What Is Social Security and How To Understand It
Understanding Social Security Basics – Part 1:
(1) What is Social Security?
Most people think of social security as “retirement” benefits that they get from the government later in life. However, social security includes Medicare which covers some health care expenses for individuals over age 65. Additionally, it provides for survivor benefits to families of deceased workers and benefits for disabled and blind individuals and their families.
(2) How is your social security benefit calculated?
Your benefit is based on your highest 35 years of earnings adjusted for inflation. You need to work at least 10 years to qualify for retirement benefits later. Disability benefits and survivor benefits can be obtained with a shorter work history. Note that some individuals work in jobs (ie: government workers, public school teachers, etc.) that don’t allow their income to qualify for a social security benefit because they receive a separate government pension.
(3) Will social security be around when I retire?
Well, since employers and young workers are taxed to provide for the social security benefits of current retirees, it seems unlikely that it will disappear altogether (absent some monumental breakdown of society). However, fewer workers and more retirees can lower the amount of the benefit you’ll be entitled to down the line. Currently, the Trust Fund would need to reduce benefits to about 75 cents for each dollar of projected benefits starting in 2034 if things don’t change.
(4) How can I see my current social security benefits statement?
You can use the social security website here to set up an account to review your statement. You’ll need to know some personal information in order to establish your account, but then you’ll be able to look it up online at your convenience if you can’t locate the paper statement. Down the line, if you choose to get further assistance analyzing how to get the most out of your social security benefits, you’ll want to bring your statement to the financial analyst assisting you. You can also call the social security helpline at 1-800-772-1213 to request a copy of your social security statement.
(5) When can I take social security?
You can take it as early as age 62 (whereby your benefits are reduced by up to 30%), at full retirement age of 66 or you can defer and take it at age 70 (which increases your benefit by up to 32%). Currently, if you were born between 1943-54, your “full retirement age” is 66 and for those born in 1960 and later, your full retirement age is age 67. Check out your full retirement age based on the year you were born using the social security retirement age calculator here.
(6) Is my social security benefit reduced if I work after “retirement”?
If you take social security early (ie: before age 66), your benefits are reduced $1 for every $2 in earned income above $15,720 for 2015. (Note that “earned income” does not include income from investments or pensions). After you reach full retirement age (ie: 66), there is no reduction in your social security benefit regardless of your income.
(7) Are social security benefits taxed?
Yes. Up to 50% of your social security benefits will be taxed at your income tax rate if your combined income is at a certain level ($25,000-34,000 if single; $32,000-$44,000 if married). If your income is above these upper levels, then 85% of your social security benefit will be taxed at your income tax rate.
(8) What are Spousal Benefits?
The spousal benefit means that your spouse can collect up to 50% of your retirement benefit (and you can collect up to 50% of your spouse’s benefit). You may want to do this if your spouse’s benefit is likely to be higher than your own given your work history. However, the spousal benefit through you gets reduced by the spouse’s own retirement benefit or if the spouse claims before full retirement age. The spousal benefit plays into some strategies I’ll discuss in my next blog relating to “File and Suspend” and “Restricted Application” which you can learn more about by clicking on the links herein.
Divorced individuals might also be entitled to a spousal benefit if they were married 10 years or more, the person seeking spousal benefits is currently unmarried and if the former spouse is entitled to receive his or her own benefit. There are fewer perks available to divorced individual’s ability to collect (ie: spousal benefits no increased by delayed credits earned by you or a former spouse), but it’s still good to know about this option.
What are Survivor Benefits?
A surviving spouse can receive the larger of his or her own benefit or 100% of the deceased spouse’s benefit (ie: survivor benefit). Therefore, if you (ie: the subsequently deceased spouse) take benefits early, then the survivor benefit for your spouse will also be permanently reduced. But, if you wait, then the survivor benefits to your spouse are increased by the delayed earnings credits for the deceased spouse. Divorced individuals can also claim survivor benefits through a deceased former spouse if the marriage lasted 10 years and you’re currently unmarried (or you remarried after age 60).
Government Pension Offset.
If an individual receives a pension from a federal, state or local government based upon work for which he or she didn’t pay social security taxes, then their spouse’s or widow/er’s benefits may be reduced. Here’s a calculator for your reference if this situation applies to you.
Obviously, if you have questions about social security, you shouldn’t hesitate to contact me to see whether you should co