The Social Security Puzzle


For all that we complain about it, social security continues to be one of the single most important tools for a successful retirement in the United States. To make it work well for you, there are some basics you need to understand: First, don't get confused about the difference between the social security retirement program and social security disability (SSDI), an income assistance program available to people of non-retirement age. A lot of the internet "information" and advice out there pertains to SSDI but won't do you a bit of good when it comes to retirement benefit questions.

Now that we have that straight, let's see how the social security retirement program works. Congress passed the Social Security Act of 1935 to address some of the horrible poverty and suffering we saw throughout the country during the Great Depression. The part of the act that provided monthly retirement benefits took a few more years to get started and then expanded in the 1950's and the 1960's. Medicare, the health care insurance program, was added in 1965.

In one sense, social security looks like a  savings program—you put in a little bit from every payroll check over the course of your working life, and when you retire, you have money to start taking out. But social security is actually more like an insurance policy. The money you put in is going to a shared "pot." Some people will put in more than they take out in the end; others will collect more than they put in. Even though your benefits are based on your social security payment history, the trick to making out well or poorly is in when you take the money and how long you and your dependents live after that (check your estimated benefit here).

The difference between 65 and 70

Overwhelmingly, financial advisors recommend that clients wait until 70 to take their social security benefits. Why? We are assuming that you will live quite a bit past the age of 65, and we'd rather you get a larger payment every month for the rest of your life than start early with a low monthly amount. Those of you who start at 62 (the earliest age) will be penalized by permanently lower payments for the rest of your life—up to 30% less every month.

Things look better if you wait until "full" retirement age at 65, but the Social Security Department has added in some extra incentives to get you to wait a little longer. If you were born after 1943, the Social Security Program will add an extra 8% to your benefit for every year after age 65 that you delay retirement. This continues until you hit age 70, when you've maximized what you can get.

(*Note: even if you are going to delay you social security benefits, you need to apply online for Medicare within the 3 months before you turn 65 or face the possibility of higher premiums and delays when you need it later!)

Clever tricks

There are more than a few tricks to getting the most out of social security. Here are a few that get used a lot:

  • Your spouse and dependent children (and even a former spouse) can receive benefits (and Medicare) based on your social security history. This means that you are not just analyzing how much you receive when deciding when to take benefits—you need to add in the financial effect of getting payments for your spouse and dependents. For a look at how much a spouse or dependent child can receive at different ages, check the Social Security Spousal Benefits Page.
  • But... you can also claim your benefit at full retirement, start benefits for your spouse or dependent child, and then suspend your own benefits until you reach a later retirement age. Confusing, right? A fair number of people use this trick to start benefits to a member of the household while still delaying their own benefits (to get those nice increases I mentioned above). In effect, this means your spouse/child gets the benefits from your social security now while you are still in line to get the increased amounts after age 70.
  • If you think about it, everything I just wrote above means that if you are the spouse of someone who has retired or a widow, you might want to lean on those benefits and wait to file for your own social security benefits. Not only do you get a better rate on your social security when you get it, but if you are receiving both the program will adjust your spousal benefits to a lower amount (they become in social security terms "excess" benefits).
  • Suspending your application is one thing—withdrawing and reapplying is another story. As I mentioned in my last post, a piece of advice gets passed around the internet every few years that instructs everyone to apply for benefits at 65, take the benefits for a while and then repay the whole amount and reapply at 70. At the heart of this strategy is the fact that you don't have to repay the benefits to the Social Security Administration with interest. If you have the bank account and organizational skills to manage this, it means you get an interest free loan for a few years, which you could use to other great things. However, the Social Security Administration got tired of this one in 2010 and made it tougher. Now you can only repay within 12 months of your first filing. If you consider how much paperwork goes into the withdraw & reapply process, it probably isn't worth the pain!


It seems strange to many people, but you will probably pay taxes on your social security income. In fact, if your total income is more than $34,000 (if you file yourself)/$44,000 (if you file jointly with a spouse,) you could pay federal income taxes on up to 85% of your social security benefits. The rate of income tax you will pay still depends on your tax bracket, as usual. But this little tax fact may well play into your decisions about when to take social security benefits.

And a couple of tips...

If you are really wanting to delve deeper in to the mysteries of social security, start with Laurence Kotlikoff's Q&A's for  PBS and plan on getting comfortable with a lot of online calculators. Otherwise, it is probably a very good idea to pay a planner for a consultation or financial plan as you approach retirement.