Just about every American living today is covered by Social Security, a government retirement plan signed into law in 1935. Ninety-eight percent of all workers are in jobs covered by Social Security. One in six Americans receives Social Security benefits. Social Security has become an important facet of American life.

What is Social Security?

Originally planned as a social insurance program designed to pay retired workers aged 65 and older a continuing income, a number of changes have been added over the years to make the program more comprehensive.

Workers acquire credits towards Social Security benefits through payroll taxes collected throughout a person’s working life. The final level of benefits received is directly related to the lifetime earnings of the worker.

For example, if someone worked sporadically or for low wages, the final benefit would reflect this. If a worker was unemployed for a period of time, no contributions would have been made because no payroll taxes were collected. This would lower the total lifetime earnings.

What is covered by the Social Security Program?

Several changes have been made over the years to make the Social Security program more responsive to the needs of a changing population. The law was amended to extend payments to spouses and minor children of a retired worker. Survivor benefits were approved to cover beneficiaries in the event of premature death of the worker.

In the 70’s Social Security benefits were tied to increases in the consumer price index so that retirees would not see their incomes eroded by inflation. This benefit allows for periodic increases in the monthly Social Security checks.

Other allowances were written into the law to cover disabled workers aged 50 – 65 and disabled adult children.

Planning Your Retirement Expenses

According to the 2010 Retirement Confidence Survey conducted by the Employee Benefit Research Institute, about 65% of people aged 45 and older have less than $100,000 in retirement savings. About 40% have less than $25,000 and around 33% have less than $10,000.

For those who depend on needing less money during retirement, statistics show that almost 50% of retirees found that their spending during retirement was equal to or higher than their pre-retirement spending.

These figures point to a sobering reality for people facing retirement. The average retiree will have to plan carefully to make the new lifestyle fit a reduced income.

Many retirement planners refer to retirement income as a three-legged stool: Social Security benefits, traditional company pensions and personal savings and investments. While past retirees and could depend on Social Security payments alone or a generous company pension, prospects for the next big wave of retirees, the Baby Boomers, seem less rosy. Generous pension plans are being replaced by self-funded 401-k and 403-B plans.

The overburdened social security system may be faced with reduced benefits, means testing (basing benefits on adjusted gross income) or higher eligibility ages. These developments mean that retirees will have to craft their own retirement strategy focusing on saving, investing and adjusting ones expenses and lifestyle. What steps can be taken to ensure financial well-being and independence in retirement?

When Should You Start Getting Social Security?

There are three options for receiving all security benefits: receive them early, receive them at normal or full retirement age or wait longer. Depending on what year you were born your normal retirement age could be as early as 65 or as late as 67 (See chart below).

If you were born in… Your normal retirement age is…

1937 or earlier 65
1938 65 and two months
1939 65 and four months
1940 65 and six months
1941 65 and eight months
1942 65 and 10 months
1943-1954 66
1955 66 and two months
1956 66 and four months
1957 66 and six months
1958 66 and eight months
1959 66 and 10 months
1960 or later 67

Source: Social Security Administration

Penalty for Early Retirement

If you opt for early retirement, your benefit is reduced for each month before your normal retirement date. For example, if your normal retirement age is 66 and you decide to receive early retirement benefits at age 62, there will be 4 years (48 months) of reduced benefits. The total benefit reduction would be 25%. This reduced benefit amount represents a lifetime reduction–you will face a lifetime of lowered payments.

Credit for Delayed Retirement

If you put off taking your benefits until you have passed normal retirement age, you will get an increase in your monthly Social Security check. For example, you were born in 1944, your normal retirement age is 66, but you delay taking Social Security payments until age 68. By waiting the extra two years (24 months), you get a credit of 8% for each year or 16%. Your credit will be 16% higher than you would have gotten at age 66. Again, this is a permanent lifetime increase.

If You Decide to Keep Working

You can work and earn as much as you want and still receive your full Social Security benefit payments once you reach full retirement age. However, if you are younger than full retirement age and your earnings go above a certain dollar amount, some of your benefit payments during the year will be withheld by Social Security.

If Social Security withholds some of your benefits because you continue to work, you will get a higher monthly benefit amount when you reach your full retirement age. If you would like to work and earn more than the exempt amount, it will not, on average, reduce the total value of lifetime benefits you receive from Social Security—and may actually increase them.

After you reach full retirement age, the Social Security administration will recalculate your benefit amount and you will get credit for any months in which you did not receive some benefit because of your earnings. In addition, as long as you continue to work and receive benefits, the Social Security administration checks your record every year to see whether the additional earnings will increase your monthly benefit.

Deciding Whether to Take Benefits Early

Consider taking benefits early if…

• You’re no longer working and really can’t make ends meet without your benefits.
• You’re in poor health.
• You’re the lower-earning spouse, and your higher-earning spouse can wait to file for a higher benefit.

Consider waiting to take benefits if…

• You’ve reached normal retirement age and want to continue working. Benefits will not be reduced because of your earnings.
• You’re in good health.
• You’re the higher-earning spouse and want to be sure your surviving spouse receives the highest possible benefit.

For further information about retirement and your Social Security benefits, go to www.ssa.gov.