What Are Social Security Benefits?
Social Security benefits are payments made to qualified retirees and disabled people, and to their spouses, children, and survivors. Social Security—officially the Old-Age, Survivors, and Disability Insurance (OASDI) Program in the United States—is a comprehensive federal benefits program designed to provide partial replacement income for older workers and their spouses, those whose spouse or qualifying ex-spouse have died, and the disabled. Under specified conditions it also supports children of beneficiaries.
President Franklin Roosevelt signed the original Social Security Act into law in 1935. The current law, after a number of amendments, encompasses several social insurance and social welfare programs, including the issuance of Social Security benefits. Benefits are determined by a specific set of criteria issued by the Social Security Administration (SSA).
- Social Security benefits provide partial replacement income for qualified retirees and disabled individuals, as well as for their spouses, children, and survivors.
- An individual must pay into the Social Security program during their working years and accrue 40 credits in order to qualify for benefits.
- The benefit amount someone receives is based on their earnings history, the year they were born, and the age when they start to claim Social Security.
- Spouses who don't work or haven't amassed the requisite number of credits can receive benefits based on their spouse's work record.
- Benefits may be taxed depending on one's income and tax filing status.
How Social Security Benefits Work
Payroll taxes under the Federal Insurance Contributions Act (FICA) tax or the Self Employed Contributions Act (SECA) (for self-employed individuals) fund Social Security and all of its benefits. The Internal Revenue Service collects tax deposits and formally entrusts them to the Social Security Trust Fund, which is made up of the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund.
Individuals qualify for Social Security old age (or retirement) benefits by paying into the program during their working years. Full insurance is based on accumulating 40 quarters or "credits" from covered wages, and a worker can earn up to four credits a year. One credit is awarded for every $1,410 in earnings, starting in 2020, an amount that is adjusted annually to keep up with inflation, so in 2020 you would need to make $5,640 to accrue four credits. A payroll-tax cap sets the maximum amount of earned income that is subject to the Social Security payroll tax. In 2020, the payroll tax cap was $137,700.
The SSA keeps track of your earnings throughout your career, indexes each year's total earnings, and uses the 35 highest-earning years to determine your average indexed monthly earnings (AIME). Next, your AIME is used to arrive at your primary insurance amount (PIA), the monthly amount you can begin to collect when you reach full retirement age. For individuals born in 1938 or later, full retirement age gradually increases from 65 until it hits 67 for those born after 1959. You can collect Social Security retirement benefits at age 62, but the amount of the benefit will be reduced to compensate for receiving it earlier and, presumably, for a longer period of time. Conversely, if you wait until you're 70, you'll get an extra 8% a year, which means you'll collect 132% of your PIA for the rest of your life.
Cost-of-living adjustments (COLAs) equal to the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) are made to Social Security benefits to counteract the effects of inflation.
In 2020, the maximum monthly Social Security payment for retired workers was $3,011. The SSA’s retirement calculators can help you determine your full retirement age, the SSA’s estimate of your life expectancy for benefit calculations, rough estimates of your retirement benefits, actual projections of your retirement benefits based on your work record, and more. Retirees with non-FICA or SECA-taxed wages will require additional help because rules for those individuals are more complex.
Spousal and Survivor Benefits
Spouses who didn’t work or who didn’t earn enough credits to qualify for Social Security on their own can receive benefits starting at age 62 based on their spouse’s work record. Similar to claiming benefits on one's own record, a spouse's benefit will be reduced if they claim benefits before reaching full retirement age. The highest spousal benefit someone can receive is half the benefit their spouse is entitled to at their full retirement age.
When a spouse dies, the surviving spouse is entitled to receive 100% of whichever Social Security benefit is higher—their own or their deceased spouse's. If the surviving spouse is not yet at full retirement age, they are entitled to a prorated amount starting at age 60. Then, at full retirement age, the surviving spouse is entitled to their spouse's full benefit or their own—whichever is higher.
People who were married for 10 years or longer—and are are divorced and have not remarried—are entitled to collect the spousal benefit and the spousal survivor benefit. The rules are complicated so review them carefully.
Social Security Benefits and Taxes
If an individual taxpayer's income exceeds $25,000, or a married couple filing jointly has income that's more than $32,000, they will be required to pay taxes on their Social Security benefits. The portion of benefits that is subject to taxation depends upon income level, but no one pays taxes on more than 85% of their Social Security benefits, regardless of income. Benefits received due to disability are, in most cases, tax-free. If your child receives dependent or survivor benefits, this money does not count towards your taxable income.