Social Security

For over eighty year, Social Security has provided Americans like you with a stream of guaranteed income that gives certainty in retirement and makes budgeting easier. These benefits are especially important today as fewer and fewer people are retiring with defined benefit pension plans. Without pensions to lean on in retirement, more of the retirement planning responsibility rests on your shoulders.

But few Americans know how to optimize their benefits and maximize the amount they will collect in retirement. Even fewer people actually understand how the program works. That’s why we’ve written this guide.

Read on to get smart about the health of the Social Security system, to learn how to maximize your benefits and to understand how Social Security can fit into a broader retirement income plan.

info icon

Don’t have time to read the whole guide now? Get the printable version and read it later.

Social Security Basics

social-security-guide-checklistEveryone knows of Social Security’s existence, but there’s a surprising amount of misunderstanding about what Social Security is (and is not). We wanted to begin to clear up those misconceptions because understanding Social Security is critical to maximizing your retirement income.

Let’s start with the basics. Social Security is a government run program that collects your money (through taxes) while you work and provides qualifying workers a paycheck each month in retirement. It’s the government’s income annuity. While working, you’re required to pay a portion of each paycheck through your taxes to help fund Social Security. When you retire, you get a monthly check from the Social Security Administration that will continue for as long as you’re alive.

social-security-guide-increasing-benefitAs long as you’ve earned enough Social Security credits, typically meaning you’ve worked and paid taxes for at least 10 years, you’ll be eligible for benefits when you retire. You can start receiving benefits as early as 62 or as late as 70 years old. The size of your benefits depends on the number of years you’ve worked, how large your earnings were during those years, the cost of living, and, importantly, at what age you claim your benefits. The Social Security program offers benefits beyond the basic retirement paycheck, including Medicare, spousal, and disability.

Later in the guide we’ll explain how Social Security benefits are calculated and what decisions you’ll be able to make to maximize those benefits.

The Good & The Bad

As you’re heading towards retirement there’s no doubt you’ve seen, heard, or thought a lot about the role Social Security plays in retirement. But with all the information out there, you, along with many others, may find yourself in a cloud of confusion about the matter.

First, the good stuff. Social Security has a number of benefits, including:

  1. Secure Income That Won’t Run Out: Since the creation of Social Security in the 1930s, its been a reliable and trusted income source for hundreds of millions of retired Americans.
  2. Expense Management: Secure income makes retirement planning easier because you know how much money you can use to enjoy the lifestyle you want and deserve in retirement.

However, Social Security has a couple key issues that we Americans need to think about:

  1. Social Security Funding Is At Risk: Absent any major policy changes, the Social Security fund is expected to run out in between 2033 and 2037. To keep the program alive, benefits might have to be reduced or taxes raised. Uncertainty around the future of Social Security means we need to think of new ways to help fund our retirement lifestyles.
  2. Portion Of Your Expenses: Social Security only provides 42% of the pre-retirement expenses of an average American. As a result, Americans today must have additional retirement savings or income sources available to help fund their lifestyles. This trend will likely become more pronounced in the future.

Social Security Credits

With Social Security playing an increasingly important role in retirement planning, it’s important that you fully understand how your Social Security benefits are calculated.

Social Security credits are the “building blocks” of your benefits. In a lot of ways, earning Social Security credits is an effortless process, but without enough credits, the Social Security Administration (SSA) has no obligation to deliver your monthly benefit check.

social-security-guide-working-yearsFor retirement benefits you need 40 credits. So how do you earn enough of these credits? You earn 1 credit for every $1,320 (which is adjusted for inflation over time) of taxable earnings. You can earn up to 4 credits per year, meaning that you’ll have an adequate number of credits after 10 years of work.

Once you qualify for Social Security benefits, your individual benefit level is determined using the average of your highest 35 years of earnings, the overall length of your career, and an index factor for that specific year. Your benefits are also impacted by what’s called a Cost of Living Adjustment (COLA), an adjustment made to Social Security to account for the effects of inflation. COLAs are generally equal to the percentage increase in the Consumer Price Index for urban wage earners and clerical workers (CPI-W) for a specific period (more on this in the Cost of Living Adjustments section).

