Social Security Retirement Benefits FAQs

By Jeffrey W. Hunter, Vice President, TD Wealth® Strategist

Social Security provides a valuable source of retirement income for millions of retirees. According to the Social Security Administration (SSA), 97% of older adults either receive Social Security or will receive it. Considering the significant role that Social Security can play in most people's retirement plans, I thought it would be helpful to answer some of the more common questions asked by our clients:

Who qualifies for Social Security retirement benefits?
In order to be eligible for retirement benefits, you must be aged 62 or older (unless you become disabled or blind prior to age 62) and have earned at least 40 Social Security "credits" over the course of your employment.

The earliest that you are eligible for a retirement benefit is the first month in which you are age 62 for the entire month.

You earn Social Security credits by working at a job where Social Security taxes are withheld from your pay, or by earning money from self-employment. For 2025, you receive one credit for every $1,810 of income earned during the year. You can earn a maximum of four credits each year. Accordingly, you will receive the full four credits in 2025 if you earn $7,240 at any time during the year ($1,810 x 4).

How are my retirement benefits calculated?
Social Security uses a formula to determine your "primary insurance amount" ("PIA"). That's the monthly retirement benefit you will receive if you begin your benefits at "full retirement age."

Your "full retirement age" depends on the year you were born. It's age 66 for anyone born from 1943–1954. If you were born 1955–1959, it's age 66 plus 2 months for each year after 1954. For anyone born in 1960 or later, your full retirement age is 67.

The starting point for calculating your PIA is your earnings record. In this regard, the SSA keeps track of how much money you have paid Social Security taxes on each year. For many people, their actual income, and the amount of income on which they have paid Social Security taxes is identical. However, that is not the case for higher income earners. For instance, in 2025 you only pay Social Security taxes on the first $176,100 that you earn. Any earnings above that threshold are not subject to Social Security taxes and are therefore excluded from your Social Security earnings record.

All of your annual earnings from any years prior to the year you turned 60 are then inflation adjusted. Any earnings from age 60 on are taken at face value with no inflation adjustments.

The next step is to sum up your 35 highest-earning years and divide that by 420 (i.e., the # of months in 35 years). The result is your average indexed monthly earnings (AIME).

Your AIME is then plugged into Social Security benefits formula in effect during the year that you turn 62. Here's the formula in effect for 2025:

1. Multiply the first $1,226 of your AIME by 90%
2. Multiply any amount between $1,226 and $7,391 by 32%
3. Multiply any amount over $7,391 by 15%
4. Add up the results to arrive at your PIA

The final step is to account for the age at which you intend to claim your benefits. A bite is taken out if you begin receiving them before reaching full retirement age. Alternatively, an amount is added to your benefits if you claim them after reaching full retirement age, but only up until you reach age 70.

There are a couple of noteworthy items regarding the above calculations. First, as you can see, Social Security replaces a higher portion of wages for lower-earning workers versus higher-earning workers. Also, if you have fewer than 35 years of earnings, the calculation will include zeros. Working additional years will knock out those $0 earnings years and may be something worth considering in connection with your retirement planning.

What's the impact of claiming benefits before or after my full retirement age?
If you claim your benefits prior to full retirement age, you will receive an amount smaller than your PIA. Your benefits will be reduced by 5/9 of 1% for each month up to 36 months and 5/12 of 1% for each month in excess of 36 months.

If you wait until after your full retirement age to claim benefits, your retirement benefit will be higher than your PIA. Your benefits will be increased by 2/3 of 1% for each month up to age 70, beyond which there is no further increase for waiting. This equates to an increase of 8% per year up until age 70.

 

Is my spouse eligible for benefits?
Yes, a spouse is eligible for retirement benefits based on the higher of their own benefit or their spousal benefit. Spousal benefits are Social Security benefits based on a spouse's work record instead of your own.

Spousal benefits can range from 32.5% to 50% of your spouse's PIA depending on when they are claimed.

You qualify for spousal benefits if:

• You are at least 62 (or younger and caring for a child you is under the age of 16 or disabled), and
• You have been married for at least one year, and
• Your spouse is already collecting their retirement benefits

If you want until full retirement age to begin collecting spousal benefits (and you are not receiving your own retirement benefit), your spousal benefit will be equal to 50% of your spouse's PIA.

If you file for spousal benefits while you are receiving a retirement benefit of your own, your spousal benefit will be reduced by the greater of your month retirement benefit or your PIA.

Unlike retirement benefits, spousal benefits are not increased by delaying them beyond your full retirement age. However, they are permanently reduced if you claim them prior to full retirement age in a manner much like retirement benefits albeit with a slightly more aggressive reduction factor.

