It's important to know a fair amount about Social Security since it will probably provide a meaningful chunk of your retirement income. Indeed, it provides about 30% of older folks' retirement income. The more you know about Social Security and how it works, the savvier decisions you can make and the more money you'll likely be able to get.
Here are a few questions related to Social Security, based on the Nationwide Retirement Institute 2023 Social Security Survey. See how many you can answer correctly -- and how survey respondents did, too.
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1. Do you know the age when you'll be eligible to collect your full retirement benefits?
Only 13% of survey respondents came up with their correct full retirement age. Half thought it would be a lower age, and 33% didn't know.
For those working today, it's 66 or 67. Some of those guessing an earlier age may have been thinking about the age of 62, which is the earliest age at which you can start receiving Social Security retirement benefits -- though starting early means your benefits will be smaller. (Of course, you'll receive more of those smaller checks if you start early.)
Deciding when to start collecting your benefits is perhaps the most important Social Security decision you'll need to make.
2. Is there a limit to how big your benefit checks can be?
More people, 58%, got this question right than many other questions. The answer is yes -- there's a maximum benefit amount each year. For 2023, that maximum is $4,555. That amounts to more than $54,000 over the course of a year, but very few people qualify for it.
3. What is the average monthly Social Security benefit?
I'm throwing this in as a bonus question because it's important to know what to expect from Social Security. As of August, the average benefit was $1,840, or about $22,000 for the year. You can get a much clearer estimate of how much you can expect by setting up a my Social Security account at the Social Security Administration (SSA) website.
4. If you're divorced, can you collect Social Security benefits based on your ex's earnings?
The answer is yes, and only 48% of those surveyed got this right. Some rules do apply, of course. For example, to be eligible, you need to have been married for at least 10 years before divorcing and can't be remarried. (It's OK if your ex is remarried.)
Social Security divorce rules allow you to collect up to 50% of your ex's full retirement benefits -- though you'll need to wait until your own full retirement age to receive that much. This can be a very welcome income source if your own benefits are much smaller.
5. Are Social Security benefits protected against inflation?
The answer is yes -- and only 30% of respondents knew that. Almost every year, there's a cost-of-living adjustment, or COLA, applied to Social Security benefits.
Typically, it's a relatively modest increase, such as 2020's 1.3% increase or 2019's 1.6% bump. But inflation has been high recently, so the increase for 2023 was a whopping 8.7% on top of 2021's 5.9% bump. It's extremely valuable for retirees that this income keeps up with inflation -- because over 25 or so years, inflation can cut the purchasing power of your nest egg in half.
6. Are workers taxed for Social Security on all their income?
You might expect this to be true, but it's not -- and only 26% of respondents got this correct. Every year, there's an earnings cap beyond which your earnings are not taxed for Social Security. For 2023, it's $160,200, up from $147,000 in 2022. Most people have all their income taxed, but if you earn, say, $20,160,200 in 2023, a full $20 million of your earnings won't be.
Many have suggested removing this cap and taxing all of every worker's income in order to put more money in Social Security's coffers and shore up the program.
7. If you work for less than 35 years, will your benefits be reduced?
Only 38% of respondents got this right -- and the answer is yes, they will. That's because the formula used to determine your benefits is based on your earnings in the 35 years in which you earned the most (adjusted for inflation). So if you only work, say, 30 years, there will be five years' worth of zeroes factored in.
If at all possible, aim to work and earn money for at least 35 years. Working longer can be beneficial, too, because, for each additional year that you work, your lowest-earning year will be kicked out of the calculations.
Take some time to read up on Social Security so that you can plan realistically for your retirement and save enough to sufficiently add to your Social Security income.
