Social Security weighs on the minds of many people, from folks experiencing retirement to those in the initial stages of their careers who are just beginning to pay their share of this dedicated payroll tax. The United States Social Security Administration (SSA) is the independent agency of the U.S. federal government tasked with administering Social Security, defined as a social insurance program consisting of retirement, disability, and survivor benefits. Before we jump in, note that Social Security is a complex matter, and there can be exceptions to some of the ‘rules.’ Here are some Social Security basics you’ll want to know:
What is Social Security?
Social Security is a program in the United States intended to support retirees and those who become disabled. The original Social Security Act was signed into law by President Franklin D. Roosevelt in 1935. Two major healthcare programs, specifically Medicare and Medicaid, were established via the Social Security Amendments of 1965. Social Security Amendments of 1983 made comprehensive changes in coverage, financing, and benefit structure. Most people living and working in the United States pay Social Security unless holding exempt status.
Who benefits from Social Security?
In general, a person aged 62 or older, or a person with disability or blindness. Individuals must be “insured” by having enough work credits. A person who has worked and paid taxes into the Social Security system for at least ten years and has earned a minimum of 40 work credits can collect Social Security based on their own benefits as early as 62 years of age. Read on to learn about spousal and survivor benefits, of which some people are eligible. To gain Social Security Disability Insurance (SSDI) benefits, one must meet the definition of disability and have worked long enough and recently enough under Social Security to qualify.
Must I take Social Security at age 62?
No. And, it may make sense for you to wait. While one may begin receiving Social Security retirement payouts at age 62, benefits are reduced before full retirement age (defined below). Delaying Social Security benefits from full retirement age up to age 70 can increase benefit amounts.
What are work credits?
Per Social Security Administration, SSA, work is measured in “work credits.” Varying amounts of credits are required for eligibility of benefits. As described above, a person must earn at least 40 Social Security credits to qualify for Social Security benefits. The credits are earned by working and paying Social Security taxes. However, work credits do not affect the “amount of benefits” one receives. Rather, they determine eligibility status.
What are spousal and survivor benefits?
Social Security benefits can help spouses in retirement and surviving spouses even sooner. However, there are qualifications for spousal benefits (for eligible married partners) and survivor benefits (for eligible survivors of the deceased). And the two are different.
- Spousal benefits coverage can begin at age 62, however, their partner through marriage must be receiving his or her own retirement benefits for the spouse to receive spousal benefits. A husband or wife with no record or low benefit entitlements based on his or her own work record may be eligible for benefits based on their spouse’s Social Security record.
- If a person is receiving retirement or disability benefits, their spouse may also be eligible for benefits if they are caring for a child who is under age 16 or who has a disability that began before age 22. However, rules apply. For example, that spouse must not be receiving Social Security benefits that exceed the spousal benefit.
- Survivor benefits for widows or widowers can begin at age 60. Note that there are advantages and disadvantages to taking survivor benefits before full retirement age. Additionally, should a person receiving survivor benefits also qualify for retirement benefits, they may apply for the higher rate as early as age 62 or as late as age 70.
- When a parent dies after having worked long enough in a job where they paid Social Security taxes, children under age 18 are likely eligible for survivor benefits. In rarer cases, other family members, such as a stepchild, grandchild, adopted child, or parents may be eligible for survivor benefits; however, special circumstances must apply.
- Children with disabilities whose parents have little income or resources may be eligible for Supplemental Security Income.
- Additionally, some divorced individuals may also be eligible for benefits based on their ex’s Social Security record. Some rules apply. For more information, read AMAC’s article entitled, Social Security Myths.
Can you provide an example of how Social Security distributions work?
Here’s an example of Social Security in action. When a qualified person retires, they and their spouse or dependent children may be eligible to receive monthly benefits based on reported earnings. Payments vary due to differences in lifetime earnings. A formula is applied to those earnings to arrive at a basic benefit also called a primary insurance account.
How is Social Security funded?