There are additional Social Security benefits available beyond the basic retirement paycheck. Later on, we’ll cover disability, spousal, and Medicare benefits. But first, let’s talk about claiming ages.

Claiming Ages

Social Security benefits available at 62, full retirement age, and 70. Waiting to claim can maximize your benefits.

When you apply for Social Security matters. There are three key numbers to know when it comes to claiming Social Security:

  • Early Retirement Age (62),
  • Full Retirement Age (66-67), and
  • Delayed Retirement Age (70).

Before we break down the pros and cons of collecting benefits at each of these ages, let’s get the definition of Full Retirement Age straightened out. Full Retirement Age, as defined by the Social Security Administration, “is the age at which a person may first become entitled to full or unreduced retirement benefits.” That is to say, Full Retirement Age isn’t one specific number, it varies slightly depending on the year you were born. For the bulk of Baby Boomers, Full Retirement Age is about 66 years old.

Regardless of the year you were born, you can start collecting benefits as early as age 62, and as late as age 70. So let’s talk strategy.

Early Retirement Age

The minimum age to receive Social Security Retirement Benefits is 62. However, individuals who claim Social Security at age 62 pay dearly for taking their money early. Their retirement benefit can be reduced by as much as 25% relative to someone who waits until Full Retirement Age, according to data from the Social Security Administration. The reduction in income benefits lasts for the duration of that individual’s life. Because the reduction in benefits from claiming early is so steep, fewer Americans than ever are claiming early. Back in 1985, 57% of men and 62% of women claimed their Social Security benefits early, at age 62. Fast forward to 2013, and those percentages have dropped to 36% and 40% respectively.

Fewer Americans are claiming Social Security benefits early.

Full Retirement Age

Your Full Retirement Age is somewhere between ages 65 and 67 depending on when you were born. For the bulk of Baby Boomers, Full Retirement Age is about 66 years old. Retirees who wait until Full Retirement Age to claim Social Security are eligible to receive their full retirement benefit for the remainder of their lives.

Social Security Benefits Full Retirement Ages

Delayed Retirement Age

If you think you might have a long life in retirement – say you’re a non-smoker in good health – waiting to claim Social Security until age 70 may pay off. In the period between Full Retirement Age and 70 retirees collect what’s known as Delayed Retirement Credits – an increase to Social Security income for each month a retiree postpones a benefit claim. In all, the Delayed Retirement Credit can boost income by 8% for each year that an individual waits to claim Social Security after Full Retirement Age, up until age 70.

Social Security benefit increases by about 8% each year you delay claiming.

Other Social Security Benefits

The Social Security Act also includes disability, spousal, survivor, and medical (Medicare) benefits.

Disability Benefits

Social Security defines disability as being unable “to engage in any substantial gainful activity (SGA) because of a medically-determinable physical or mental impairment(s) that is expected to result in death, or that has lasted or is expected to last for a continuous period of at least 12 months.” To qualify for disability benefits, you need a certain number of credits, similar to standard Social Security benefits. In this case, that number depends on how old you are when you become disabled. We’ve outlined a few situations below, though this doesn’t cover all situations.

Disabled at Age… Credits Needed Years of Work
24 or younger 6 (earned in the 3 years before you became disabled) 1.5
24-31 Credit for working half the time between age 21 and when you became disabled Half the time between age 21 and when you became disabled
31-42 20 5
44 22 5.5
46 24 6
48 26 6.5
50 28 7
52 30 7.5
54 32 8
56 34 8.5
58 36 9
60 38 9.5
62 or older 40 10

Spousal Benefits

social-security-guide-older-coupleYour spouse and perhaps even your ex-spouse can qualify to receive Social Security benefits based on your work record. For instance, your current spouse – even if he or she has never contributed to Social Security through payroll taxes – may still be eligible to receive spousal benefits.

There are some limitations, of course. The earliest that someone can claim spousal benefits is age 62. But again, an individual who takes spousal benefits that early will receive a reduced stream of income. On the other hand, a spouse who waits until Full Retirement Age to claim those benefits is eligible for 50% of the spouse’s income benefit – the maximum spousal benefit amount. An important note: spousal benefits do not earn Delayed Retirement Credits.

