Managing your Social Security benefits

For 89 years, Social Security has provided income protection to millions of retirees, people with disabilities, their dependents, and families who’ve lost a wage earner. Social Security benefits have been a key element of federal employees’ overall retirement package since the creation of the Federal Employees Retirement System in 1986.

Switching to the three-part FERS retirement plan made up of a FERS Basic Retirement Benefit (a defined benefit pension), the Thrift Savings Plan (a defined contribution savings plan) and Social Security, was a big change from the single benefit Civil Service Retirement System that exempted workers from paying the FICA tax and did not include an employer sponsored savings plan until the TSP was made available to both CSRS and FERS covered employees in 1987.  

This shift from the simple and hands-off model of the single-benefit Civil Service Retirement System has been accompanied by a decline in Social Security benefits relative to pre-retirement earnings.  

Social Security is not cast in stone. Benefits and the regulations that implement them are subject to change by Congress at any time. In recent years, they’ve changed in the direction of becoming less generous in replacing wages earned while working. The amendments to Social Security enacted in 1983, that increased the retirement age, made the benefits payable at 62 (for those born in 1960 or later) now only worth 70% of the full benefit, compared with 80% when the full retirement age was 65 (for those born in 1937 and earlier). 

Social Security benefits are based on the indexed average of the highest 35 years of wages on which an employee has paid the Social Security tax (known as FICA). The benefit formula is structured in such a way that it provides a greater replacement of pre-retirement wages for lower earners and lesser replacement for high earners. 

In 2024, the average Social Security benefit was $1,907 per month or $22,884 per year. For a Social Security beneficiary with average career earnings of $106,002 who was born in 1958, reaching their full retirement age of 66 and 8 months in 2024, this year’s retirement benefit would be approximately $38,241. This is an approximate replacement of 35.2% of their career average earnings.  

On the other hand, a Social Security beneficiary with average career earnings of $66,251 who was also born in 1958 would be entitled to a benefit of $28,953. Although this benefit is a smaller dollar amount than the higher wage earner, this is replacing 42.6% of their average lifetime wages. 

Social Security benefits are payable as early as age 62. However, the amount of the benefit is permanently reduced by 30% of the full benefit payable at age 67 for those born in 1960 or later. 

For example, a worker retiring at age 62 in 2024 who earned $69,455 in 2023, his last year of work, is entitled to a $1,668/month benefit. If they postpone the benefit to age 67, their full retirement age, the benefit would be payable at $2,383/month. Claiming the benefit at age 62 results in a permanent reduction of 30%.     

A recent Actuarial Note from Social Security explains the Social Security progressive formula as follows: 

The Social Security benefit formula uses wage-indexed earnings in computing the benefit payable at the full retirement age that is called the “primary insurance amount” or PIA. Regardless of the age that the benefit is claimed, the PIA formula: 

• Indexes annual earnings for those years when the worker is younger than age 60 using changes in the national average wage index  between each year of younger age and age 60;  

• Averages the highest 35 years of these indexed earnings and unindexed earnings at age 60 and over, and converts this average to a monthly amount, called average indexed monthly earnings;  

• Applies factors of 90%, 32%, and 15% to specified portions of the AIME in a progressive manner, resulting in higher portions of earnings replaced for those with lower AIMEs; and  

• Applies cost-of-living increases for each year after age 62.  

The retired-worker benefit payable at any age is the PIA adjusted for early or delayed retirement. The AIME calculation reflects a worker’s career-average earnings level adjusted for changes in the standard of living over the worker’s career, which is consistent with a wage-indexed denominator for the replacement rate measure. 

The 1983 amendments were enacted to permanently solve the problem of funding the Social Security trust fund, known as Old Age and Survivors Disability Insurance. But that didn’t happen. According to Social Security’s chief actuary, lawmakers will face further challenges addressing the OASDI shortfall in the coming years.  

In May, the Social Security Office of the Chief Actuary prepared a list of common myths about Social Security. As you make decisions about when to claim your earned Social Security retirement benefit, keep the following facts about Social Security in mind:  

• It is a myth that Social Security is running out of money. The fact is Social Security cannot run out of money. Even if Congress allowed trust fund reserves to become depleted, continuing income would cover 83% of scheduled benefits in 2035. By 2098, continued contributions would cover 73% of scheduled benefits.  

• It is a myth that increasing longevity and disability are the problem. The fact is that disability costs have been dropping. The age distribution of the population is the most important factor in Social Security cost. Population “aging” through 2040 is mainly due to birth rates and shifting earnings levels have reduced income since 1983 and for the future. 

• It is a myth that the money in the Social Security Trust Fund has been spent.  The fact is that every dollar of income is invested by law in interest-bearing securities backed by the full faith and credit of the United States. These are not “worthless IOUs”! Securities are issued at market yield rates. Securities held by the Trust Funds have always been honored, as have all other Treasury issues, including federal CSRS and FERS retirement benefit payments. 

• It is a myth that everyone should start receiving Social Security benefits as soon as they can. The fact is that Social Security retirement benefits are designed to provide about the same lifetime value regardless of when you start, on average. When to start is personal—you might want to wait if you are in average or better health. If you delay by working or using other assets, Social Security increases your monthly life annuity at terms available nowhere else.   

• It is a myth that there is a personal retirement account for you with Social Security. The fact is that Social Security is a “social contract” or a form of “insurance.” After all, FICA stands for Federal Insurance Contributions Act.   Basically, benefits paid today are financed primarily from recent contributions by current workers. This is why the age distribution of the population is fundamental—the workers of the day share with the retirees, survivors, and disabled of the day. This is true for advance-funded systems as well. 

• It is a myth that Social Security is a complete retirement system. The fact is that retirement is generally a 3-legged stool: The 75-80% replacement of your pre-retirement income that is coming from Social Security will generally provide about 40% of career average earnings (varies from 20% to 70%).  The other legs of the stool—personal savings and private pensions—are needed. Increasingly, Social Security is the primary source of lifetime income for many Americans. Thankfully, federal employees are covered by a generous pension benefit along with incentives to contribute to a Thrift Savings Plan due to the ability to save pre-tax dollars that are deducted automatically from your paycheck along with automatic and matching agency contributions for FERS covered employees. 

• It is a myth that “Fixing” the Social Security shortfall will be hard. The benefits or the revenue need to be adjusted to compensate for the shift in the age distribution. By 2035, scheduled benefits will be reduced by 1/4, or revenue needs to be raised by 1/3, or some combination of the two. What do the American people want? Many options are already being considered to solve the looming issue within the Social Security Trust Fund. To learn more about possible solutions, visit the Office of the Chief Actuary.