What are the three ways you can lose your Social Security?

You can lose at least part of your Social Security benefits in three primary ways: by earning too much while collecting benefits early, by being a lower-earning spouse in specific situations, and potentially due to future trust fund solvency issues if legislative action is not taken.

Social Security serves as a vital financial foundation for many retirees. Understanding the factors that can impact your benefits is crucial for effective retirement planning. While the system provides a safety net, certain circumstances can lead to a reduction or withholding of your expected payments.

Let's explore these three scenarios in detail:

1. Earning Too Much While Taking Benefits Early

If you begin receiving Social Security retirement benefits before your Full Retirement Age (FRA) and continue to work, your benefits may be temporarily reduced or withheld if your earnings exceed a certain limit. This is often referred to as the Social Security earnings limit.

• How it Works: The Social Security Administration (SSA) sets an annual earnings limit. If your income from work goes over this limit, a portion of your benefits will be withheld. The amount withheld depends on how much you earn above the limit.
  • Under FRA for the entire year: For every \$2 you earn above the annual limit, \$1 in benefits will be withheld.
  • In the year you reach FRA: A different, higher limit applies. For every \$3 you earn above this limit, \$1 in benefits will be withheld until the month you reach your FRA.
• When it Stops: Once you reach your Full Retirement Age, the earnings limit no longer applies, and you can earn any amount of money without your Social Security benefits being reduced. Any benefits withheld before you reached FRA are not lost; instead, your future monthly benefits are recalculated at your FRA to account for the withheld amounts, potentially leading to a higher monthly payment.
• Practical Insight: Carefully consider your income projections if you plan to work while claiming benefits before your FRA. Delaying your claim until you reach FRA or adjusting your work hours can help maximize your Social Security payments.

2. Being a Substantially Lower-Earning Spouse

While Social Security offers spousal benefits (which can be up to 50% of the higher-earning spouse's Full Retirement Age benefit), certain situations can lead to a lower-earning spouse "losing" out on potential benefits or receiving less than anticipated.

• Impact of Early Claiming by Primary Earner: If the higher-earning spouse claims their benefits before their Full Retirement Age, their benefit is permanently reduced. Consequently, the maximum spousal benefit available to the lower-earning spouse is also reduced, as it's based on the primary earner's reduced benefit amount. This means the lower-earning spouse may not receive the full 50% they might have expected.
• Your Own Benefit vs. Spousal Benefit: If the lower-earning spouse has their own work record, the SSA will first pay the benefit based on their own earnings. If the spousal benefit is higher, they will receive a combination of their own benefit and an additional amount from the spouse's record to reach the spousal benefit level. In essence, they don't lose their own benefit, but they may not gain significantly extra if the spousal benefit is only marginally higher, especially if it's reduced due to early claiming by the primary earner.
• Divorce Implications: A lower-earning spouse can claim benefits on an ex-spouse's record if the marriage lasted at least 10 years, they are at least 62, and are currently unmarried. If the marriage ends before the 10-year mark, the lower-earning spouse loses this option, potentially leading to a much smaller benefit if their own work history is limited.
• Strategic Planning: Spouses should coordinate their claiming strategies to optimize combined household benefits. Understanding the nuances of spousal benefits and how claiming ages affect them is crucial. For more information on spousal benefits, visit the Social Security Administration website.

3. Being Alive in 2034

This refers to the projected depletion of the Social Security trust fund reserves. According to the latest Social Security Trustees' Report, if Congress does not act, the Social Security trust funds are projected to be able to pay 100% of promised benefits until the mid-2030s. After that, without legislative changes, Social Security would only be able to pay about 80% of scheduled benefits from ongoing tax revenues.

• The Trust Fund Challenge: Social Security has two trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. The OASI fund, which pays retirement and survivor benefits, is projected to be able to pay 100% of scheduled benefits until around 2033-2034.
• Potential Benefit Reduction: If legislative action is not taken by Congress (e.g., raising the full retirement age, increasing the Social Security tax rate, or adjusting the benefit formula), all beneficiaries could face an across-the-board reduction in their monthly payments. This means everyone receiving benefits at that time would effectively "lose" a portion of their expected payment.
• Current Outlook and Solutions: While this projection sounds alarming, it's important to note that Congress has addressed similar challenges in the past (e.g., in 1983). There are various proposed solutions, and policymakers are aware of the need to ensure the long-term solvency of the program. However, without action, the projected shortfall implies a significant future reduction in benefits.
• Retirement Planning Implications: While the future of Social Security beyond 2034 is uncertain, it underscores the importance of not relying solely on Social Security for retirement income. Diversifying your retirement savings through personal investments, 401(k)s, and IRAs is a prudent strategy to build financial security. You can find more details about the future of Social Security directly from the SSA Office of the Chief Actuary.

Summary of How You Can Lose Social Security

Understanding these potential pitfalls allows you to make informed decisions that can help protect and optimize your Social Security benefits as part of your overall retirement strategy.