If you are divorced, you can still qualify for spousal income benefits based on your ex’s work record, even if he or she has remarried. However, you have to meet certain conditions first. For instance, your marriage had to have lasted at least 10 years. You must also be unmarried, at least age 62 or older, and your ex must be entitled to receive Social Security benefits. Finally, the benefit you would otherwise receive under your own work record must be less than the benefit you would receive based on your ex’s record.

Survivor Benefits

If a person works 10 years and pays into Social Security, but passes away, certain family members are able to collect survivor Social Security benefits. These benefits are available as follows:

Family Member Eligibility
Widow/widower Full benefits at full retirement age, or reduced benefits beginning at age 60
Disabled widow/widower Benefits as early as age 50
Widow/widower caring for child, age 16 or under, of the deceased Receiving Social Security benefits of their own
Divorced spouses Certain conditions required
Unmarried children of the deceased Younger than 18, or up to age 19, if they attend elementary or secondary school full time
Stepchildren, grandchildren, adopted children Certain conditions required
Disabled children Disabled before age 22 and remain disabled
Dependent parents Age 62 or older

Medicare Benefits

Medicare is federal health insurance for people age 65 or older, younger people with certain disabilities, and people with End-Stage Renal Disease (permanent kidney failure requiring dialysis or a transplant, sometimes called ESRD). The credits you earn count towards Medicare once you reach age 65. Those who have been collecting disability benefits for at least two years may be eligible for Medicare at an earlier age. And for those with permanent kidney failure or Lou Gehrig’s disease, early coverage is available and doesn’t require two years of disability.

Medicare is broken into four parts, each covering a specific service.

  • Part A: The first part of Medicare concerns Hospital Insurance. It covers inpatient hospital care, care in a skilled nursing facility, hospice care, and certain home health care.
  • Part B: Medicare Part B takes care of Medical Insurance. That is, certain doctors’ services, medical supplies, preventive services, like vaccines, and outpatient care. The costs of Part B, think premiums and deductibles, are automatically taken from your Social Security benefits.
  • Part C: The third part of Medicare covers Medicare Advantage Plans. These are private company Medicare health plans that contract with Medicare to provide your hospital and medical insurance, and often prescription drug coverage, too. This type of plan includes Health Maintenance Organizations, Preferred Provider Organizations, Private Fee-for-Service Plans, Special Needs Plans, and Medicare Medical Savings Account Plans. Out of pocket costs here vary, and depend on a number of factors from the type of services you need to the structure of the plan you choose.
  • Part D: Lastly, Part D is Prescription Drug Coverage. This is a feature of Original Medicare, some Medicare Cost Plans, some Medicare Private-Fee-for-Service Plans, and Medicare Medical Savings Account Plans. Private companies and Medicare Advantage Plans typically offer similar coverage for prescription medications, and come with similar payments, including deductibles, premiums, and co-payments.

When To Claim

Waiting until 70 will get you the highest Social Security benefit, but that doesn’t mean you’ll end up maximizing your benefits throughout retirement. The right age to claim benefits depends on your projected longevity, your marital status, your financial needs – current and estimated, and your employment status. For some, it could make more sense to begin collecting payments at the Full Retirement Age, or even earlier. Consider the following factors when making your decision:

Your Expected Longevity

social-security-guide-longevityIf you think you may have a long life in retirement, then you’ll need to maximize your income and ensure it lasts you for the rest of your life. Get an idea of how long you may live by checking out Blueprint Income’s Longevity Calculator. The longer your life expectancy, the more delaying claiming Social Security until age 70 makes sense.

Your Marital Status

Single applicants benefit from delaying the receipt of their own benefits. But did you know that your spouse could also benefit from waiting to claim spousal benefits? Your husband or wife can take spousal benefits as early as age 62, but that may result in a benefit that’s as little as 1/3 of the amount they’re eligible to receive.

If your spouse instead defers until Full Retirement Age, then he or she can collect a stream of income that’s equal to 50% of your Social Security benefit.

How Quickly Do You Need The Money?

social-security-guide-calendarPersonal circumstances play a major role in the timing of Social Security benefits. Indeed, sometimes retirees end up in situations where they have to begin receiving their income as early as possible. An individual who is forced to retire earlier than anticipated due to layoffs or illness, or who is terminally ill, may decide to claim Social Security benefits earlier.

