Social Security Explained
Social Security Definition
Social Security is a governmental program that provides retirement benefits, disability income, survivor’s benefits and supplemental security income for those who are eligible.
Social Security is the name given to the government’s Old-Age, Survivor’s and Disability Insurance (OASDI) program in the United States.
Workers pay onto the Social Security system generally via a payroll deduction.
A portion of the Social Security tax is paid by the employee and by the employer.
There is also a Medicare tax paid through payroll deduction, but that money goes to the Medicare Trust Fund.
The Social Security tax that is withheld goes into the trust fund for Social Security.
Over the course of their working careers, workers earn credits towards their future retirement benefits based upon the number of quarters they’ve worked and the amount that they have paid into the system.
Social Security Meaning
There are several aspects to being eligible for Social Security benefits under the various sections of Social Security.
As a worker to be eligible for benefits you must:
- Be at least age 62 (or be disabled or blind); and
- You must have enough work credits to qualify for benefits.
For those filing applications for benefits after December 1, 1996, you must be a U.S. citizen or an alien who is lawfully present in the United States.
In order to qualify for a benefit, workers must earn 40 Social Security credits throughout their working careers.
Credits are earned based on the amount of their earned income from employment and self-employment during the year.
Social Security Explanation
The most common type of Social Security benefit is the retirement benefit.
The earliest that you can file for this benefit is age 62, delaying your initial filing until age 70 will result in the maximum benefit level.
Social Security survivor’s benefits are available to a surviving spouse, dependent children and parents who were dependents of the deceased worker.
These benefits are available to surviving spouses and dependents of workers receiving retirement benefits and those receiving disability benefits based on meeting eligibility requirements.
Disability benefits protect those who have not yet reached retirement age but who become disabled and who meet Social Security’s medical guidelines for disability.
Note that these workers must have met certain work guidelines and that these benefits can be difficult to qualify for.
Full Retirement Age
Full retirement age (FRA) is an important concept with regard to understanding how Social Security works.
Your FRA is the age at which you are entitled to 100% of your retirement benefit based on your lifetime earnings record.
For those born in 1960 or later, your FRA is age 67.
For those born between 1943 and 1954, your FRA is age 66.
For this born from 1955 through 1959, you FRA is 66 plus two months for each year in that range.
For example, for someone born in 1957, their FRA is 66 and 6 months.
Read the chart above for a complete breakdown of Full Retirement Age.
Social Security Retirement Benefits
Retirement benefits are the benefits associated with Social Security by most people.
Workers are eligible to take their benefit as early as age 62.
This will result in a reduced monthly benefit versus waiting to claim your benefit at your FRA or until age 70 when your benefit maxes out.
Claiming Social Security benefits at age 62 results in a significant reduction versus waiting until your full retirement age.
This chart from information on the Social Security website shows the impact of claiming your benefit at 62.
Claiming at ages between 62 and FRA will result in a proportional reduction in your benefit compared to the full benefit available upon reaching your FRA.
Note this reduction in your benefit by claiming early is a permanent one.
Waiting to claim your benefit until age 70 will result in the largest benefit.
There is no increase in benefits for waiting beyond age 70.
Waiting to claim benefits beyond your full retirement age results in an annualized increase of 8%, this is prorated by the month in which benefits are claimed.
For someone who FRA is 66, waiting until age 70 to claim benefits will result in a benefit that is 32% higher than if they claimed their benefit at age 66.
How Social Security is Calculated
Social Security benefits are calculated based upon the worker’s averaged monthly indexed earnings over their highest 35 earning years.
This is used to calculate your primary insurance amount, or the basic benefit that you would receive at your full retirement age.
For those who do not have 35 years of earnings history, those years are counted as $0 when doing this calculation.
Continuing to work into retirement can add to this history, missing years will be added, if your earnings are higher than the lowest years in your earnings history this could increase your benefits.
Divorce & Social Security Benefits
If you are divorced, you may be eligible for a benefit based upon your ex-spouse’s earnings record.
Social Security will first look at your own benefit based upon your earnings record.
