What your Social Security benefits statement tells you, and what it doesn't

Robert Powell
Special to USA TODAY

On paper, your Social Security statement seems straightforward enough: There's an estimated monthly retirement benefit, for example, which will vary depending on the age you start collecting.

But the statement also includes items that are easy to overlook or misinterpret. And it excludes others that you also need to understand, experts say.

First, young workers should know that the benefits aren't all about retirement, says Dave Freitag, a Social Security expert with MassMutual. The program provides three different types of benefits – retirement, disability and survivors.

Your statement, in addition to showing you your retirement benefit, also provides up-to-date detailed information about disability and survivors benefits, Freitag says.

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Social Security cards.

What are 3 main types of Social Security benefits?

“Retirement can seem to be a long way off for younger workers, but disability or survivor benefits could be needed in the very ... near term.”

Of the 65 million people collecting benefits from the Social Security system, 6 million receive survivor benefits and 10 million receive disability benefits.

Your personalized monthly retirement benefit is only an estimate that includes numerous assumptions, according to Bill Reichenstein, the co-author of "Social Security Strategies: How to Optimize Retirement Benefits."

First, the personalized estimates are based on your earnings-to-date and they assume you’ll continue to earn the same amount until you start your benefits.

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Table showing Social Security COLAs since 1975

How can you determine how much Social Security you will get?

“The further you are from the estimated projection of benefits, however, the greater swing in the accuracy of those projections, particularly if your work history is inconsistent, you have breaks in your work history, or you transition to self-employment,” says Heather Schreiber, the founder and president of HLS Retirement Consulting.

So let’s say you leave the workforce for one or two years. Here’s what will happen:

“If you report no earnings for one year, the Social Security Administration will refer to your most recent year of recorded earnings for that year,” Schreiber says. “Once you report no earnings for the second year, your benefit projections will be adjusted to reflect that you are no longer working until you report earnings in any subsequent year(s).”

The Social Security Administration also assumes that current laws will prevail so “that nationwide Social Security tax receipts will be sufficient to meet these current promised benefits,” Reichenstein says. “If no changes are made, current projections suggest that the Social Security Administration will only be able to meet about 80% of promised benefits beginning about 2035.”

Work requirements for Social Security

There’s a work requirement in order to receive Social Security. To qualify for retirement benefits, you need to work at least 10 years under covered employment to earn 40 credits, Schreiber says.Your benefit, however, is calculated using the highest 35 years of your earnings, indexed for inflation, she says.

“If you have worked less than 35 years, zeros are substituted for the missing years in the calculation of future benefits. Therefore, working longer to replace zero earning years will help bolster your income benefit.”

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Taxes on Social Security benefits

Your monthly retirement benefit estimate doesn’t reflect how it will be taxed, or what happens to your benefit if you collect before full retirement age (FRA) and continue to have earned income.

“Under current laws, up to 85% of pretax benefits are subject to income taxes,” Reichenstein says.

You would not lose 85% of benefits due to taxes, he says.

Rather, if $85 of every $100 in benefits are taxable at 20%, you would lose $17 to taxes.

Still, Social Security benefits have a tax advantage over distributions from an IRA, Freitag says.

Is it better to take Social Security at 62 or 67

Your Social Security statement also details the value of deferring your benefit each year between age 62 and 70.

“The old ... statement just reported the benefits at 62, full retirement age and age 70,” Freitag says. “Filling in the gaps between 62 and 70 helps workers make a choice on purpose rather than by accident.”

How does the Windfall Elimination Provision Work?

There are situations in which your benefit projections may be lower than those reflected on your statement, Schreiber says. That occurs if your earnings are not covered by Social Security — federal or state government, or a foreign country — for example, and you participate in a retirement plan or receive a pension plan from one of these entities.

“The Windfall Elimination Provision (WEP) may reduce any Social Security retirement benefit you have earned during periods of covered employment,” she said. “Conversely, the Government Pension Offset (GPO) may reduce or even eliminate any auxiliary Social Security benefits that you may be entitled to, such as a spousal, ex-spousal, or survivor benefit.”

How does Social Security affect Medicare?

If you’re collecting Social Security and enrolled in Medicare, the government will reduce your benefit by the amount of your Medicare Part B premium. So if your monthly Social Security retirement benefit is $1,500 and your monthly Medicare Part B premium is $170.10, you’ll receive a monthly check for $1329.90, said Reichenstein.

Your Social Security statement also reinforces the importance, for many, of signing up for Medicare within three months of your 65th birthday to avoid a lifetime late enrollment penalty, Freitag says. Plus, there are links to websites with information about Medicare.

How do I find out my Social Security benefit amount?

Benefit estimates on your Social Security statement, which you may view anytime by visiting my Social Security account, are calculated in today's dollars, Schreiber says. If you want to view your benefit projections using future or inflated dollars, you may do so by using the Social Security Administration’s online benefit calculator.

Note, too, that your estimated monthly Social Security retirement benefit does not reflect any cost-of-living-adjustment (COLA) that you might receive once you start collecting Social Security.

Mistakes in Social Security benefits

 All workers, young and old, should check their earnings history each year, Freitag says.

“Errors in recorded earnings history can reduce monthly retirement benefits, disability benefits, and survivor benefits,” he warns. “There is a limited time to correct earning history errors.”