Social Security is funded by working people and their employers. Employers and employees pay Social Security through payroll taxes. Each pays 6.2 percent of wages up to the taxable maximum of $160,200 (for 2023) and the self-employed pay 12.4 percent. Workers pay taxes mandated by the Federal Insurance Contributions Act (FICA) or by the Self-Employed Contributions Act (SECA).
Does everyone get the same amount of Social Security payout?
No. Social Security payments are dependent on workers’ earnings and levels of benefits vary.
Is it better to take Social Security at 62 or wait until older?
Typically, unless disabled, 62 is the earliest age one may begin receiving Social Security income. However, if you start taking Social Security at age 62, rather than waiting until your full-retirement age (FRA), currently age 67 in 2023, expect a reduction in monthly benefits. Consider that FRA is expected to rise in the future. Additionally, starting from the month you reach full retirement age, you can get your benefits with no limit on your earnings. And those who delay taking their benefit from full retirement age up to 70, will see increased benefit amounts.
So, what’s the “best age” to take Social Security benefits?
There is no single answer for everyone. People must make informed decisions based on multiple factors to include personal financial standing, monthly benefit amounts, work status, and other considerations like eligibility based on someone else’s record, life expectancy, and more. Valuable support and guidance can be gained through the Social Security Administration at www.ssa.gov or under the guidance of a trusted financial or Social Security Advisor.
Do you have to apply for Social Security, or does it automatically kick-in?
One must apply for Social Security retirement benefits up to 4 months before they wish to start receiving benefits. A person may apply for Social Security online or by calling the national toll-free service at 1-800-772-1213. (TTY 1-800-325-0778). Or one may make an appointment to visit a local Social Security office. Good info to know: SSA urges people to sign up for Medicare 3 months before their 65th birthday. This is independent of retirement age and social security status.
Is Social Security expected to run out? And, If so, why?
While it is not likely to suddenly go bankrupt right this minute, substantial problems loom over the future of Social Security. If changes are not made, a reduction in benefits is forecast to occur by 2033. At that point in time, the administration would likely pay about 75% of the promised benefits. Why is Social Security in jeopardy, you ask? Demographic changes play a considerable role, with more retirees and fewer workers paying payroll taxes. Having more people taking out funds than putting in funds will lead to insolvency. While present day retirees are likely okay, concerns are heightened over the financial security of future generations of retired senior citizens. Remember that many people currently rely on Social Security payments to live, and this is unlikely to change.
What complexities are involved in Social Security?
Understand that there are complexities involved in retirement and Social Security decisions. Many program rules and exceptions apply. And making ill-informed or wrong decisions can negatively affect one’s future. Increasingly, people are turning to Social Security Advisors who guide clients on benefit choices. These specialists have in-depth knowledge of Social Security benefits. This enables them to help folks plan for the Golden Years and determine optimum times for retirement to maximize those benefits. Social Security Advisors, and other related professionals like CPAs and Financial Advisors, offer valuable services and advice to enable seniors to live well in retirement. So, when in doubt, lean on a professional in the field.
What is COLA?
COLA stands for Cost-Of-Living-Adjustments. These Social Security general benefit increases are based on cost of living as measured by the Consumer Price Index. Since inflation is high of late, concerns exist about whether Social Security benefits will keep in pace with rising costs.
Why should I care about Social Security?
Social Security is a crucial topic. What people paid in allows them to live with dignity in retirement. Should the “Social Security well” begin to run dry, many older Americans will likely suffer via benefit cuts. Not only is it widely viewed as unfair for hard workers to pay in their own money with the possibility of receiving reduced benefits or none in return, but future generations will likely struggle in many ways – from putting food on the table to affording things like housing, clothing, and medications. So, everyone should care.
What’s the best way to prepare for retirement?
Readying for retirement is complex. It’s important to self-educate on Social Security basics and beyond to make well-informed decisions. One may greatly benefit from the advice of professionals such as qualified CPAs, Financial Planners, and more specifically Social Security Advisors who can help you prepare for this mature stage of life.
This information is provided for general purposes only and is not intended as financial advice. Note that these answers are general and are subject to change. Please visit AMAC Foundation’s Social Security Advisory Service for free expert Social Security counseling.