If your ex-spouse’s benefit based on their earnings record would be higher, you will receive an additional amount over and above your own benefit to bring you to the higher amount.
In order to be eligible to receive a Social Security benefit based upon the earnings record of an ex-spouse:
- You must be at least age 62
- The marriage must have lasted for at least ten years
- You must be unmarried
- Your ex-spouse must be eligible for Social Security retirement or disability benefits
Social Security Taxation
Your Social Security benefits can be subject to taxation.
This will be based upon your combined income for the year.
Combined income is defined as:
Adjusted gross income + non-taxable interest income + ½ of your Social Security benefits
Based on your combined income for the year, 50% or 85% of your Social Security benefit could be subject to taxation for the year.
These amounts are not limited to earned income and there is no age limit on taxation of your benefits.
The above regards the potential federal taxation of your benefits.
In addition, 13 states currently tax Social Security benefits all or in part.
Social Security & Working
If you receive Social Security benefits prior to our full retirement age, your benefits will be reduced if you work and your earned income is over a certain threshold.
Earned income is income from employment or self-employment.
For 2020 that threshold is $18,240.
For any earned income above this level, your Social Security benefit will be reduced by $1 of every $2 of earned income.
If you were to reach your full retirement age in 2020, the benefit reduction would be $1 for every $3 of earned income over a threshold of $48,600.
Note these earned income thresholds generally increase annually.
There are no limits on earned income, and no benefit reductions due to earned income once you reach your FRA.
Any benefits lost due to earning too much will be paid to you starting when you reach your full retirement age.
Even with this repayment, if you are working and know your earned income will exceed the income threshold it may behoove you to wait until either your full retirement age or at least to a time when your earned income will not cause a benefit reduction to file.
Just like any Social Security claimant, filing later will result in a higher initial benefit.
If you file for benefits and then return to work, you can file for a once per lifetime withdrawal of benefits.
This must be done within 12 months of your initially receiving benefits.
All benefits paid to you, plus any that were paid to family members based upon your earnings record must be fully repaid.
This also applies to any taxes or Medicare premiums withheld.
You can then reapply for your benefits at a later date.
Social Security & Medicare
Social Security and Medicare are two separate and distinct governmental programs.
However there is some relationship between the two.
If you are receiving Social Security benefits at age 65, you will generally be automatically enrolled in Medicare Parts A and B, known as original Medicare.
If you are working or covered by health insurance by an employer (either as an employee or as the spouse of one) you will need to contact Medicare to opt out.
Medicare premiums will generally be withheld from your Social Security benefit payments as well.
Benefits for Survivors & Dependents
A surviving spouse can be eligible for survivor’s benefit from their deceased spouse based on that spouse’s lifetime earnings and their age at their death.
Survivor’s benefits are available to a spouse as early as age 60, and as early as age 50 if he or she is disabled.
There is no age limit for a widow or widower who is caring for dependent children under the age of 16.
Children of a deceased parent might also be eligible for benefits up to a family maximum level.
Additionally, parents of a deceased worker who were dependents of that worker at the time of their death might also be eligible for survivor’s benefits.
A surviving spouse can collect a benefit as early as age 60, though this benefit will increase each year up to their full retirement age.
They can collect the survivor’s benefit initially and then switch to their own benefit if it is larger beginning at age 62 and up to age 70.
Social Security Benefits
Social Security Disability Insurance (SSDI) provides benefits to the worker and certain members of their family if they have worked both long enough and recently enough to be insured.
There is an application process that is thoroughly reviewed by an agency in your state of residence.
Qualifying for Social Security disability coverage can be difficult.
If your application is rejected, there is an appeal process.
If you are receiving Social Security disability benefits at the time you reach your full retirement age, these benefits will automatically convert to Social Security retirement benefits.
Social Security Summary
Social Security is a comprehensive benefit program run by the government.
It offers retirees a key tool source of retirement income. Benefits are available for widows and widowers as well as dependents of a deceased worker.
Additionally, Social Security offers a disability program as well.
Workers pay into Social Security throughout the course of their working life via a payroll tax.
Their benefit is determined by their top 35 years of earnings throughout their career.