What If You Claim Early and Keep Working?

If you are under Full Retirement Age and you make more than Social Security’s yearly earnings limit ($17,040 in 2018), Social Security will reduce your benefit. If you are under Full Retirement Age for the entire year, $1 will be deducted from your benefit payments for every $2 your income exceeds the earnings limit. In the year in which you reach Full Retirement Age, Social Security will deduct $1 in benefits for every $3 you earn over a different limit ($45,360 in 2018). This penalty only applies to earnings before the month you reach Full Retirement Age. After you reach Full Retirement Age, you can receive Social Security benefits with no limit on your earnings.

What If You Take Income Early and Change Your Mind?

In the event you initially decide to take Social Security benefits early, and you later decide you should have waited to claim, you can withdraw your application within the first 12 months of starting to receive income. You will have to repay the amount that has already been paid to you. After that, you can start benefits at a later date and receive a boost to your income from Delayed Retirement Credits.

Cost of Living Adjustments

One element that makes Social Security so essential to retirement planning is that it includes increases to account for the rising cost of living. This is especially important, considering retirees can go on living 25 years or more after they’ve left the workplace.

Social Security bases its Cost of Living Adjustment (COLA) increases on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

If there was a percentage increase in the average CPI-W for the third quarter of the current year over the average for the third quarter of the last year a COLA took effect, then Social Security will increase retirement benefits by that amount. If there is no increase in the average CPI-W, then there is no COLA increase. In 2017, there was a 0.3% adjustment, and the adjustment for 2018 is 2.0%.

Here’s a breakdown of what COLA increases have been over the last thirty years:

Cost of living increases have varied between 0.0% and 5.8% over the last 30 years, averaging 2.65% over that period. But in this decade, there has been no COLA increase three different years, including in 2016.

Social Security Cost of Living Adjustments from 1997 to 2016.

The fact that there was no COLA increase for 2016 and a very small one for 2017 has stirred up some discussion on how these increases are calculated and whether the CPI-W adequately reflects the spending patterns of older individuals – particularly with respect to medical spending.

What are alternatives? CPI-E, for one. In 1987, the Bureau of Labor Statistics created the CPI-E, a price index that follows the spending patterns of individuals aged 62 and older. An analysis by Boston College’s Center for Retirement Research revealed that the average annual increase for the CPI-E was 2.9% from the third quarter of 1983 to the third quarter of 2015.

Meanwhile, the CPI-W experienced an average annual increase of 2.7%. The difference between the two indexes in that 32-year period has been attributed to the higher cost of medical care for the elderly, according to the CRR. Some have argued that perhaps the CPI-E is a more accurate reflection of older Americans’ spending habits, compared to the CPI-W.

Another alternative method of calculating benefits is based on Chained CPI.

When drafting the 2014 budget proposal, President Obama had proposed that Social Security use the Chained Consumer Price Index instead of traditional CPI. The chained CPI assumes that when prices go up for a certain item, consumers will substitute that purchase with a similar but cheaper item. As a result, the chained CPI rises at a lower slower rate than the CPI-W. If Social Security COLA increases were pegged to the chained CPI, benefit increases would be smaller. The Congressional Budget Office had estimated that a shift to the chained CPI could lower deficits by as much as $233 billion over ten years.

Progressive activists groups blasted the proposed switch to the chained CPI, and President Obama dropped the proposal. For the time being, cost increases are linked to CPI-W.

Recent Changes

As we round out your knowledge of Social Security, it’s important to take note of two changes in recent years. This first change has to do with a claiming strategy for married couples to use called file and suspend. The second change is with regard to a strategy called restricted application.

Change to File and Suspend Rules

Under the old rules, file and suspend went like this:

Take John, age 66. John is married and at Full Retirement Age. To maximize Social Security, he will now file for benefits and suspend receipt of that income. Meanwhile, his wife, Jane, files for spousal benefits and receives them. Because John has held off on receiving his own Social Security benefits, he will receive Delayed Retirement Credits that will increase his income stream by 8% for each year he continues to delay receipt of benefits, up until age 70.

