For many Americans, Social Security is the only monthly retirement check they receive. As work pensions become more and more rare, its importance in retirement is increasing. Yet few people understand much about the system and the benefits available to them.

Social Security and Divorce

A divorce has a significant impact on Social Security benefits, especially for the lower earner. When developing a divorce settlement through mediation or otherwise, it makes sense to consider not only the short-term but the longer-term financial well-being of both spouses, especially for marriages that have been lengthy. This often brings Social Security into the conversation.

This is the first of several posts intended to make its benefits and options understandable – particularly from the perspective of a divorcing spouse.

Social Security System Basics

Social Security has existed since 1935 as a social insurance program – not a welfare program. The payments made to you are proportional to what you pay into the system. Your contributions are matched by your employer. You carry your coverage with you when you change jobs. The system is self-funding and doesn’t rely on government subsidies. There are, however, well-founded concerns about its long-term financial viability unless significant changes are made.

Categories of insurance protection have been expanded over the years and now include:

• Retirement benefits (for workers over 62 who retire)
• Family benefits (for dependent family members, including spouses and former spouses, of a worker who retires or becomes disabled)
• Survivor benefits (for surviving family members including former spouses of a worker who dies at any age)
• Disability benefits
• Medicare (health insurance for retirees over 65)

Two of the most common Social Security mistakes are: a) grabbing benefits too early and b) failing to take full advantage of spousal benefits. Many divorced spouses are completely unaware of the benefits they’re entitled to. They often don’t realize that a divorced spouse may qualify for the same spousal benefits as a married spouse.  This includes both retirement and survivor benefits.

Social Security had a financial crisis in the late 70s and early 80s which resulted in changes to the system to improve its financial health. It faces another financial crisis in about 2033 – when there will not be enough money in the program to pay the benefits that will be due. This is widely recognized but as yet there is insufficient agreement in Congress to enact a solution.

The average retiree draws $1,294/month. The maximum amount payable to a full-retirement-age (say 65 year-old) retiree in 2014 is $2,431/month. The payment amounts are tied to inflation and therefore increase slightly each year. You can retire as early as 62, but your monthly payment will be permanently reduced by up to 25%. If you defer retirement to later than your full retirement age, it will be increased by as much as 32%.  You can determine the amount the Social Security Administration (SSA) estimates you will get at different retirement ages at www.ssa.gov/myaccount.

It’s possible to understand how the SSA figures out your monthly retirement benefit payment. Understanding this can help you plan and take steps to maximize it.  If you are a spouse or an ex-spouse, you may also be entitled to Social Security Spousal Benefits.