The Social Security program was established in 1935 to provide retirement income to certain workers. The program was later expanded to cover most of the workforce. Prior to the program's development, individuals were completely responsible for funding their personal financial needs both during their working years and during retirement. If an individual failed to save for retirement, that individual was unable to retire from the workforce. Like any large, complex government program, there are many components to Social Security. Ten common questions about the program are addressed below. (For background reading, see Introduction To Social Security.)
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Answers to Your Questions
1. When Am I Eligible to Receive Benefits?
Based on when you were born, retirement benefits may begin as early as age 62 (partial benefits) and as late as age 67 (full retirement age).
- If you were born prior to 1938, your full eligibility date is age 65.
- If you were born after 1960, your full eligibility date is age 67.
- People born in between 1938 and 1942 are eligible on a graduating scale that increases by two months per year.
- Persons born between 1943 and 1954 are eligible for full benefits at age 66.
- Those born between 1955 and 1960 are eligible based on a graduating scale that increases by two months per year, culminating in an eligibility age of 67 for those born in 1960 or later.
2. How Is Eligibility Determined?
Eligibility for Social Security is based on credits earned during your working years. Most people need to earn 40 credits in order to qualify. As of 2016, one credit is given for every $1,260 in earned income up to a maximum of four credits per year.
3. How Much Money Will I Receive?
The amount of your Social Security benefit is calculated by averaging the earnings from your 35 highest income-generating years. The average monthly Social Security payment for retired workers as of January 2016 is $1,341. There was no Cost of Living (COLA) increase for 2016.
4. Can I Receive Social Security If I Am Still Employed?
Beginning the month you reach your full retirement age, you can continue to work without reducing your Social Security benefits payments. If you opt to receive Social Security prior to your full retirement age, you are permitted to earn up to $15,720 for 2016. For every $2 in earnings over the limit, $1 is withheld from the benefits. In the year you reach your retirement age, you may earn up to $41,880. For every $3 in earnings over the limit, $1 is withheld from the benefits until the month you reach your full retirement age.
5. How Does Social Security Work for My Spouse?
If your spouse has worked long enough to qualify for Social Security, you both qualify for full benefits. If your spouse did not work or earned only a small amount and therefore qualifies for a benefit from Social Security that is less than half of your benefit, your spouse's benefit will be increased to a rate equal to half of your benefit amount.
6. What Happens If My Spouse Dies?
If the surviving spouse has reached his or her full retirement age, the spouse is entitled to 100% of the deceased worker's basic benefit amount. Prorated amounts are paid to surviving spouses who have not yet reached retirement age. If the surviving spouse was receiving Social Security benefits and the deceased's benefits were greater, the survivor will receive the higher benefit amount.
7. Is The System In Trouble?
The Social Security program is a "pay-as-you-go" system. Money paid in by current taxpayers is spent to pay benefits to current retirees. As the ratio of current workers to current retirees drops, fewer people will be paying into the system as a larger number makes withdrawals. In addition, people are living much longer than when the program first began in the 1930s, and this stretches out the payments that millions of Americans will be receiving. More adjustments may need to be made to the system in the future. (For more insight, see How Secure is Social Security? and Social Security Depletion: Is The Fear Justified? )
8. What About the Social Security Trust Fund?
Many people believe that the money taken from their paychecks goes into a "trust fund," and remains there earning interest until the person who paid the money into the system, retires and begins to take it back. This vision of a trust fund is a myth. Contributions beyond the amount needed to fund the Social Security system are indeed deposited in a government account called the Social Security Trust Fund to be used when current tax income does not cover all the obligations of the Social Security System. There are actually two trust funds: the Disability Insurance (DI) Trust Fund and the Old-Age and Survivors Insurance (OASI) Trust Fund.
Tax income is deposited on a daily basis, and is either exchanged for a government IOU or invested in government-issued Treasury bonds. In both cases, the cash goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund. Politicians spend the cash, relying on future generations of taxpayers to make good on the IOUs, and to repay the principal underlying the Treasury bonds. As the number of retirees increases and the number of workers declines, repayment of the IOUs and bond principal will be necessary in order to meet the payments owed to Social Security beneficiaries, including retirees, those on disability and the children and survivors of beneficiaries. According to the Social Security Administration's (SSA) "Summary of the 2015 Annual Reports," depletion of the DI Trust Fund is expected to occur in 2016. The combined trust fund, including Social Security Old-Age and Survivors Insurance (OASI), is expected to be depleted in 2034. After that, "tax income is projected to be able to pay about three-quarters of scheduled benefits through the end of the projection period in 1989." The "trust fund" exists only as an accounting model, not as an actual funded account.
9. What Is Being Done to Fix the System?
According to the SSA, large policy changes will be needed to ensure that the system is sustainable on a long-term basis. Social Security was designed as an income supplement; it was not designed to replace 100% of a worker's salary. Unfortunately, a large percentage of senior citizens rely on Social Security for all, or a majority, of their retirement income.
Because current retirees make up such an enormously active voting block, and current workers hope to retire someday, politicians feel that changing the system will hurt their chances for re-election, or otherwise stunt their careers. Former Speaker of the House Tip O'Neill referred to Social Security as the "third rail of politics. Touch it and you die!"
10. Will There Be Any Money Left When I Retire?
The general consensus is that the U.S. government will not let the Social Security program fail. However, that does not mean that the program will be maintained in its existing state. Legislators have already increased the eligibility date for receipt of full benefits from age 65 to age 67 for citizens born in 1960 or later. Additional increases in the age of eligibility, reductions in benefits, or both, are likely to be necessary in order to get the program back on solid footing. Raising taxes to fund the system is another likely course of action.
Have More Questions?
Social Security is a complex and evolving program with many moving parts. To learn more about it, read Types of Social Security Benefits. If you are contemplating the best strategy to maximize your payout, read Retiring Early: How Long Should You Wait? You can also visit the U.S. Social Security Administration online.