New file and suspend rules are as follows:

If you reached your 66th birthday by April 29, 2016 – the date when the new rules went into effect – you can still file and suspend under the old rule set. You’ll also have the right to claim a lump sum payout of suspended benefits up to age 70. However, if your 66th birthday is after the effective date of the regulation, the rules are different. You can still file and suspend your own benefits, and earn Delayed Retirement Credits until age 70, but your spouse, or other family members, cannot collect on your work record while your benefits are suspended. That is, your spouse can only collect spousal benefits while you’re currently receiving your own benefits.

Change to Restricted Application Rules

Under the old rules, this is how it worked:

At age 66, Erin, who is married, has reached Full Retirement Age. She decides to file a restricted application so that she only receives a spousal benefit. This way, Erin will receive a spousal benefit while allowing her own Social Security benefit to accumulate Delayed Retirement Credits up until age 70.

Today, restricted application works a little differently.

Now, if you are eligible for a spousal benefit and a benefit under your own work record, you will have to file for both at the same time. Social Security will give you the greater of these two benefits.

These claiming strategies were thought of as loopholes that only wealthier retirees were taking advantage of. Congress rewrote the rules as a part of the Bipartisan Budget Act of 2015 as a way to save money and improve the financial status of Social Security without affecting the benefits of retirees who need them most.

Taxes on Benefits

Did you know that up to 85% of your Social Security benefits could be subject to income taxes? The extent to which your benefits are subject to taxes depends on your Modified Adjusted Gross Income (MAGI), which considers earnings, pension income, taxable interest and dividends, plus non-taxable interest and half of your Social Security benefits. The sum of MAGI, non-taxable interest and half of your Social Security benefits is called your “combined income.”

Single people with combined income of less than $25,000 ($32,000 for married couples) will have 0% of their Social Security benefits taxed. Single people with a combined income between $25,001 and $34,000 ($32,001 to $44,000 for married couples) will have 50% of their Social Security benefits taxed. Finally, single people whose combined income exceeds $34,000 and married couples with a combined income over $44,000 will have 85% of their Social Security benefits taxed.

Single or Married? Combined Income Level % of Benefits Taxed
Single Less than $25,000 0%
$25,001 – $34,000 50%
Greater than $34,000 85%
Married Less than $32,000 0%
$32,001 – $44,000 50%
Greater than $44,000 85%

Supplementing Social Security

Retirees supplement their Social Security benefits with income from other sources.An analysis of 2013 Social Security Administration data revealed that individuals aged 65 and over in the top quartile for income (an average income of $78,180) received only 18% of their income from Social Security. So what makes up the remaining 82%? MIT economist James Poterba says the remaining income comes from earnings (44%), pensions (22%), assets (14%), and “other” sources (3%).

With the decline of pension plans, we see these figures changing as time progresses, so we want to hone in on other ways to establish a steady income throughout retirement. Here’s a quick rundown of what they might be:

Income Annuities

Income annuities provide a guaranteed lifetime stream of income during your retirement. You pay a lump sum upfront to purchase your annuity from an insurance company, then the insurance company sends you a series of payments for the rest of you life.

Income annuities come in two forms: immediate or deferred. With immediate income annuities you begin receiving payments immediately after purchase, whereas with deferred income annuities you can choose to begin receiving payments at a date much later on. Income annuities provide a financial backstop that allows you to spend your retirement savings without fear of outliving your money. They also allow you to pool longevity risk, something other financial instruments, such as bonds do not. One thing to keep in mind: income annuities have no cash value, therefore they are not a liquid asset, meaning you can’t access the money if you need it in an emergency.

info icon

Learn more about immediate income annuities in our SPIA Guide and deferred income annuities in our DIA Guide.

Qualified Longevity Annuity Contracts

A QLAC is a type of Deferred Income Annuity that comes with tax-deferral benefits. You can transfer the lesser of $130,000 or 25% of your qualified retirement account to a QLAC, which will then generate a future lifetime income stream starting between ages 70½ and 85. During the period in which income is deferred, the money used to purchase the QLAC is excluded from the required minimum distribution (RMD) calculation, a required annual withdrawal retirees must take from retirement accounts once they turn 70½ years old.

info icon

Learn more about using longevity annuities to defer your RMDs in our QLAC Guide.

