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Social Security benefits make up about 30% of elderly Americans’ incomes, according to the Social Security Administration.
For some beneficiaries, it can be 90% or more.
Yet many people do not think of those earned benefits, and the monthly checks that come with them, as a personal financial asset, according to Social Security expert Larry Kotlikoff, author of a new book titled “Money Magic: An Economist’s Secrets to More Money, Less Risk and a Better Life.”
The money you pay into the system is generally fixed, amounting to 12.4% of your earnings from work that are subject to Social Security taxes. Those taxes are split 50-50 between you and your employer, so you each pay 6.2%, up to a certain cap. In 2022, that tax is applied on up to $147,000 in wages.
Yet the money you may eventually get back from the program is not set in stone.
If you claim at the earliest age you’re eligible — 62 — you will receive permanently reduced benefits. If you instead claim at your full retirement age — generally age 66 to 67, depending on the year you were born — you will receive 100% of that benefit based on your work record. For each year you wait until age 70, you may increase your benefits by 8% through what is known as delayed retirement credits.
However, there are other ways you may increase your benefits even after you claim, according to Kotlikoff.
If you’re between your full retirement age and 70 and are already receiving benefits, you can still stop your monthly checks now and restart them later in order for your benefits to start growing again.
The bump-up you will receive is the delayed retirement credit for the time your benefits were suspended.
But beware: If your spouse or children are receiving benefits based on your record, their checks will also stop. And their benefits will not grow during that time, with the exception of adjustments for inflation, Kotlikoff said.
Alternatively, if you decide to claim but regret your decision, you may get a do-over through what is called a withdrawal of application.
This is only available so long as it has been less than 12 months since your decision to claim was made. However, the catch is that you will need to repay all the benefits you received — including spousal or dependent benefits that may have gone to your family — in order to reverse your decision. What’s more, you can only do this once in a lifetime.
When Social Security retirement beneficiaries are still working, they may be subject to a retirement earnings test if they are below their normal retirement age.
Benefits for people in that category whose earnings exceed a certain level will be reduced.
In 2022, the annual exempt amount is $19,560 for people under retirement age. But for people who will reach their retirement age this year, the annual exempt amount is $51,960, which applies only to the months preceding your birthday.
Notably, once you reach your retirement age, your monthly benefits are permanently increased to make up for the months when benefits were withheld, according to the Social Security Administration.
These benefit reductions coupled with other taxes workers pay may erroneously discourage beneficiaries from returning to work, even after their impact diminishes, Kotlikoff writes.
There’s another reason why working longer may increase your benefits.
Your Social Security benefits are calculated based on your covered earnings, or the jobs in which you paid taxes to the program.
Generally, the Social Security Administration ranks all of your earnings for those years and takes the highest 35 values. This ranking is used to form your average indexed monthly earnings, which is then used to calculate the benefit amount you would receive if you claim at your retirement age.
If you keep working, it is possible to increase your average indexed monthly earnings, and therefore the monthly benefits for which you are eligible.
This is particularly important for people with inconsistent work records, or who took time out of the workforce and have low earnings or even zeroes for some years.
That also particularly goes for high-earning older workers who earn above the annual cap for Social Security taxes ($147,000 in 2022).
“By earning more, regardless of how old you are, you can replace these weak spots with a positive or higher value,” Kotlikoff writes.