5. What Can I Expect From Social Security?

1. Your Retirement Vision
2. Estimate Your Retirement Expenses
3. Paying for Health and Long-term Care
4. Your Defined Benefit Pension
5. Social Security Benefits
6. Estimate How Long Your Resources Will Last
7. Drawing Income from Tax-Advantaged Accounts
8. Managing Taxes
9. Manage Your Investments
10. Should You Consult Professionals?

Most, but not all, public employees are covered by Social Security. If you have paid into Social Security for your entire working life, you should be able to rely on the Social Security benefit statementyou receive annually. The Social Security Web site has extensive information and calculators to help you understand your benefits.

Social Security benefits are determined by a formula based on the highest inflation-adjusted earnings you had for 35 years. If you have fewer than 35 years of earnings that were subject to Social Security tax, zero earnings are used in the formula for years that were not subject to the tax. These zero years can have a significant impact on the resulting benefit. Unlike most pension formulas, the Social Security formula is progressive; that is, it is intended to replace a higher percentage of income for workers who have lower average lifetime earnings.

When should you begin benefits? Full Social Security retirement age is increasing from 65 for those born in 1937 or earlier to 67 for those born in 1960 or later. Regardless of your full retirement age, you can begin drawing benefits any time after age 62. If you start benefits before your full retirement age, benefits are reduced a little for each month you start getting checks before your full retirement age.

For example, a person who has a full retirement age of 66 and begins Social Security benefits when he or she turns 62 will get a check that is 25 percent less than the amount the person would have gotten if he or she had waited to begin at age 66. Waiting until later, the person would get higher monthly checks, but fewer of them in the long term. The amount of the benefit reduction about balances with the number of checks expected; that is, the total value of lifetime benefits is expected to be about the same regardless of when they begin. The longer you live beyond life expectancy, the better it would have been to wait and get the higher amount.

Of course, there is no way for anyone to know whether waiting to begin benefits will turn out to be the right thing to do. If a person has reason to expect a particularly long life, waiting to begin benefits can make sense. Social Security’s Quick Calculator shows your "break-even age," the age at which the value of waiting for higher benefit checks by postponing benefits exceeds the total of more, but lower benefit checks started earlier.

Earning income while collecting Social Security. There is, however, one situation when beginning Social Security benefits before full retirement age can be a big financial mistake: when you will still be earning enough to reduce your benefits.

Prior to your full retirement age, Social Security benefits will be reduced by $1 for every $2 earned more than the earnings limit ($13,560 for 2008, adjusted annually). After full retirement age, there is no earnings limit, so any amount may be earned without sacrificing Social Security benefits. This earnings limit applies only to gross earned income (before payroll deductions), not to payments from deferred compensation, pension, or investment income.

Spouse’s benefits. A person will receive the higher of the Social Security benefit calculated on his or her own work record or that of his or her spouse. A person may even receive benefits on a former spouse’s record if the person was married to the former spouse for at least 10 years, is at least age 62, and is not married. A spouse will get the higher of the benefit calculated on his or her own work record or a benefit equal to half of his or her own spouse’s benefit, adjusted for the person’s own age. A benefit calculated on a spouse’s work record might be reduced if the spouse is getting a pension from work not covered by Social Security.

Tax considerations. You may have to pay taxes on as much as 85 percent of your Social Security benefit. The amount of this benefit subject to income tax is determined by your combined income - adjusted gross income, nontaxable interest, plus half of your Social Security income.

Public employees who are not covered by Social Security in their government careers but who get a government pension may nevertheless qualify for a Social Security retirement benefit in two ways:

They may have earned a benefit from other covered work.
They may qualify as the spouses (or former spouses) of covered workers.

If they qualify for a retirement benefit from work not covered by Social Security, Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) rules apply (these rules are further discussed below). Check with your benefits administrator at work to see if you may be affected by these rules.

Benefits as a worker when getting pension from work not covered. The WEP uses a modified benefit formula for those workers not covered by Social Security in their government jobs but who qualify for benefits from other employment.

The regular Social Security formula separates a worker’s inflation-adjusted average 35 years of earnings into three amounts and multiplies each by a different percentage. Lower average lifetime earnings are multiplied by a higher factor; higher lifetime earnings by a lower multiplier. This means that the formula is progressive; that is, it is designed to replace a higher percentage of earnings for lower-paid workers.

For public employees who earn a Social Security benefit from other work and who will get a retirement benefit earned from work not covered by Social Security, the formula can result in a high percentage of lifetime earnings being replaced by Social Security. Much of their earnings were not subject to Social Security tax so they appear to have earned less than they actually did. To avoid this situation, Congress created an alternate benefit formula. Consult with your local Social Security office or go to www.ssa.gov to see if this alternate formula applies to you and how it may impact your benefits.

Benefits as a spouse when getting a pension from work not covered. A spouse normally may receive Social Security payments equal to half of his or her spouse’s benefit if this benefit would be more than one earned on the spouse’s own work record.

The GPO withholds a portion of a Social Security benefit drawn on a spouse’s work record from retired government employees who get a retirement benefit from noncovered work. The GPO formula withholds $2 of Social Security, a benefit that is based on a spouse’s work record, for each $3 received in government pension earned from work not covered. Neither the spouse’s own Social Security benefits nor the government pension are affected. The GPO may eliminate benefits drawn on a spouse’s work record.