Social Security is a government program initiated in 1935 to collect taxes from working Americans and distribute these funds to qualifying disabled workers, retirees, and their families. The goal was to help them remain financially secure and provide a guaranteed source of income. It also instituted annual cost-of-living adjustments (COLAs) to help Social Security keep pace with inflation.
Here's a closer look at how the program works, the different types of Social Security benefits, and what you can expect when you're ready to claim benefits.
Social Security is not just for retired workers though as of November 2020, 71% of the recipients were retirees. The remainders were spouses and ex-spouses, children of retirees, disabled workers, and survivors of deceased retirees.
Social Security uses a system of credits, which you collect by working and paying Social Security taxes. SS retirement benefits are for workers 62 and older, and you need 40 credits to qualify for retirement benefits. A worker typically must work for ten years, though if they die or are disabled at an early age, they may qualify with fewer credits. Credit in 2021 is defined as $1,470 in earned income, and you may earn up to four credits per year.
Certain family members may be eligible to claim benefits on your work record if this amount is larger than what they are entitled to on their own. Eligible family members include spouses and ex-spouses if the marriage lasted for at least ten years, and they have not remarried. They must also be at least 62 to claim benefits and may receive up to 50 percent of their former spouse's total benefit amount. Dependent children and other family members may also qualify for family benefits in specific circumstances.
Retirement benefits
You can begin receiving retirement benefits at age 62, but your payments will be greater if you wait until your full retirement age (FRA). Your FRA is 66 if you were born between 1943 and 1954, then it rises by two months every year after that until it reaches 67 for those born in 1960 or later. You can collect sooner if you are eligible for survivor benefits or Social Security Disability Insurance (SSDI).
Retirement benefits will depend on your average indexed monthly earnings (AIME) over your 35 highest-earning years and the age at which you begin taking benefits.
If you plan to retire before your full retirement age, you should be aware that your benefits will be reduced. The drawbacks of taking early benefits before your FRA include less income for the rest of your life (except for cost -of-living-adjustments). If you begin claiming at 62, you'll get only 70% of your standard benefit if your FRA is 67 or 75% if your FRA is 66. Social Security will increase your benefit for every month you wait past your full retirement age until you reach the maximum benefit at age 70. Delay past full retirement age and Social Security increases your benefit 8 percent a year until age 70. There is no financial incentive to delay past age 70.
The maximum monthly Social Security benefit in 2021 at the full retirement age of 66 and 2 months is $3,148 (about double the average retirement benefit). To draw the top benefit, your earnings must have exceeded Social Security's maximum taxable income — the annually adjusted cap on how much of your income is subject to Social Security taxes — for at least 35 years of your working life. The COLA is 1.3% for 2021.
Social Security takes your 35 highest-earning years, calculates an inflation-adjusted average, and plugs that into a progressive formula that determines your "basic" benefit. The amount you receive from Social security depends on several factors, most importantly your lifetime earnings from work in which you paid Social Security taxes. The amount will also be affected by how old you are when you claim benefits. You won't know the exact amount until you file, but you can use many available Social Security Calculators to get an estimate.
If you continue working past your full retirement age and have a relatively high-income year or two, you could substantially increase your benefit.
You can continue to work and receive benefits. But, if you are below full retirement age and earn more than a certain amount, your monthly benefits will be temporarily reduced. Once you reach full retirement age, the reduction is eliminated, and your benefits will be increased to make up for what was lost over time.
Receiving Social Security benefits under your FRA could cause you to give some of that money back to the government if your income is high enough. The Social Security Earnings Test withholds $1 from your checks for every $2 you earn above $18,960 in 2021 if you are under your FRA all year. If you reach your FRA in 2021, it'll take $1 for every $3 you earn over $50,520 if you obtain this amount before your FRA. Once you're past your FRA, the government recalculates your benefit to include the amount that is withheld.
Disability benefits
SS disability benefits are available to adults 18 or older who cannot work due to a physical or mental disability expected to last at least 12 months or result in death. You may still be eligible even if you haven't earned 40 credits, depending upon your age at the time of your disability. Your average lifetime earnings determine your benefit, so individuals who made more while working will receive larger disability checks.
How to sign up
To sign up for Social Security, you can apply online or call 800-772-1213. Many local offices have been closed to in-person visits since March 2020 due to the coronavirus pandemic, but once they reopen you can file for all types of benefits in person. A government representative will verify the information in your application to determine if you qualify, and then you'll begin receiving monthly checks.
When should I take my benefits?
Deciding when to take benefits is a personal decision. Talk to your financial advisor and consider all the options above, the longevity in your family, your health, and your other income sources.
Many people fear for the future, and with the aging of America, there will be fewer workers to support a greater number of retirees. The latest Social Security Trustees' Report indicates that the program's trust funds could be depleted by 2035, after which it would be able to pay out only about 76% of benefits to retirees and about 92% to disabled workers.
Currently, no specific government actions have been taken to ensure the program's long-term sustainability, and benefits may likely be reduced in the future. It is imperative to take your retirement into your own hands and save as much as possible in addition to any social security income that you may expect.
Heidi Strauss, Principal
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Investment advice is offered through Strauss Financial Group, Inc., a Registered Investment Advisor.
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