Social Security – Financial Literacy Month

Social Security is a cornerstone of retirement income for millions of Americans.

Social Security intertwines with personal financial decisions in complex ways as we plan for-, get close to-, and live in- our retirement.  In light of the role Social Security plays in retirement funding, it is important to have a solid grasp on financial concepts crucial to long-term planning.

Financial Literacy and Long-Term Planning
Long-term financial goals may be different for everyone.  Whether the goal is saving for retirement, buying a home, or funding a child’s education, careful consideration and planning are necessary to achieving those goals.  By understanding concepts like compound interest (see previous blog), risk management, and asset allocation, individuals can make informed decisions that align with their objectives.

Social Security – A Pillar of Retirement Income
Social Security plays a central role in the retirement plans of millions of Americans, expecting at-least a portion of their retirement income to come from this government program.  Social Security came to life in 1935 as part of the New Deal enacted by President Roosevelt, on the heels of the Great Depression, in an effort to avoid similar economic disasters in the future.  This safety net is funded primarily by payroll taxes, and is being allocated to current beneficiaries rather than being set aside for future use.

As of February 2023, the average Social Security benefit was around $1,782 per month, or about $21,384 per year.

In 2023, the maximum Social Security benefit was $3,627 per month, or about $43,524 per year.

And yet, for many retirees, Social Security benefits represent a significant portion of their retirement income.  However, the future solvency of the Social Security system has com under scrutiny in recent years due to factors such as aging population, longer life expectancies, and changing demographics.

Women and Social Security
Social Security holds particular significance for women.  The factors weighing on this include women often earning less than their male counterparts, women taking more breaks from the paid workforce for caregiving responsibilities, and women typically outliving men.  These circumstances result in women accumulating less savings and receiving smaller pensions.

According to the Social Security Administration Annual Statistical Supplement of 2022, representing data from December 2021 — the following lists which percentage of Social Security beneficiaries are women, by age group.  In all age groups, women make up more than half of the beneficiaries of Social Security.  However, this data also clearly indicates women are typically outliving men, as we see the percentage increase with age range:

54% age 60-69
54% age 70-79
58% age 80-89
and 68% age 90-99

The Impact of Financial Literacy on Social Security
Understanding the implications of claiming benefits early versus delaying them can significantly impact lifetime benefits.  While individuals can begin claiming Social Security as early as age 62, doing so will result in reduced monthly payments compared to waiting until full retirement age (typically between 66 and 67, depending on the year of birth.)  Conversely, delaying benefits beyond the full retirement age can increase monthly payments to a maximum of 70.

Additionally, understanding the taxation of Social Security benefits can help individuals minimize their tax liabilities in retirement.  Depending on their income level, retirees may be required to pay federal income tax on a portion of their Social Security benefits.  By strategically managing other sources of income, such as withdrawals from retirement accounts, individuals can minimize the impact of taxes on their overall retirement income.

As Social Security continues to play a significant role in retirement funding for millions of Americans, individuals must possess the knowledge and skill to navigate their financial affairs effectively.  By promoting financial literacy through education, employers, financial advisors, and community organizations, we can empower individuals to make informed decisions that lead to greater financial security and well-being in retirement!