How you can help employees understand Social Security benefits

Considering how important an income source Social Security benefits have become for U.S. retirees, many Americans demonstrate a poor understanding of this vital program.

In fact, a recent study found that almost half (49%) of U.S. adults aren’t certain how much of their income Social Security replaces (or will replace).¹ Likewise, 49% of survey respondents believed — incorrectly — that their benefits would increase at full retirement age if they file to receive benefits early.¹

Misunderstandings about Social Security benefits could lead some individuals to unnecessarily file for benefits before full retirement age, causing a reduction in monthly benefits that could adversely affect their income for all of their retirement.

As a recognized source of trustworthy information, plan sponsors and advisors share a unique opportunity to help employees and plan participants educate themselves about Social Security. When participants understand the benefits they may qualify for and how they’re calculated, they can develop a better sense of their own retirement planning needs — and become more open to learning about ways of improving their own retirement security.

Here are a few key points to get a conversation started.

Social Security: just one part of a bigger picture

In 1935, President Franklin D. Roosevelt signed the Social Security Act into law, establishing the benefit program in its early form, intended as a measure of “social insurance” against poverty among elderly and disabled Americans.² This highlights the fact that Social Security wasn’t intended to be a sole source of retirement income.³

Since its beginnings, the program has evolved to provide benefits to most workers who’ve accrued 40 credits (equivalent to 10 years of work) or more, as well as workers who’ve developed disabilities, and survivors of deceased workers.³ Employers and employees each pay 6.2% in Social Security tax on the employee’s income to fund the Social Security trust, up to $147,000 in 2022, and self-employed workers are responsible for the full 12.4% tax on their income.³

While Social Security’s cash reserves are often the subject of discussion as aging populations rise, employees should understand that their taxes fund this important benefit program. Rather than focus on the program’s long-term security, employees should be encouraged to think about what else they can do to plan ahead for a more secure and comfortable retirement.

How much employees may expect to receive

Social Security benefits are based on lifetime earnings before retirement, with low-wage workers receiving up to 75% of their average earnings, top earners receiving about 27% of their pre-retirement average earnings, and those in the middle typically receiving about 40%. These percentages apply to those claiming benefits at full retirement age; earlier claims receive lower payments.³

The estimated average monthly payment for all retired workers in 2022 was $1,657, and the maximum benefit payment was $3,345 per month.⁴ A spouse of an eligible worker can receive up to half the worker’s full benefit, starting when the worker’s spouse reaches full retirement age. Even divorced spouses may receive benefits if they meet certain qualifying criteria.⁵

What employees need to know about claiming benefits before reaching full retirement age

The earliest a person can choose to start receiving benefits is at age 62. Full retirement age for those born in 1960 or later is 67 — and the earlier a person begins collecting, the more their monthly benefit payment will be reduced. The Social Security Administration reduces benefit payments by about half a percent for each month between claiming and full retirement age. That means someone claiming benefits at 62 would receive about 70% of their full benefit.³

On the flip side, delaying benefits has the opposite effect on monthly payments, up to age 70. If a person reaches full retirement age at 67 and delays benefits until they reach 70, their monthly payments will be about 124% of their full benefit.⁶

You may encourage employees to create their own my Social Security account, where they can review benefit estimates and experiment with different claiming options to see the potential effects of claiming earlier and later than their full retirement age.

Claiming benefits isn’t the same as retiring

Some people choose to claim benefits and work, but those claiming early may face reduced benefit payments if they earn over a threshold amount, but those who wait to claim until their full retirement age won’t see their benefits reduced by working. In 2022, those younger than full retirement age see reductions when earning more than $19,560 per year, and those who are still working but will reach full retirement age during the year can earn up to $51,960 before their benefits are reduced.⁷

Don’t wait to start a conversation

Social Security claiming strategies can be a significant consideration in retirement planning. There’s no shortage of free and reliable information available from the Social Security Administration, but some employees may experience information overload. With guidance from a financial professional, some workers may learn they can retire when they choose and still delay claiming benefits to maximize their monthly payments down the road.

A conversation about estimated benefits and claiming strategies for an employee and their spouse, if married, can be a welcome entry point for other retirement planning and investment topics. 

Plan sponsors and advisors should consider making educational events open to employees and spouses to help demystify Social Security and retirement planning. If your plan also provides financial education content, be sure employees are aware of learning modules or tools that can help them estimate and plan for benefit payments.

SOURCES
¹ Nationwide, New Study: More Than Two-Thirds of Americans Don’t Know that Social Security is Protected Against Inflation, July 19, 2022.
² SSA.gov, Social Security History, no date.
³ SSA.gov, Understanding the Benefits, 2022.
⁴ SSA.gov, Fact Sheet: 2022 Social Security Changes.
⁵ SSA.gov, Benefits for Your Family, no date.
⁶ SSA.gov, If you were born between 1960 your full retirement age is 67, no date.
⁷ SSA.gov, Receiving Benefits While Working, no date.

CMRS-4950687.1-0922-1024