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Financial Planning
May 2023

Social Security Awareness Month

By Ken Cranstone, CFP®

Since 1935, Social Security has helped millions of Americans maintain a basic standard of living long after retiring from their chosen profession. April was Social Security Awareness month, and while many understand that Social Security pays monthly benefits to retirees, there is a lot more to it to ensure you get the most out of the system that will almost certainly be with us for many years to come!

Although Social Security has different facets beyond retirement income (survivor’s insurance, disability insurance, hospital, medical insurance, etc.), retirement benefits are often the most well-known aspect of the agency.

The purpose of retirement benefits is to provide some level of wage replacement: supplemental income to replace wages after a person retires from the workforce. Payroll taxes on the first $160,200 of annual income fund these benefits, and the benefits are designed to provide the highest degree of wage replacement for lower-income individuals. For example, say a worker has earned roughly $2,000 monthly (adjusted for inflation) throughout their career. Their Social Security benefits at retirement would be approximately $1,287 per month. This is about a 64% wage replacement (1,287 divided by 2,000). If another worker earned roughly $1,000 per month (adjusted for inflation), their benefits would be $900 monthly. This is a 90% wage replacement.

How are benefits calculated?

You can calculate a worker’s Social Security benefits by first taking the inflation adjusted earnings of their top 35 years (subject to that annual cap currently at $160,200). From this number, take 90% of their average monthly earnings up to $1,115, plus 32% of the amount from $1,116 – $6,721, plus 15% of the amount above $6,721, up to the maximum. This figure is your primary insurance amount (PIA).

Social Security benefits are determined as a percentage of this PIA, which changes relative to how early or late you decide to file for benefits.

People can begin filing for Social Security retirement benefits as early as 62 and as late as 70. Social Security designates a full retirement age (FRA) for workers which, depending on your birth year, will fall between age 66 and 67. This is a magic date for Social Security benefits because it marks the point at which you can receive 100% of your PIA for life. Claiming at age 62 means you will receive 70% – 75% of your PIA, and delaying until age 70 means you will receive 124% – 132%.

When to claim?

There are pros and cons to claiming early versus delaying benefits, and the correct answer will be a matter of personal circumstance. In general, if you expect to live into your late eighties or beyond, waiting until age 70 yields the most benefit. If you have health concerns that may shorten your lifespan, then claiming early may make more sense. This decision becomes more complex when you factor in spouses who can claim benefits at a different time from when you can.

Regardless, since Social Security benefits can amount to figures in the millions over a lifetime, and two strategies could yield differences in the hundreds of thousands, it is important to build a plan for when to claim Social Security benefits.

Solvency of the system

Each year, Social Security comes into the crosshairs of media outlets with sensationalized headlines about the insolvency of the Social Security system. This is far from reality.

The reality is that there is currently a deficit between payroll taxes (money in) and benefits disbursed (money out). A trust fund called the Old-Age and Survivors Insurance Trust Fund (OASI Trust Fund) covers this shortfall. Without congressional action to change the inflows or outflows from the Social Security system, the OASI Trust Fund is scheduled to run out in 2033. If this happens, Social Security will continue to make payments from payroll taxes alone, which is enough to fund 77% of expected obligations.

While this may sound alarming, it is far from clear that depletion of the OASI Trust Fund would lead to a cut in benefits. It would likely be political suicide for members of Congress to allow constituents to suffer a clear and sudden loss of Social Security benefits; what is more likely is a lowering of costs to the government by incremental changes such as increasing the target retirement age, decreasing cost of living adjustments, and so forth. In any event, there is a lot of time to act, and many variables can be adjusted to keep paying benefits for at least the next 75 years (they only run analyses through 2098).

If you really enjoy getting into the weeds, you can read the full Trustee’s Report here.

Hopefully knowing how benefits are calculated and that benefits are not in jeopardy to the extent the media leads us to believe provides some solace. With that we hope you had a wonderful Social Security Awareness month!

The information provided herein is for educational purposes only, and should not be construed as advice, including, but not limited to tax, legal, insurance, investment, or retirement advice. For your specific planning needs, please seek the advice of Integris Wealth Management, your tax accountant, attorney, insurance agent, or other professional as appropriate. Investing involves the risk of loss.


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