Michael Callahan
About 180 million American workers are covered by Social Security, and an estimated 65 million people receive Social Security benefits every month. Social Security can be a lifeline for retired and disabled people who have little to no income. For other retirees, Social Security benefits are just one part of a diverse financial plan.
Social Security is a massive program with a lot of complicated rules and regulations. Whether you’re nearing retirement or just starting to think about Social Security benefits for the first time, here’s what you need to know.
What is Social Security?
The Social Security Act of 1935 created the Social Security program. The average life span had risen by 10 years since 1900, and improved health conditions meant that there were more retired, disabled and vulnerable Americans who were unable to work and lacked economic stability. Social Security was created to maintain their welfare, and to guarantee that retired workers would continue to receive monthly income after they turned 65. Most people working today won’t qualify for monthly retirement benefits until they’re 66 or 67, but the principle is the same: Social Security benefits provide a reliable income source for workers and their families in their older years, and are a core element of a satisfying retirement for many people.
Usually when people talk about Social Security benefits, they’re talking about retirement benefits. Social Security also pays out benefits for people who are permanently disabled through the Social Security Disability Insurance (SSDI) program, and provides survivors benefits for family members of deceased workers.
How Does Social Security Work?
Members of today’s workforce pay for current Social Security benefits through a dedicated payroll tax. Collected taxes are kept in two trust funds, the Old-Age and Survivors Insurance (OASI) fund and the Disability Insurance (DI) fund. Money from the OASI fund is used to pay for retirement and survivors benefits, while the DI fund pays for disability benefits. Any surplus money is invested in Treasury bonds to further bolster the reserves.
Once you’re eligible for Social Security retirement benefits and decide you’re ready to claim them, you’ll receive a monthly payment for the rest of your life. The size of your retirement benefit depends on how much you earned during your career and how old you are when you take your benefits.
Benefits are paid from the DI fund for individuals who qualify for Social Security disability benefits. SSDI is available to people who are disabled or blind, and who have paid into Social Security in the past. This program differs from the Supplemental Security Income program (SSI), which provides for low-income elderly and disabled people; SSI is administered by the Social Security Administration but isn’t funded by Social Security taxes.
Who’s Eligible for Social Security?
You become eligible for Social Security retirement benefits by “paying into” the system with payroll taxes. Workers are eligible for benefits after earning 40 work credits, which generally takes 10 years.
A deceased worker’s family members may also be eligible for survivors benefits earned on the worker’s record. Survivors don’t have to earn work credits to qualify for these benefits, but must meet other conditions.
When Does Social Security Start?
Eligible applicants can claim their retirement benefits at any point beginning at age 62, but many choose to wait until after they reach their full retirement age. Your FRA is determined by the year of your birth; it’s 66 or 67 for today’s workforce.
It pays to delay claiming benefits, which is why financial planners often recommend this strategy. The Social Security Administration calculates your “primary insurance amount,” or the amount you’re entitled to receive as a monthly benefit, using your earnings record. When you claim Social Security right at your full retirement age, you get 100 percent of that amount every month. Claiming benefits early reduces the benefit by a fraction for every month remaining until your FRA. Or, if you delay benefits beyond your FRA, the amount continues to grow until you turn 70.
It’s advisable to apply for disability benefits as soon as you become fully disabled. There’s an automatic five-month waiting period for these benefits, so payments won’t begin until at least six months after the date that the SSA decides a disability began.
How Do You Claim Social Security Benefits?
Once you decide to claim Social Security retirement benefits, the process is simple. The easiest way to claim benefits you’ve earned is to complete an application through your mySocialSecurity account on SSA.gov.
Applying for disability benefits is a little more complicated, since applicants have to submit medical evidence as part of the process. Applications can also be submitted through the SSA’s website.
How is Social Security Taxed?
Social Security is taxed based on what other income you have in a given year. If your combined income (adjusted gross income + nontaxable income + ½ of your SS benefits) is between $25k and $34k as a single person ($32k and $44k married filing jointly), then 50% of your social security benefits will be included in your income for tax purposes. If your income is above the $34k amount ($44k married) then 85% of your social security benefits become taxable.
Is Social Security in Trouble?
Fears about the future of Social Security are justified, but there’s no reason to panic. As of the Trustees’ 2020 report, reserves in the OASI fund are projected to only pay for full benefits through 2034. When the reserves run out, payroll taxes from current employees will be the only source of funding for Social Security benefits. The SSA projects that this income will be enough to cover about 76 percent of scheduled benefits.
(The news is better for people who rely on SSDI benefits. The DI fund should be solvent through 2062, and the SSA currently expects that tax income will cover 92 percent of disability benefits after that.)
So, yes, the future of Social Security is shaky. But a lot can happen before 2034. Legislative reform could increase tax revenues or make other changes to the program. It’s still safe to count on your benefits as part of your family’s financial future—just make sure those benefits are only one part of a comprehensive financial plan. Social Security alone probably won’t be enough to finance the kind of retirement you’re envisioning.
Sachetta, LLC helps clients at all stages of retirement planning understand the role that Social Security will play in those plans. Whether you’re new to the workforce or preparing to claim your Social Security benefits soon (or anywhere in between), our advisors are here to provide guidance about maximizing and protecting your retirement income. Contact us today.
Michael J Callahan, CPA, CFP®, MST, is a Certified Financial Planner™ practitioner, Certified Public Accountant, and holds a Master’s Degree in Taxation from Bentley University. Mike has been involved in personal financial planning, as well as both business and individual taxation for more than 15 years. Our ideas about money are formed by our life experiences. Over the years, Mike has seen those close to him make common money mistakes from not having enough life insurance, to not doing the proper estate planning. When he received an inheritance in college and started looking into how he could use it to achieve his goals, he realized that he could use those experiences to help others. He changed his major to Finance, and the rest is history.