Managed Payout Funds

Managed payout funds are a way of providing a steady monthly income that keeps up with inflation. The allocation of payments may change over time to avoid eating away at the principal investment payment, which brings us to a downside of managed payout funds: they don’t provide a guaranteed lifetime stream of income. They can also expose investors to downside risk due to high allocations toward equities. Nevertheless, this is another tool for generating retirement income.

4% Withdrawals from an Investment Portfolio

The 4% Rule was born in the ’90s when financial planner William P. Bengen concluded that someone who started withdrawals between 1926 and 1976 could make the portfolio last for at least 30 years by taking an initial 4% withdrawal and adjusting it for inflation each year. A simple rule if you’re looking to live off your own investments. However, after the market collapses in 2000 and 2008, researchers fear that 4% may be too generous a rule. Instead, people are opting for dynamic withdrawal strategies that evolve alongside the market.

The History of Social Security

Economic security is a societal concern dating as far back as ancient Greece and medieval Europe, with the ever present threats of unemployment, illness, disability, death, and old age. In medieval Europe, economic security conjured up thoughts of land and serfdom. But as societies grew more and more complex, the need for formal organizations to protect and provide financial security grew. From guilds to friendly societies to fraternal organizations, we began, in the 1500s, to see the practice of providing actuarially-based life insurance.

From there, the idea of government responsibility in providing economic security and welfare grew, from unimaginable realities, such as the English Poor Laws of 1601 that called for the dependent poor population to wear a shameful P on their clothing, to shadows of our present Social Security system, like Thomas Paine’s Agrarian Justice that called for a system that included annual benefits of 10 pounds sterling paid to every person age 50 and older, to protect against poverty in old-age. Civil War pensions and company pensions came close, too, but it wasn’t until late 19th century Europe that the idea of Social Security in a modern industrialized world truly come to be.

Even later, it wasn’t until the Great Depression rocked the US economy that President Franklin Delano Roosevelt passed the Social Security Act in 1934. This new act, among other provisions, established a social insurance program specifically designed to pay a continuing income to retired workers age 65 and older. Back then the average lump sum payment upon retirement was merely $58.06!

If the drastic jump in retirement payments since 1934 didn’t tip you off, there’s been a number of necessary amendments made to the Social Security Act since its implementation to keep up with the ever changing economy. Here are some highlights:

  • 1939 Amendments: Two new categories to note of here: (1) Dependent Benefits given to the spouse and minor children of a retired worker, and (2) Survivors Benefits paid to the family in the event of premature death.
  • 1950s Amendments: Raised benefits for the first time, a necessary change to the still very young program, and positioned the system to develop into the virtually universal coverage it has today. Also legislated the first COLA (cost-of-living adjustment), an annual increases to Social Security benefits to account for the effects of inflation on fixed incomes, and initiated a disability insurance program.
  • 1960s Amendments: Two big changes here. The first: lowering the age at which men are eligible for retirement benefits from age 65 to age 62. The second: the passage of Medicare, which extended health coverage to Social Security beneficiaries age 65 or older.
  • 1970s Amendments: The ’70s was the decade of automatic adjustments in benefits, thanks to two key changes: (1) A law changed to provide automatic annual COLAs based on the annual increase in consumer prices, rather than leaving people to wait on a special act of Congress for a benefit increase, (2) Wage-indexing of the initial benefit amount to ensure benefits keep up with standards of living.
  • 1980s Amendments: This decade marked big changes to the disability program, as well as a new requirement that Social Security must send annual statements to nearly all people working under Social Security, as a sort of financial planning tool.

As you can clearly see, Social Security has been an ongoing, evolving system, and it’s probable that that’ll remain moving forward. Read on to peek into the projected future of Social Security, and a few other amendments that could be on the way.

The Future of Social Security

For many of us, Social Security makes up a significant portion of our retirement income plan. But, we’ve heard concerns raised about its long term viability and potential interventions that will be required to keep it alive. Based on the history of the program and the government’s commitment to provide support to the elderly and disabled, we believe that Social Security will remain an important source of retirement income in the future. The question is then not a matter of existence but instead one of value. That is, can we expect Social Security benefits to continue according to today’s trajectory, or will they be reduced in the future?


