The Social Security program was established in 1935 to provide retirement income to certain workers. It was later expanded to cover most of the U.S. workforce. Like many large, complex federal programs, it doesn’t get much love: Retirees, politicians and political and financial websites complain about it and point out all of its flaws. But it remains America's pension plan and the financial lifeline that many people use to stay afloat in their old age.
Regardless of how old you are, however, you should know some of the facts about Social Security. Here are answers for 10 of the more common questions people ask.
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 65 and as late as age 67.
- If you were born prior to 1938, your full eligibility date, aka your full or "normal" retirement age, is age 65.
- 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.
- If you were born after 1960, your full eligibility date is age 67.
The earliest full retirement age – that is, the age at which you can receive your full benefits – is 65. You can opt to start receiving benefits as early as age 62, but they will be partial benefits: You receive smaller payments, only 75% of your benefits to be exact, for the rest of your life. If you wait until full retirement age, you get the full 100% of what’s coming to you.
Conversely, you don't necessarily have to take Social Security benefits at your full retirement age. Instead, you can delay receiving them, and grow them by 8% per year up to age 70 – a nice bonus for those who don't need the funds right away. After that, you can continue to delay, but the size of the benefit payments will no longer increase.
2. How Is Eligibility Determined?
Eligibility for Social Security is based on credits earned during your working years. As of 2018, for every $1,320 you make, you earn a credit, and you need to earn four a year (that is, have an annual earned income of $5,280). If you were born in 1929 or later you need 40 credits – or 10 years of full-time work – to receive full Social Security benefits at retirement. “Once you have these minimum credits, your benefit is based on your highest 35 years of averaged earnings,” says Michael Windle, financial advisor at C. Curtis Financial Group in Plymouth, Mich. “If you only worked 20, you would have 15 years of zero income.”
There are special provisions that can change the formula if you had certain public service jobs. “For citizens who have government-sponsored pensions, like teachers, firefighters, police officers or other public employees, there is a high probability that your Social Security benefits are reduced or even eliminated,” says Mark Hebner, founder, and president of Index Fund Advisors, Inc., in Irvine, Calif.
3. How Much Do I Pay Into the Program?
As of 2018 and 2019, workers pay 6.2% of their wages toward Social Security, up to a maximum of $128,400 in 2018 and $132,900 in 2019. Employers also contribute a payroll tax of 6.2% of each employee's salary. Unfortunately, those who are self-employed have to pay both portions, bringing their payment up to 12.4% of their earned income.
4. How Much Will I Get?
Your Social Security benefits are based on your lifetime earnings. The formula's a tad complicated, but basically, the amount payout is calculated by averaging the earnings from your 35 best income-generating years, as noted above. The average monthly Social Security payment for retired workers as of August 2018 was $1,415.94. There is a 2.8% cost of living (COLA) increase for 2019.
5. Can I Receive Social Security If I Still Work?
Yes, you can be employed and receive Social Security benefits. If you’re older than your full retirement age, you can work as much as you would like and receive full benefits. If you’re below full retirement age but eligible for some amount of benefits, Social Security will reduce your payments based on a calculation.
Basically, if you're opting to receive Social Security prior to your full retirement age, you are permitted to earn up to $17,040 for 2018 and $17,640 in 2019. For every $2 in earnings over this limit, $1 is withheld from the benefits. In the year you reach your retirement age, you may earn up to $45,360 ($46,920 in 2019) before the system deducts $1 for every $3 in earnings over the limit. This continues until the month you actually become fully eligible.
6. 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 that is less than half of yours, your spouse's payment will be increased to a rate equal to half of your benefit amount.
What happens if a 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.
And what if you are divorced? If you are currently remarried, you’re not entitled to any of your ex-spouse’s benefits. If you’re not, you may be entitled to a part of his or her benefit if you were married for at least 10 years and have been divorced for at least two years. Your benefit is as much as half of your ex-spouse’s full retirement amount if you start taking benefits at full retirement age. However, this only applies if you've no benefits of your own or aren't eligible for full benefits – but would qualify for a higher amount of benefits based on your ex-spouse’s work record.
7. Do I Have to Pay Taxes on Social Security Income?
That depends. If you file a federal tax return as a single adult and your income is higher than $25,000, you have to pay taxes. If you’re married, filing jointly, and your combined income is higher than $32,000, you’re on the hook, too. But, under current rules, you never have to pay taxes on more than 85% of your Social Security income, regardless of how much you make.
8. How Do I Apply for Benefits?
You can do it online. You’ll need your original birth certificate, a copy of your W-2 forms for last year and possibly other documentation. You can also apply by phone or in person at a Social Security Administration (SSA) office.
9. How Does Social Security Actually Work?
Many people believe that the money taken from their paychecks goes into a something like a personal bank account and remains there earning interest until they retire and begin to take it back. It doesn't quite work like that. Social Security is a "pay-as-you-go" system. Money paid in by current taxpayers is spent to pay benefits to current retirees.
Contributions beyond the amount needed to fund the Social Security system are deposited in a government account called the Social Security Trust Fund, to be used when current taxed income does not cover all the system's obligations. 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 U.S. 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 "Summary of the 2015 Annual Reports," 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."
10. Is Social Security In Trouble?
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. Furthermore, Social Security was designed as an income supplement; it was not intended to replace 100% of a worker's salary. Unfortunately, a large percentage of senior citizens now rely on Social Security for all, or a majority, of their retirement income.
According to the Social Security Administration, large adjustment policy changes will be needed to ensure that the system is sustainable on a long-term basis. 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.
The general consensus is that the U.S. government will not let the Social Security program fail, though. 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!"