Social Security: A primer

Social Security has provided financial security to seniors, the disabled, and their beneficiaries for decades. According to the Social Security Administration (SSA), nearly 69 million Americans will receive a monthly Social Security benefit in 2025, representing about $1.6 trillion in annual benefits.¹

In recent years, however, the solvency of the Social Security program has become a major concern for many Americans. Recent reports suggest that some funding sources are on track to be depleted by as early as 2034 without further action from Congress.²

Given the critical role that Social Security plays in many Americans’ retirement plans—and the concerns many beneficiaries share about its future—a little context can go a long way. The primer below, developed by Westmount’s financial planning team, provides some important background about how the program works and what lies ahead.

A brief history of Social Security

In the aftermath of the Great Depression, financial security remained a top concern for many Americans, particularly seniors and those approaching retirement age. While many different schemes and structures were proposed, President Franklin D. Roosevelt signed Social Security as we know it into law on Aug. 14, 1935.³

Modeled on the principle of “social insurance,” which had become prevalent in 19^th century Europe, the Social Security Act, in its original form, was designed to serve retirees aged 65 or older through a federal old-age benefits system. In the decades that followed, Social Security expanded to include additional benefits like income for dependents, disability income, spousal benefits, and more.

However, the rapid expansion of the social safety net also encountered some challenges. In the 1980s, a projected funding shortfall called the future solvency of the Social Security program into question. The Social Security Amendments of 1983 introduced significant changes to the system that persist today, including gradually raising the Full Retirement Age from 65 to 67, increasing payroll tax revenues, and making benefits partially taxable for the first time.

How are Social Security benefits funded and calculated?

To be eligible for Social Security retirement benefits on your own record, an individual must have at least 10 years of qualifying work history. That’s because Social Security benefits are primarily funded through the collection of payroll taxes, otherwise known as FICA (via the Federal Insurance Contributions Act). These current-year tax revenues contribute approximately 80% of benefit liabilities. The FICA rate attributable to Social Security is 12.4% of earned income (split evenly between an employee and their employer, respectively) up to the 2025 wage base of $176,100.⁴ The remaining ~20% is paid for by the Old-Age, Survivors, and Disability Insurance (OASDI) trust funds, which are funded by previous years’ tax surpluses.

When determining benefits, the SSA uses a beneficiary’s Average Indexed Monthly Earnings (AIME), a calculation based on a worker’s 35 highest years of indexed earnings. This data is then used to compute the Primary Insurance Amount, or PIA, the baseline for the ultimate benefit calculation.

The PIA calculation is relatively complex, using a system of “bend points” to provide greater relative benefits for lower-earning beneficiaries. The bend points for 2025 benefit calculations are:

• 90 percent of the first $1,226 of his/her average indexed monthly earnings, plus
• 32 percent of his/her average indexed monthly earnings over $1,226 and through $7,391, plus
• 15 percent of his/her average indexed monthly earnings over $7,391

Ultimately, the PIA calculation provides the amount you would receive if you claimed benefits at Full Retirement Age (67 for most beneficiaries).⁵ Other benefits (spousal, survivor, etc.) have calculation nuances, which we will discuss below.

What are the different kinds of Social Security Retirement benefits?

There are many different types of Social Security benefits. Below, we outline three of the most common scenarios.

Most people are familiar with Social Security retirement benefits, which, as we’ve discussed above, are based on one’s earning history as calculated according to a beneficiary’s AIME and resulting PIA.

You can start receiving Social Security benefits as early as age 62 or as late as age 70. However, the timing of your claim date can impact your overall benefit amount.

For example, suppose you claim your benefits after reaching the Full Retirement Age (FRA) of 67. In that case, you will receive a monthly increase to your benefit, annualized to 8%, in the form of Delayed Retirement Credits. Conversely, claiming before reaching FRA will result in a reduced benefit. Generally speaking, your claim date’s impact is permanent and material to your total lifetime benefit amount. It is important to note that Social Security may adjust your benefits annually via a Cost-of-Living Adjustment.

Spousal benefits are another major benefit type. Spousal benefits are most relevant for married individuals over the age of 62 who are not eligible for traditional retirement benefits based on their own work history or who expect to receive a relatively small benefit amount.⁶

If you claim benefits at FRA, the maximum spousal benefit is 50% of your spouse’s PIA amount. Spousal benefits are similar to traditional retirement benefits in that if you claim a spousal benefit before reaching FRA, you would be subject to a benefit reduction based on how early you claim. However, unlike a traditional retirement benefit, there are no Delayed Retirement Credits for spousal benefits.

In any case, your spouse must have already claimed their benefit before you become eligible for a spousal benefit. If you are eligible for both a spousal benefit and a benefit on your own work record, the SSA will consider your application a “Deemed Filing,” and automatically pay you the higher amount. In addition to current spouses, certain divorced spouses may be eligible for spousal benefits on their prior spouse’s record.

The final benefit type we will touch on is survivor benefits. You may be eligible for survivor benefits if you are the spouse, divorced spouse, child, or dependent of a deceased individual who was eligible for Social Security benefits before they passed.

Your ultimate benefit amount will depend on your relationship with the decedent, but for spouses and ex-spouses, you can receive between 71.5% and 100% of your (ex-)spouse’s benefit, depending on when you claim.

It is important to note that survivor benefit timelines deviate slightly from retirement and spousal benefits, as they can be claimed as early as age 60. Eligibility for survivor benefits, especially in the case of those who are divorced, can be very nuanced, so it is recommended that you contact your Westmount advisor if you believe this benefit type may be applicable to your individual situation.

Within each benefit type, there may be ways to optimize your lifetime income through different claiming strategies. Depending on your income level, up to 85% of your Social Security benefit may be subject to Federal income taxes.

What is the future of Social Security?

In its current form, one of Social Security’s primary funding sources—the OASDI trust funds—are projected to be depleted by 2034, which would result in a shortfall of benefit funding without further congressional action.

Fortunately, Congress has many levers it can pull to shore up the program, such as raising the Full Retirement Age, increasing the wage cap, modifying the FICA rate, and more.

As always, we continue to monitor any potential changes and their impact on our clients. If you have any questions about Social Security, retirement, or any other financial planning matters, don’t hesitate to get in touch with your Westmount advisor. You can also call us at 310-556-2502 or email info@westmount.com.