Are my children eligible for benefits as well?
Yes, if your children are under the age of 18 (or disabled with a disability that began before age 22), and you are receiving Social Security retirement benefits, your children may be eligible for a benefit of up to 50% of your PIA.

However, there is a maximum benefit that can be paid to a family based on the work record of a single person. If the family's benefit exceed this maximum limit, the benefits of each person other than the worker will be reduced proportionately.

How are my Social Security benefits taxed?
The tax code treats Social Security benefits differently from all other types of income. To determine if any of your benefits are taxable you need to look at your "combined income." Your "combined income" is equal to the sum of:

• Your adjusted gross income, not including any Social Security benefits, plus
• Any tax-exempt interest you earned, plus
• 50% of your Social Security benefits

If your "combined income" is below $25,000 ($32,000) if married filing jointly), none of your Social Security benefits will be taxed.

For every dollar of combined income above that level, $0.50 of your benefits will be taxable until the point that 50% of your benefits are taxed or you reach $34,000 of combined income ($44,000 if married filing jointly).

For every dollar of combined income above $34,000 ($44,000 if married filing jointly), $0.85 of your benefits will be taxable up to the point that 85% of all your Social Security benefits are taxable.

Unlike the income tax brackets, these combined income thresholds have not been indexed for inflation since 1993. Accordingly, a larger portion of Social Security benefits will be taxed over time due to bracket creep.

Can I collect retirement benefits while I am still working?
The short answer is yes. However, prior to reaching full retirement age, if you work while collecting Social Security benefits, the amount that you and your family receive will be reduced by 50% of the amount by which your annual earnings exceed a certain threshold ($23,4000 in 2025).

In addition, if a family member is working while receiving a benefit based on your work record, their benefit (but not your own benefit) will be reduced if their earnings exceed that same threshold amount.

After reaching full retirement age, the earnings test no longer applies, and you can earn as much as you want without any reduction in your benefits. At that time, your benefit will also be recalculated and increased to account for any prior months that your benefit was reduced or eliminated as a result of the earnings test.

Is it possible to undo a poor Social Security claiming decision?
For the most part, your initial claiming decision is permanent. However, there are a few options available for those who change their mind.

First, if you have been receiving your benefits for less than 12 months, you can withdraw your application by filing a form with the SSA and paying back all the benefits received to date. This includes all benefits paid out on your work record, so any benefits paid to your spouse or children must be repaid as well.

If approved, it will be like you never filed at all. You can only take advantage of this option once in your lifetime.

If you have been receiving benefits for 12 months or more, it's no longer possible to "undo" your application and start over. However, once you reach full retirement age, you can request to have your benefits "suspended," so that they continue to grow as if you hadn't filed yet for them. This will allow your benefit amount to grow by 8% each year up until you reach age 70.

Alternatively, if you wish you had claimed your benefits earlier, you can choose to back date your application by up to six months. However, this option is only available for those that have deferred their benefits beyond their full retirement age.

Is Social Security going bankrupt?
Social security is facing a long-term solvency crisis, but it is not going bankrupt.

In this regard, it's important to understand that Social Security is set up as a self-funded pay-as-you-go program. Monthly Social Security checks are primarily funded by the payroll taxes collected from current workers with the Social Security Trust Fund making up any deficits.

Unfortunately, current projections are that the Trust Fund could be depleted within the next 10-12 years. This is primarily because we now have a decreasing number of workers paying for an increasing number of retirees.

According to the most recent Trustees Report, the Trust Fund is projected to have enough resources to cover all promised benefits until 2035.¹ Absent a change from Congress, Social Security benefits would then need to be cut for all current and future beneficiaries to about 83% of scheduled benefits.¹ So, once again, Social Security will not run out of money in 2035, it just won't be able to pay benefits at the same level.

We have had two other solvency crises with social security in the past (one in 1977 and another in 1983.) In both cases, legislators were able to come together and pass bipartisan legislation to fix the problem. In 1977, they raised the payroll tax by 25% and the maximum taxable wage base by 68%. In 1983, they essentially cut benefits by slowly phasing an increase in the full retirement age from 65 to 67.

Congress could od something very similar today in terms of raising taxes and/or cutting benefits to solve this crisis as well. Hopefully, as in the past, legislators will find the political will to unite and resolve this matter before the trust fund is exhausted.

What is the optimal claiming strategy for me and my family?
Unfortunately, the answer to this question would literally require a book. In this regard, the Social Security rules are amazingly complex, and, on top of that, each family has their own unique set of variables (ages, marital status, health issues, need for income, tax position, retirement ages, outlook for the future, risk tolerance, etc.). unfortunately, there is no one-size-fits-all answer.

 

Please reach out to a TD Wealth® Relationship Manager to schedule a meeting with your personal tax advisor and/or CPA to discuss how Social Security will impact your retirement planning.