Explaining Social Security in 8 Steps

by Bethany
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The Social Security program affects nearly all Americans and helps support disabled and older adults. There are about 167 million people paying taxes into the program with almost 60 million receiving money each month. The vast majority of beneficiaries are retirees, although there are also millions of survivors and disabled adults who rely on this benefit.

On average, a benefit can replace around 40% of a wage earner’s income after they retire. The program is not designed to be a retiree’s sole source of income, but it has become that for many. For most workers, Social Security will be their only form of guaranteed income when they retire as most employers have shifted away from defined benefit pensions and toward defined contribution plans like 401(k)s.

Once you begin receiving your benefit, your payments will continue to increase to keep pace with inflation, unlike an annuity or pension. This is one of the most commonly overlooked advantages of Social Security. The program also offers a guaranteed benefit that is based on your earnings. The more you earn, the higher your benefit. This system provides a foundation to retire for millions of Americans, yet many do not understand exactly how it works. Here’s what you should know about the advantages the system offers and how you become eligible.

What Is Social Security?

America’s Social Security System was created in 1935 by President Roosevelt as the first form of federal assistance for the elderly. The program began as a means to provide income to retirees and the unemployed with a lump sum benefit at death. The program has been expanded and changed many times over the last century, but its goal remains the same: economic security for retired and disabled adults.

Social Security is a financial safety net for American workers who are ready to retire or become disabled. The program is based on workers’ contributions into the system while employed. The majority of workers in the U.S. pay into the system while employed through payroll deductions and receive money later when they retire.

While many people think of this system as just a program for retirees, benefits are available for survivors, spouses, and disabled adults as well. Many people who receive a benefit are disabled, a family member of someone receiving a benefit, a divorced person using a spousal benefit, a family member of a deceased worker, or a dependent parent of a deceased worker.

While the Social Security system is generally stable, the trust fund is set to run out in 17 years. Without action, tens of millions of Americans will receive just 75% of their benefit when the fund begins to run out. Fortunately, this is likely to be averted, possibly by increasing the age at which workers can qualify for payments.

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Social Security Benefits

There are three types of benefits available under the program: retiree, disability, and survivors. The benefit is designed to replace some earnings when a worker retires, can no longer work, or dies. Low earners have a higher share of their income replaced by their benefit than high earners. All benefits paid to survivors, retirees, and disabled adults come from mandatory tax withheld from workers’ paychecks. On average, retired workers and widows or widowers receive a benefit of $1,391 per month. Disabled workers receive an average of $1,172 per month. The maximum benefit for someone retiring in 2017 at full retirement age (FSA) is $2,687.

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Who Gets Social Security?

There are several types of SSA benefits available. While the system is primarily designed for retirees who have contributed to the system by working at least 10 years, there are also survivor and disability benefits. Contributions while working offer a safety net in case of disability and they can cover an adult child who becomes disabled before the age of 22. When a worker has enough work history to qualify for a benefit, his or her wife or husband and children can receive a survivor benefit when the worker dies. About 45 million retired workers and family members currently receive a benefit compared to 6 million survivors of deceased workers and 10 million disabled workers and family members.

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How Is Eligibility Determined?

Social Security retirement benefits are based on the contributions a worker makes into the system. While employed, you pay into the system to receive benefits once you are eligible. You must work at least 10 years to earn the necessary 40 credits. One credit is awarded for $1,260 in earnings, although this amount changes every year for inflation. You can earn a maximum of 4 credits per year. The minimum 40 credits requires earnings of at least $5,040 per year. Once you accumulate at least 40 credits, you cannot receive payouts from the system until you are at least 62 years old. Credits are only earned on income on which you pay Social Security taxes. This can be income from a job or self-employment, but other types of income like capital gains do not count.

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How Much Do You Get?

Determining how much you will receive from Social Security can be complicated. The SSA no longer mails annual statements to workers with personalized estimates of benefit payments, but you can still go online for your estimate. The average benefit is about $1,200 per month. The maximum a worker who retires at 66 can receive is about $2,400, but this requires earning the maximum taxable amount of about $106,000 every year starting at 21. Benefits are based on your 35 highest-earning years which are adjusted for inflation. If you do not have a full 35 years of work history, zeros are averaged in. Married couples can receive benefits based on their own work history or up to 50% of their spouse’s benefit, whichever is higher.

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Can You Get Social Security and Still Work?

It is possible to receive your benefit and continue working, but there may be consequences. If you are younger than full retirement age (66 or 67, depending on your birth year) and your income exceeds the annual earnings limit, working may reduce your benefit amount. The Social Security Administration will reduce your benefit payment by $1 for every $2 you earn above the limit. Once you reach FSA, your benefit will no longer be reduced for your earnings, regardless of how much you earn. You can also increase your benefit by continuing to work as your payment will be recalculated. This is also true if you receive a survivors benefit; earnings from work can increase your benefit amount.

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How Does Social Security Work For My Spouse?

A married partner has the right to claim a benefit under their own earnings record or as a spousal benefit with 50% of the spouse’s benefit at full retirement age. At the age of 62, a partner can be eligible for a benefit through a spouse even if he or she has never worked under the system as long as the married partner is receiving their benefit. This spousal benefit is still available to divorced couples as long as the partner has not remarried before 60 and the marriage lasted at least 10 years. Taking a spousal benefit will not reduce the amount the other partner receives. It’s important to verify your full retirement age before taking a spousal benefit, as collecting the benefit early will permanently reduce your benefit.

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Do You Have to Pay Taxes?

In the past, SSA income was tax-free, but it is no longer this simple. Lawmakers have passed rules that allow tax on up to 85% of income to shore up the Medicare system. Some people do not need to pay tax on the income while others may pay taxes on part of the income. It’s estimated that 70% of beneficiaries are safe from tax, but about 18 million beneficiaries do owe taxes on some of their earnings. As a general rule, you will likely pay tax on your SSA income if your provisional income exceeds $25,000 as an individual or $32,000 on a joint tax return. Provisional income refers to your adjusted gross income (AGI) not including your benefit plus 50% of your benefit. Depending on your provisional income, you may owe tax on up to 50% of your benefit or a full 85% of your benefit. If you rely completely on your benefit without additional income, you likely owe no taxes.