Social Security

Social Security, formally the Old-Age, Survivors, and Disability Insurance (OASDI) program, was established by the Social Security Act of 1935 and has been the bedrock of American retirement security for nearly a century. Nearly all workers in the United States pay Social Security taxes (6.2% of wages up to the wage base, matched by employers) and earn credits toward benefits. In 2025, workers earn one credit for each $1,810 of covered earnings, up to four credits per year; 40 lifetime credits (roughly 10 years of work) are required to qualify for retirement benefits.

The amount of your Social Security retirement benefit is based on your average indexed monthly earnings (AIME) over your 35 highest-earning years, adjusted for wage inflation. A progressive formula — the primary insurance amount (PIA) formula — replaces a higher percentage of income for lower earners. In 2025, the formula replaces 90% of the first $1,226 of AIME, 32% of AIME between $1,226 and $7,391, and 15% of AIME above $7,391 (these 'bend points' adjust annually).

Full retirement age (FRA) is 67 for anyone born in 1960 or later. Benefits can be claimed as early as age 62, but are permanently reduced by up to 30% compared to the FRA benefit. Delaying beyond FRA earns delayed retirement credits of 8% per year (two-thirds of 1% per month) up to age 70, producing a benefit up to 24% higher than the FRA amount. The decision of when to claim is among the most consequential financial decisions a retiree makes, affecting decades of retirement income.

Social Security benefits are partially taxable for higher-income retirees. Up to 50% of benefits may be taxable if 'combined income' (adjusted gross income plus non-taxable interest plus half of Social Security) exceeds $25,000 for single filers or $32,000 for married filing jointly; up to 85% is taxable above $34,000 (single) or $44,000 (married). These thresholds have not been indexed for inflation since 1983, drawing a growing share of beneficiaries into taxation. Coordinating Social Security claiming strategy with Roth conversions and other retirement income sources is a sophisticated but high-value element of retirement planning.

The claiming age decision produces permanent, compounding consequences on monthly benefit levels. Claiming at 62 — the earliest possible age — reduces the FRA benefit by as much as 30% for those with an FRA of 67, and that reduced amount becomes the permanent baseline on which all future cost-of-living adjustments are calculated. Claiming at FRA (67 for those born in 1960 or later) receives 100% of the calculated benefit. Each month of delay beyond FRA adds two-thirds of 1% to the benefit, totaling 8% per year, so claiming at 70 rather than 67 results in a benefit 24% higher than the FRA amount. This delayed-claiming premium is effectively a guaranteed, inflation-adjusted annuity rate of 8% per year — a return difficult to replicate in markets on a risk-free basis. Break-even analysis shows that delaying from 62 to 70 typically requires living past roughly age 80 to come out ahead in cumulative lifetime benefits, though longevity expectations, spousal survivor benefit considerations, and the opportunity cost of drawing down personal savings during the delay period all affect the optimal claiming decision for each household.

The taxation of Social Security benefits follows the combined income formula, which was designed in 1983 and has never been adjusted for inflation. Combined income equals adjusted gross income plus tax-exempt interest income plus one-half of Social Security benefits. Single filers with combined income between $25,000 and $34,000 include up to 50% of benefits in taxable income; above $34,000, up to 85% of benefits become taxable. For married filing jointly, the corresponding thresholds are $32,000 to $44,000 (up to 50% taxable) and above $44,000 (up to 85% taxable). Because these thresholds were never indexed for inflation, a steadily increasing percentage of beneficiaries owe tax on a growing fraction of their benefits each decade. A practical implication is that Roth conversions completed before Social Security benefits begin can reduce future combined income by replacing taxable IRA withdrawals with tax-free Roth distributions, potentially keeping benefits below or within the 50% inclusion tier. Similarly, managing capital gains realizations, required minimum distributions, and taxable interest income in the early retirement years can materially reduce the share of Social Security that ends up subject to federal income tax.

Full Retirement Age Table: Full retirement age is the age at which a worker becomes entitled to 100% of their calculated Social Security benefit. FRA varies by birth year: those born in 1943-1954 have an FRA of 66. Born in 1955, FRA is 66 and 2 months. Born in 1956, 66 and 4 months. Born in 1957, 66 and 6 months. Born in 1958, 66 and 8 months. Born in 1959, 66 and 10 months. Born in 1960 or later, FRA is 67. Benefits claimed before FRA are permanently reduced: claiming at 62 when FRA is 67 reduces the benefit by 30%, as the SSA applies a reduction of 5/9 of 1% for each of the first 36 months before FRA and 5/12 of 1% for each additional month. Benefits claimed after FRA grow by 8% per year (2/3 of 1% per month) in delayed retirement credits, capped at age 70 — four additional years of delay beyond FRA of 67 produces a 32% increase in monthly benefit. There is no benefit to delaying beyond age 70.

Spousal and Survivor Benefits: Social Security provides substantial benefits to spouses and survivors that can significantly exceed what either spouse would receive based solely on their own work record. A spouse who has not worked — or who worked at lower wages — can claim a spousal benefit equal to up to 50% of the working spouse's FRA benefit, provided the working spouse has already filed for their own benefit. The spousal benefit is not enhanced by delay beyond FRA, unlike the worker's own benefit — claiming a spousal benefit at 67 (FRA) versus 62 produces a 35% reduction, but waiting past 67 adds nothing. Survivor benefits are more generous: a widow or widower may claim up to 100% of the deceased spouse's benefit, including any delayed credits the deceased had earned. The optimal Social Security claiming strategy for married couples often involves a coordinated approach — having the lower-earning spouse claim early to provide household income while the higher-earning spouse delays to 70, maximizing the survivor benefit that will support the longer-lived spouse for potentially decades.