The Social Security program was established in 1935 to provide retirement income for certain U.S. workers. It was later expanded to cover most of the workforce. Today it remains America's pension plan and the financial lifeline many people use to stay afloat in their old age. In fact, Social Security provides about half of elderly Americans with at least 50% of their income, and about 1 in 5 with 90% of their income, according to the nonpartisan Center on Budget and Policy Priorities.
Regardless of how old or far from retirement you are, it's worth knowing some key facts about Social Security and how it works. Here are answers for 10 questions people often ask.
1. When Am I Eligible?
Based on when you were born, you will be eligible for so-called "full" retirement benefits early as age 65 or as late as age 67.
- If you were born before 1938, your full or normal retirement age is 65.
- If you were born between 1938 and 1942, the age ranges from 65 and 2 months to 65 and 10 months.
- If you were born between 1943 and 1954, it's 66.
- If you were born between 1955 and 1960, it ranges from 66 and 2 months to 66 and 10 months.
- If you were born after 1960, it's 67.
You can opt to receive Social Security as early as age 62, but if you do, your monthly benefits will be permanently reduced. For example, if you take benefits at 62, and your full retirement age is 66, your benefits will be reduced by 25%. Conversely, if you postpone taking benefits past your full retirement age, you will be rewarded with a higher benefit—up to age 70, when benefits max out and there is no further incentive to delay.
Social Security benefits grow by 8% per year up to age 70 if delayed.
2. How Is Eligibility Determined?
Your eligibility for Social Security is based on credits you earn during your working years. As of 2019, for every $1,360 you make, you earn one credit, up to a maximum of four per year. If you were born in 1929 or later you need 40 credits—essentially 10 years of full-time work—to receive 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, a 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 In?
As of 2019, workers pay 6.2% of their wages into Social Security, on up to $132,900 in income. Employers contribute another 6.2%. People who are self-employed have to pay both portions, or 12.4%.
- Social Security is considered America’s pension plan, with individuals becoming eligible at either 65 or 67 years old.
- Eligibility for Social Security is based on credits earned during your working years.
- Benefits are based on lifetime earnings, with the simple formula being calculated by averaging the earnings from the 35 best income-generating years.
4. How Much Will I Get?
Your Social Security benefits are based on your lifetime earnings. The formula is a little complicated, but basically it averages your income from your 35 highest-earning years. If you have already accumulated 40 Social Security credits you can use the Retirement Estimator at ssa.gov to get a rough estimate.
The maximum monthly Social Security payment for retired workers as of 2019.
5. What If I Still Work?
Yes, you can receive Social Security benefits while you are still working. If you’ve reached full retirement age, you can work and earn as much as you'd like and receive full benefits. If you’re under full retirement age but receiving Social Security, your benefits will be reduced temporarily.
The reduction is $1 for every $2 of earned income over $17,640 (in 2019). During the year in which you reach full retirement age, your benefits will be reduced by $1 for every $3 in income over $46,920 (in 2019). That continues until the month you become fully eligible.
The money is not lost, however. Social Security will credit it to your record when you reach full retirement age, resulting in a higher benefit.
What Is the Spousal Benefit?
If your spouse has worked long enough to qualify for Social Security, you both can claim them. 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 Owe Taxes on Benefits?
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.
You never have to pay taxes on more than 85% of your Social Security income, regardless of how much income 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 Work?
Many people believe that the money taken from their paychecks goes into 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.
10. Is Social Security Solvent?
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.
For all these reasons, in the "Summary of the 2019 Annual Reports", trustees wrote that "both Social Security and Medicare face long-term financing shortfalls under currently scheduled benefits and financing." Starting in 2020, Social Security's program costs will exceed its income. Then, the program will have to start dipping into its nearly $3 trillion trust fund.
The Social Security retirement program is projected to be able to pay full benefits on schedule until 2034, at which point the trust will be depleted. Trustees also projected that Social Security's disability trust fund will run out in 2052 (20 years later than projected in the previous year's report) due to "a continued decline in new disabled-worker applications and lower-than-expected disability incidence rates."
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. However, 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!"