement age. You can collect the full amount of Social Security you have earned at what the Social Security Administration calls your full retirement age, which varies based on your birth year. The full retirement age used to be 65 for people born in 1937 or earlier. But the full retirement age was gradually increased in two-month increments from 65 and two months for people born in 1938 to 65 and 10 months for those born in 1942. The full retirement age is 66 for baby boomers born between 1943 and 1954. It's scheduled to further increase from 66 and two months for Americans born in 1955 to 66 and 10 months for people born in 1959. And the full retirement age is 67 for everyone born in 1960 or later. Workers who begin receiving Social Security benefits before their full retirement age will receive reduced payments for the rest of their lives.

You get bigger checks if you delay claiming. You can increase your Social Security checks by delaying when you sign up for Social Security. For example, people born in 1943 or later will get 8 percent larger payments for each year they delay claiming after their full retirement age, up until age 70. After age 70, there is no additional benefit to delaying claiming Social Security. "If you're going to err, err on taking in later," says William Reichenstein, a Baylor University professor and principal of Social Security Solutions. "The risk of running out of money in your lifetime is obviously greatest if one or both of you live a long time, and if that's the case, then it pays to wait. You can't outlive the Social Security benefit."

Married couples have additional claiming options. Married couples are entitled to claim Social Security based on their own work record, or payments worth up to 50 percent of the higher earner's benefit. And when one spouse dies, the surviving spouse will receive an amount equal to the higher earner's benefit. "The higher earner should base his benefits decision on the age he would be when the second spouse dies," says Reichenstein. "What would probably be the best strategy is for him to wait until he turns 70 because after the death of the first spouse, the survivor keeps the higher benefits." Ex-spouses are also eligible for Social Security benefits if the marriage lasted at least 10 years.
Couples who have reached their full retirement age can even claim spousal payments, and then later switch to payments based on their own work record, which will then be higher due to delayed claiming. "The spouse with the higher salary can file and suspend and the other could receive 50 percent of that one's benefit for four years and then still get the delayed retirement credit," says Jim Blankenship, a certified financial planner for Blankenship Financial Planning in New Berlin, Ill., and author of A Social Security Owner's Manual.

Payments are adjusted for inflation. Social Security payments are adjusted each year to keep up with inflation, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. Since automatic cost-of-living adjustments were added to Social Security in 1975, they have ranged from 14.3 percent in 1980 to zero in 2010 and 2011.

Insurance benefits for younger people. Social Security isn't just for retirees. Working-age people who become disabled and are no longer able to work can qualify for Social Security payments. And when a worker dies, his or her spouse and children are often eligible for monthly payments.

Electronic payments are now required. Your Social Security check probably won't come via mail. New Social Security recipients have been required to select an electronic payment option since May 2011, and approximately 93 percent of Social Security and Supplemental Security Income payments are already directly deposited into a bank or credit union account or loaded onto a prepaid debit card. "It costs the government and ultimately taxpayers a little over a dollar for paper checks and about 10 cents for each electronic transaction," says Walt Henderson, director of the electronic fund transfer strategy division at the Treasury Department.

You can view your Social Security statement online. The Social Security Administration has stopped mailing paper Social Security statements to most workers to cut costs. If you want to view your complete earnings history, taxes paid into the system, and get a personalized estimate of your expected payments, you'll need to create a Social Security online account and log in to view your statement. It's a good idea to periodically check your statement to make sure your information is being recorded correctly and to make decisions about when to claim Social Security. "I recommend that everyone get in the habit of checking their online statement each year, around their birthday, for example," says Michael Astrue, the former Commissioner of Social Security. You can also now sign up to receive benefits, change your direct-deposit information, and access a benefit verification letter online.

The trust fund has a projected deficit. The assets in the Social Security trust funds are expected to be exhausted in 2033, according to the Social Security Board of Trustees' annual report. After that, incoming tax revenue will provide enough income to pay out about three-quarters of promised benefits. "If nothing else is done, certainly payments would be reduced dramatically to just what the tax rolls were bringing in each year, but we can always increase the Social Security tax," says Blankenship. Possible changes that might correct the problem include tax increases, benefit cuts, or a combination of the two approaches. The trustees found that an immediate payroll tax increase of about 1.3 percent for workers and employers or an immediate benefit reduction of 16.2 percent would both correct the projected deficit and restore the program to solvency for the next 75 years.