First, let’s take a look at the financial status of the Social Security program. There are three important drivers: tax revenue, benefits, and the trust funds. To fund the Social Security program, individuals and employers are taxed a combined 12.4% per year, as stipulated by the Federal Insurance Contribution Act (FICA). The revenue generated by these taxes is used to cover the Social Security benefits owed to Americans each year. If the tax revenue is insufficient, or less than the benefits, in any given year, the trust funds are available to pick up the difference. Ultimately, the financial status of the program is measured by its solvency, which is the ability to draw on the Social Security trust funds to pay full benefits.

During years in which tax revenue exceeds benefit payments, the difference is deposited into the trust funds and they increase in size. The opposite is true when benefits owed exceed tax revenue, at which point the trust fund is drawn down to cover the difference. The latter occurring in any given year is not necessarily a problem, unless it is projected to persist long into the future. Eventually, if benefits are consistently greater than revenue, the Social Security trust funds risk being depleted. Reports from the last five years have indicated that the combined old-age, survivors, and disability insurance trust funds (OASDI) are projected to run out between 2033 and 2037. At that point, we’d be relying only on Social Security tax revenues, which would cover 75-80% of benefits owed. The actuaries at the Social Security Administration have also outlined alternative scenarios, ranging from trust funds being depleted even earlier to not being depleted at all.

Funding Status of the Social Security Trust Fund

Assuming the more favorable scenario doesn’t materialize, ensuring benefits are fully payable and avoiding depleting the trust funds would require making changes to the law.

Amendments To Social Security Act

Absent experience deviating significantly from economic and actuarial assumptions (such as birth rates, workforce participation, longevity, etc.), the Social Security trust funds are projected to be depleted by 2037. At that point, Social Security taxes would be the only source of revenue available, enough to cover only 75-80% of full benefits. Preventing this means making changes to the law, either in the form of higher taxes or lower benefits.

Looking back at the history of Social Security, full benefits have always been paid in a timely matter since the program was created in 1935. At times, this has required amending the Social Security Act, such as in 1977 and 1983. In 1977, changes were made to the way benefits are indexed from one generation to the next. And, in 1983, the full retirement age was increased from 65 to 67 and taxation of benefits was introduced.

Within the next 20 years, we should expect to see more amendments to the Social Security Act. While nothing has been decided, here are some options being considered:

  • Reduce the annual Cost of Living Adjustment
  • Slow down growth of benefits from one generation to the next
  • Increase the full/normal retirement age and/or the earliest eligibility age
  • Reduce benefits for family members
  • Increase payroll taxes
  • Allow trust funds to be invested in equities and corporate bonds instead of only government bonds
  • Increase taxation of benefits or reduce tax breaks at lower-income thresholds

What’s the takeaway? We should all be prepared for potential reductions to Social Security benefits, especially if retirement is still years away. To the extent possible, Blueprint Income recommends striving for a retirement savings and income plan that excludes or only includes a fraction of your current estimated benefit. That way, you’ll be prepared for the worst and otherwise be able to pleasantly surprise yourself with an extra couple of vacations per year!

Applying for Social Security

Ready to take the plunge and apply for Social Security? Or, interested in tracking and predicting what your benefit will be? Here’s what you need to do:

Signing Up for My Social Security

In the name of making Social Security easier to integrate into your day-to-day life, the agency created ‘my Social Security’, a site where individuals can establish an account, follow their earnings and get an estimate of their future benefits if they’re still working.

So how do you sign up? Just go to and click on “Create an Account.” You can only create an account for yourself. And in order to sign up, you’ll need to have a valid email address and a U.S.-based mailing address.

How To Apply For Social Security Benefits

You can sign up online at to apply for benefits. You can also reach the agency by phone at 1-800-772-1213, or 1-800-325-0778 if you’re deaf or hard of heading. You can apply for benefits in person by paying a visit to your local Social Security office. This site will help you find offices based on your zip code.

Have the following documents on hand when you contact Social Security:

  • Your Social Security card
  • Your original birth certificate
  • Proof of U.S. Citizenship or lawful alien status
  • A copy of your U.S. military service documents if you served prior to 1968
  • A copy of your W-2 forms and, if applicable, your self-employment tax return for last year

If you want to apply for spousal benefits, be sure to include your marriage certificate and your divorce decree, if you’re applying as a divorcee. Also, you’ll need your banking information to receive your benefits through direct deposit.