As you plan your retirement, understanding the benefits of social security can be beneficial. For many Americans, social security benefits play an essential part in their retirement income. Therefore, it is an important part of retirement planning. Understanding how it works can help you make the most of your benefits, so let’s take a closer look at the ins and outs of social security benefits. Doing so can help you approach retirement with the knowledge you need to prepare for retirement adequately.
What is Social Security?
Social security is a federal insurance program that provides income for retirees, people with disabilities, and other qualified individuals. It was created in the 1930s as part of the New Deal’s Social Security Act to provide economic security for the elderly population, who were often unable to work due to age or disability. The program has since grown to include many other benefits, including disability payments and survivor’s benefits.
How Does Social Security Work?
The amount of money individuals receive from social security benefits depends on their earnings over their working lifetime. The higher your earnings when you work, the more money you receive when you retire or become disabled. To be eligible for social security benefits, you must have worked long enough and paid enough taxes into the system over your lifetime. You must also be at least age 62 (or older) and have earned a minimum of 40 credits or quarters from working. You may also claim benefits and be under 62; however, you must be completely disabled to receive social security benefits via Supplemental Security Income or SSI.
Social Security Eligibility Requirements
You can start receiving retirement benefits as early as age 62 if you meet the eligibility requirements outlined by the government. Generally speaking, in addition to being at least 62 years old, you have also worked at least ten years in jobs covered by social security taxes and have paid into the system during those ten years of work. However, other factors can affect your eligibility (such as earnings level), so it’s best to check with the Social Security Administration if you have questions about your eligibility status. Additionally, there are several strategies available for maximizing your social security benefits based on when and how much money you choose to receive each month, so make sure to do research before deciding when to claim your benefits.
The Different Types of Social Security Benefits
Unfortunately, many people aren’t aware of the range of assistance available via their social security benefits, so here’s a brief overview.
Social security benefits provide disability benefits for individuals who become disabled and cannot work due to physical or mental impairment. This includes short-term and long-term disability benefits, which can cover medical expenses and other costs associated with being disabled. Workers are entitled to disability payments that usually start after five months of unemployment due to disability. They will continue as long as an individual remains disabled and meets all eligibility requirements set forth by SSA regulations.
If an individual passes from premature death, their dependents may be eligible for survivors’ insurance benefits from social security. These benefits can help cover funeral costs for deceased workers and provide financial support to survivors in need. For example, widows may be eligible for a one-time lump sum or ongoing monthly payments, depending on their circumstances. Survivor benefits are designed to replace some of the income lost due to the death of a family member. Maternal and child welfare benefits are typically paid out until the surviving spouse or dependent children reach age 18 (or 19 if still in school). In certain cases, survivor benefits may be extended beyond this age if certain conditions are met.
Of course, the most well-known benefit of social security is retirement benefits. When someone retires after paying into social security over the course of their working life, they are eligible to receive regular payments from the government until they reach the age of 70 (or later). The amount you receive depends on how much you paid into social security throughout your working life and how long you were employed before retiring. Should you wait until full retirement age (67 for everyone born after 1960), you will get a larger monthly benefit than if you claimed it earlier. If you wait until after, your retirement benefit will continue to increase yearly until it reaches its maximum amount.
Medicare is a health insurance program administered by the federal government. It provides coverage for people 65 or older and certain disabled individuals. While not officially part of the government’s social security program, there is a link between the two as you become eligible for Medicare once you start receiving social security benefits. You may also be eligible if you’re under 65 but have certain disabilities or diseases.
Managing Social Security
As you can imagine, managing social security for the entire United States population is a big job. Let’s examine the two entities that help manage this program.
Social Security Administration
The Social Security Administration (SSA) is responsible for administering the social security program in the United States. The SSA is a government agency with over 60,000 employees working to ensure seniors receive their social security benefits on time and accurately. The SSA also provides disability payments, retirement planning, and survivor benefits.
The SSA works closely with Congress to ensure the social security program remains updated with current policy changes. They also work with other federal agencies, such as the Department of Labor (DOL), to ensure all applicable laws and regulations are being followed in regard to social security payments and benefits. Additionally, the SSA works with private employers to ensure their employees receive their social security payments correctly.
