Social Security has been a fact of retirement life since 1935. But how much do you really know about it?

When you should take Social Security may depend on several factors, but many people opt for early benefits, which can start at age 62. However, there is a big difference between age 62 ($2,710 per month) and age 70 ($4,873 per month). In fact, you may receive over $1 million in benefits, so deciding when and how to take the income is a critical decision.

Brumbaugh Wealth Management has compiled a list of five surprising facts about Social Security to help you plan and understand.

1. The Social Security Trust Fund ($2.9 trillion) Exceeds the Gross Domestic Product of Every Country in the World Except the Sixth Largest.

This comparison is often used to emphasize the sheer size of the Social Security Trust Fund. The only GDP that surpassed the Trust Fund’s value at that time was that of the sixth-largest economy globally.

The Social Security Trust Fund is a key component of the U.S. Social Security system. It is a reserve of funds set aside to cover future Social Security benefit obligations, particularly when there is a projected shortfall between the program’s income and expenses. The Trust Fund is primarily funded through payroll taxes collected from workers and employers.

It’s worth noting that discussions and debates about the sustainability of Social Security and potential future adjustments to the system have been ongoing. Factors such as demographic changes, life expectancy, and economic conditions can influence the financial health of the Social Security program.

For the most up-to-date information, it is recommended to check recent reports or official publications from sources such as the Social Security Administration or other reputable economic databases.

2. Social Security Is the Primary Source of Retirement Income for the Majority of Americans

Many Americans rely heavily on Social Security benefits to fund a substantial portion of their retirement. For a significant percentage of retirees, Social Security is the primary or even sole source of guaranteed income. This is particularly true for those with limited or no access to employer-sponsored pension plans or personal savings.

While Social Security is a critical component of retirement income for many, it is typically intended to be a supplement rather than a comprehensive solution. Financial advisors often emphasize the importance of diversifying retirement income sources, including personal savings, employer-sponsored retirement plans (like 401(k)s), and other investments.

3. Benefits Are Subject to Federal Income Taxes

The 1983 amendments to the Social Security Act made benefits taxable.

These amendments to the Social Security Act marked a significant shift in the taxation of Social Security benefits in the United States and part of broader changes to address the long-term financial challenges facing the Social Security program.

The taxation of Social Security benefits is based on income thresholds. If a beneficiary’s “combined income” (defined as adjusted gross income plus non-taxable interest plus one-half of Social Security benefits) exceeds certain limits, a portion of their Social Security benefits becomes subject to federal income tax.

The thresholds for taxation vary based on filing status. The two primary filing statuses are single and married filing jointly. If an individual’s or a couple’s combined income exceeds the specified thresholds, a percentage of their Social Security benefits becomes taxable.

4. Benefits Are Determined by Your Average Earnings Over a Lifetime of Work Based on the 35 Highest Years of Earnings

Social Security benefits are calculated based on the highest 35 years of indexed earnings. If you have worked for over 35 years, the SSA will use the 35 years with the highest earnings. If you haven’t worked for 35 years, the calculation will include years with zero earnings.

The SSA calculates your average indexed monthly earnings (AIME) by taking the sum of your highest 35 years of indexed earnings and dividing it by the number of months in those 35 years. The AIME is then used to determine the primary insurance amount (PIA), which is the basic figure used to calculate the monthly retirement benefit. The PIA is the amount you would receive if you claim benefits at your full retirement age (FRA).

5. There Haven’t Always Been Cost-of-Living Adjustments

The Social Security system underwent significant changes in 1975 with the passage of the Social Security Amendments of 1972. One key feature of these amendments was the introduction of automatic cost-of-living adjustments (COLAs) to Social Security benefits. This marked a shift in the mechanism for adjusting benefits.

This shift to automatic adjustments has been a significant feature of the Social Security system since the mid-1970s, providing a more responsive and efficient method to ensure that benefits keep pace with the changing economic landscape.

Learn how to best plan for your retirement at Brumbaugh Wealth Management. With a collective experience of almost 100 years, Brumbaugh Wealth Management is motivated by your goals and values and is driven to provide lasting and comprehensive solutions. 

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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named representative, broker – dealer, state – or SEC – registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.