Social Security is a federal benefits program in the United States, founded in 1935. While the program encompasses disability income, veterans' pensions and public housing, it is most commonly associated with monthly retirement benefits.
The Social Security system is funded through payroll taxes. The Federal Insurance Contributions Act (FICA) mandates a 12.4% levy on the first $128,400, as of 2018, of each individual's earned income each year. The employer pays 6.2% and the employee pays 6.2%. The self-employed pay 12.4%. Contrary to popular belief, this money is not put in trust for the individual employees who are paying into the system, but is used to pay existing retirees. Any excess is invested in U.S. Treasury bonds.
Social Security Credits
Eligibility for Social Security benefits is accrued over time. Prior to 1978, workers were required to earn $50 in a three-month quarter in order to receive one Social Security credit. The achievement of 40 credits, accrued over 10 years of working, provided eligibility. Employers now report earnings once per year instead of quarterly and credits are accrued based on your earnings, not based on a set time frame, so it is possible to earn all four possible credits even if you only work a short period each year. As of 2018, workers are required to earn $1,320 per credit.
The amount of your Social Security benefit is calculated by averaging the earnings from your 35 highest income-generating years. The maximum monthly Social Security check that you can earn is $2,788 per month in 2018. To sign up for Social Security benefits, it is recommended that you apply three months prior to your retirement date.
Social Security Eligibility
While past generations reached full eligibility for Social Security at age 65, everyone born after 1937 must adhere to the following eligibility requirements:
|Year of Birth||Full (normal) Retirement Age|
|1937 or earlier||65|
|1938||65 and 2 months|
|1939||65 and 4 months|
|1940||65 and 6 months|
|1941||65 and 8 months|
|1942||65 and 10 months|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
|1960 and later||67|
Plan for Your Retirement
According to the Social Security Administration, Social Security was never designed to serve as the sole source of a retiree's income. The Administration notes that "Social Security replaces about 40% of an average wage earner's income after retiring, and most financial advisors say retirees will need about 70% to 80% of their work income to live comfortably in retirement."
The best way to achieve a secure retirement is to take matters into your own hands. This means making sure to take advantage of a 401(k) or similar tax-advantaged retirement plan, if your employer offers one, or investing in an IRA or other vehicle.
The Bottom Line
While Social Security is built as a supplement to retirement income, one thing is for certain: planning for additional ways to fund your retirement is a good idea. If you reach retirement and other sources of income, such as Social Security and defined-contribution plans, are able to provide sufficient income, your personal savings will add to the mix and you'll have more money than you need. If you reach retirement and those other sources of income are not enough, you'll still be able to rely on the nest egg you've built.