An estimated 45 million Americans receive Social Security retirement benefits each month, according to the Social Security Administration (SSA). The average monthly benefit is $1,543, and for some, it represents their primary source of retirement income.
Even if you’ve saved funds in a 401(k), an individual retirement account (IRA), or another qualified retirement plan, if you’re banking on Social Security to supplement that, then you may be in for a shock once your first payment arrives. If you recently started receiving Social Security benefits, there are three common reasons why you may be getting less than you expected: an offset due to outstanding debts, taking benefits early, and a high income.
- Your Social Security check will decrease if you owe certain debts like back taxes or student loans.
- Taking your Social Security benefits early can reduce your payments by up to 30%.
- Triggered by higher income, a higher Medicare premium can diminish your monthly Social Security check.
1. Offsets Shrank Your Social Security Check
One potential scenario that may result in lower Social Security benefits is an offset. That’s when someone to whom you owe money makes a claim against your benefits. Examples of debts that could result in an offset include:
- Defaulted student loans
- Unpaid alimony or child support obligations
- Back taxes
SSA regulations protect the first $750 in the benefits that you receive. However, if it’s determined that a debt does indeed belong to you, then the SSA will reduce your benefits each month by a certain amount until what you owe is repaid. Once an offset for debt is satisfied, you’ll receive your full benefit amount. Meanwhile, you have to deal with the temporary shortfall.
Also, you may be subject to an offset if you receive Social Security benefits before you reach full retirement age and continue to work. However, once you reach full retirement age, your earnings will no longer reduce your benefit, no matter how much you earn.
2. Early Benefits Shrank Your Social Security Check
For most people retiring now, the full retirement age for Social Security purposes is either 66 or 67, depending on the year when you were born. But it is possible to begin taking your Social Security retirement benefits as early as age 62. While that can give you some financial relief if you’re strapped for cash, there is a tradeoff. The size of your benefits automatically—and permanently—goes down.
A 2020 survey of 1,727 adults in the U.S. ages 25 and older by the Nationwide Retirement Institute (NRI), a subsidiary of the Nationwide Mutual Insurance Company, found that almost three in four baby boomers (73%), and most Gen Xers (90%) and millennials (97%), incorrectly identify the age at which they are eligible for full retirement benefits. In that same study, future retirees over age 50 expect to receive a higher payment than what long-term retirees actually receive.
How much can taking benefits early really cost you? Let’s say your normal retirement age is 67, but you decide to apply for Social Security when you turn 62. Because you’re taking benefits for an extra 60 months, your Social Security check would be reduced by 30%.
If you’re entitled to $1,000 a month, then you’d only get $700. That’s a pretty significant chunk of money to give up, and that check will be lower for life. If you’re thinking of getting benefits early, then it pays to crunch the numbers to see how much you stand to lose by doing so.
If you wait until you’re age 70 to take Social Security benefits, then you’ll get an extra 8% for each year starting with your full retirement age. But claiming after age 70 doesn’t increase your benefits further, so there’s no reason to wait any longer.
3. Medicare Premiums Shrank Your Social Security Check
You are eligible to enroll in Medicare the year when you turn 65. If you sign up for Medicare Part B, then your premiums are deducted from your Social Security benefits. For 2021, the standard monthly premium is set at $148.50. However, it’s entirely possible that you could end up paying more if you fall into a higher tax bracket.
If you file an individual return and your income is higher than $88,000 but less than $111,000, then you will pay $207.90 in 2021. If your income ranges from $111,000 to $138,000, then you pay $297. And if it’s more than $500,000, then you will pay $504.90. The full breakdown of rates is available on the Medicare website.
“If your income has recently dropped, you may appeal to the SSA for a lower premium. The IRS may be providing the SSA with older data that needs to be updated,” says James B. Twining, CFP, founder, and CEO of Financial Plan Inc.
For certain high-income earners, Medicare premiums are equivalent to 30%, 50%, 65%, or even 80% of the total cost of coverage.
Other Factors Affecting Your Social Security Check
If you retire before full retirement age and your income goes up instead of down for any reason—you sell off a high-value asset, you start a profitable business, or you earn a lot as a consultant or freelancer—then that could substantially impact what you get from Social Security, at least until you reach full retirement age.
Fewer than one in 10 adults polled by the Nationwide Retirement Institute understand the factors that determine the maximum Social Security retirement benefit.
A Word About Reserves
Even though the Social Security pot is replenished each month with payroll taxes from all income earners, the fund’s resources aren’t infinite. This means that they will dry up at some point.
According to a 2020 report by the SSA, retirement benefits will be fully paid on schedule until 2034. The trust fund’s reserves are expected to be exhausted after that point, with taxes expected to cover only 76% of scheduled benefits after that point. Congress will need to make more changes to how the fund is replenished so that retirees can continue to get full coverage.
The SSA points out that the numbers in the 2020 report don’t take into account the impact of the COVID-19 pandemic. This means that, if anything, they are likely to get worse.
The Bottom Line
Relying on Social Security to see you through retirement can put you on thin ice financially. It becomes even trickier when you’re getting less money than you budgeted to receive. Taking the time to clear up any outstanding debts, weighing the cost of taking benefits early, and looking at how your income stands to affect your benefits can help you avoid any surprises once your Social Security checks start rolling in.