Social Security is a vital component of most people’s retirement planning, but the program offers much more than that. Briefly, Social Security helps handicapped and retired individuals, as well as their families, by providing a lifetime income guarantee to those who meet specific requirements.
In this guide, we will:
- Take a deeper look at the program’s operation
- Learn the numerous types of Social Security benefits available
- Discover what to expect when it’s time to file for benefits
What Are Social Security Benefits?
Social Security benefits are payments paid to qualifying retirees and disabled individuals, as well as their spouses, children, and survivors.
In order to qualify for Social Security benefits, an individual must pay into the system during their working years and accumulate 40 credits.
Key Takeaways
- The amount of a person’s Social Security payment is determined by their work history, birth year, and age at which they begin receiving benefits.
- Spouses who do not work or who have not accumulated the required amount of credits are eligible for benefits depending on their spouse’s job history.
- Benefits may be subject to taxation based on a recipient’s income and filing status.
How it Works
In 1935, President Franklin D. Roosevelt signed the original Social Security Act into law. After a number of revisions, the present legislation incorporates a variety of social insurance and social welfare programs, including the distribution of Social Security benefits.
Social Security and all of its benefits are financed by payroll taxes under the Federal Insurance Contributions Act (FICA) or the Self Employed Contributions Act (SECA) for the self-employed persons.
The Internal Revenue Service (IRS) collects tax deposits and legally transfers them to the Social Security Trust Fund, which consists of two distinct funds.
How Does One Become Eligible for Social Security Benefits?
Contributions made throughout your working years qualify you for Social Security benefits. 40 quarters or “credits” of insured pay are required for full coverage, and a worker can earn up to four credits per year.
The Social Security Administration tracks your career earnings, indexes each year’s total earnings, and utilizes your 35 highest-earning years to calculate your average indexed monthly earnings (AIME). Next, they use your AIME to calculate your main insurance amount (PIA), which is the monthly amount you can begin receiving when you reach full retirement age.
For those born in 1938 or after, the full retirement age climbs from 65 to 67 over time, reaching 67 for those born after 1959. You can begin collecting Social Security retirement benefits at age 62, but the benefit amount will decrease to account for getting it sooner and, presumably, for a longer duration.
Different Types of Social Security Benefits
Spousal Benefits
Spouses who did not work or did not earn sufficient credits to qualify for Social Security benefits on their own might begin receiving benefits at age 62 depending on their spouse’s employment record.
Similar to claiming benefits on one’s own record, claiming benefits on a spouse’s record before achieving full retirement age will result in a reduction in the spouse’s payout.
Survivor Benefits
The surviving spouse may petition for a survivor’s benefit as early as age 60 after the death of a spouse. If they file for benefits before to attaining the full retirement age, the benefit will decrease.
They are able to move to their own benefit at any time between the ages of 62 and 70 if their benefit is more than the survivor’s benefit.
People who have been divorced for at least 10 years and have not remarried are eligible to receive the spouse benefit and the spousal survivor benefit.
Retirement Benefits
Social Security retirement benefits are available to workers aged 62 and older with at least 40 earned credits. Your benefit checks are dependent on your average indexed monthly earnings (AIME) over your 35 highest-earning years and the age at which you begin receiving benefits.
To get your regular pension based on your AIME, you must wait until your full retirement age. If you were born between 1943 and 1954, your full retirement age is 66. Subsequently, it increases by two months every year until it reaches 67 for those born in 1960 or later.
Be aware that claiming benefits before to the full retirement age (FRA) can diminish your payments.
If you begin receiving benefits at age 62, you will receive 70% of your basic benefit if your FRA is 67 and 75% if it is 66. Each month that you postpone receiving benefits raises your payments until you reach the maximum payout at age 70. This is 124% of your regular benefit if your full retirement age is 67 and 132% of your usual benefit if your full retirement age is 66.
Disability Benefits
Adults aged 18 or older who are unable to work due to a physical or mental disability that is likely to last at least one year or result in death are eligible for Social Security disability payments.
Depending on your age at the time of your condition, you may still be eligible despite not having earned 40 credits. Your compensation will depend on your average lifetime earnings, so those who earned more while employed would receive bigger disability payments.
When applying, you must supply the government with information on your employment history and medical condition, as well as any supporting documentation.
The Social Security Administration will evaluate your application to determine your eligibility. If the court finds in your favor, you will receive disability payments for the duration of your handicap or for the remainder of your life, depending on the circumstances. You may request reconsideration or appeal to an administrative law judge if the court finds against you.
Final Thoughts
Many individuals are concerned about the future, when there will be fewer workers to fund a larger number of Social Security users, despite the program’s relative success thus far.
According to the most recent Social Security Trustees’ Report, the program’s trust assets will be spent by 2034, at which point it will be able to pay out 76% of payments to retirees and 92% of benefits to disabled employees.
The government has offered numerous potential solutions for assuring the program’s long-term viability, but no plans have been established as of yet.
There is little chance that the program will be eliminated over the next two decades, but it is probable that future benefits may not extend as far as they do today.
For this reason, today’s employees must prioritize their retirement savings so that they can meet the majority of their costs on their own.