The SSA also provides educational material about social security to help seniors better understand their rights and responsibilities when filing for benefits or making changes to their accounts. They provide resources such as brochures, videos, webinars, online tools, and more so seniors can make informed decisions regarding managing their social security accounts.
Social Security Advisory Board
The Social is also partially managed by the Social Security Advisory Board or SSAB. This board is an independent entity providing advice to the U.S. government on matters related to the Social Security system. It was created in 1994 and consists of 15 members appointed by the President and confirmed by the Senate.
The social security board has three main goals: to provide objective advice, to identify best practices, and to promote public education and awareness about Social Security. To achieve these goals, the board meets regularly with representatives from various federal agencies such as the Social Security Administration (SSA) and other organizations involved in providing retirement benefits or administering Social Security programs. The board also holds hearings that allow stakeholders to present their views on issues related to Social Security.
Funding Social Security
Social security is funded by payroll taxes, also known as FICA (Federal Insurance Contributions Act) taxes. This money goes into two trust funds—the Old Age and Survivor’s Insurance Trust fund (or old age reserve account) and the Disability Insurance Trust fund. The money in these funds comes from two sources: contributions from employers and employees, as well as income from investments made by the government.
The federal government collects 6.2% of wages from employers and 6.2% from employees. This makes for a combined total of 12.4%. In 2021, this revenue accounts for $980 billion (or roughly 90%) of all social security funding. Self-employed individuals pay both halves for a total contribution of 12.4%. People who earn more than $160,200 (this figure is for 2023 and increases slightly year over year) annually do not have to pay FICA taxes on any income over that amount; however, their benefits will be calculated based on their entire earnings history up until the point when they reach that cap.
The remaining revenue comes from federal income taxes collected on social security benefits received by high earners — those making more than $25,000 per year or couples making more than $32,000 per year from their social security benefits. For individuals making more than $34,000 or couples making more than $44,000 per year from their social security benefits, up to 85 percent of these benefits may be taxable. All told, about 7% of all social security funding comes from these taxes. The remaining 6% comes from interest earned on money held by the social security trust funds and other miscellaneous sources, such as penalties imposed on employers who fail to properly report new hires or delinquent child support payments made via payroll deductions.
These taxes are deposited into two trust funds – one for Old Age Survivors and Disability Insurance (OASDI), which funds retirement benefits; and one for Hospital Insurance (HI), which pays for Medicare expenses such as hospital bills or doctor visits once you reach age 65 or become disabled depending on your situation. The money collected from FICA goes towards funding current beneficiaries’ benefits and any administrative costs associated with running the program, such as salaries of employees who manage the fund or operate call centers where people can call in with questions about their benefits or eligibility requirements, etc. Any remaining funds are transferred into investments, primarily special-issue Treasury bonds, which are issued exclusively to the trust funds at very low-interest rates so they can generate additional income to meet future obligations. Suppose there isn’t enough money in the trust fund to cover benefits. In that case, Congress can pass legislation raising taxes or borrowing from other federal programs like general revenue funds to supplement the trust fund balance so that beneficiaries receive their full benefits without interruption.
The Future of Social Security
The legislative history of the Social Security Act has ensured the social security trust funds are projected to remain solvent through 2035. However, if Congress does not take action before then, there may not be enough money for retirees after 2035 unless changes are made. In other words, without Congress taking action now or sometime over the next 15 years, retirees could see a reduction in benefits—which is why it’s important for people planning on retiring soon or already retired to understand how social security is funded so they can plan accordingly.
With so much uncertainty about the future of this program, it’s natural for people to have questions about how social security will look in years to come. As Congress struggles to keep the program alive, here are some possible changes that may occur in the future before you retire.
Changes in Benefits
The most obvious change is a decrease or increase in benefits received. Currently, recipients receiv an average of $1,550.48 per month. However, as the population ages and fewer people are contributing to the program, there may be a decrease in benefits over time. In addition, individuals born before 1959 may see their benefits reduced due to changes in cost-of-living adjustments (COLAs).
Taxes on Benefits
Only those individuals with high incomes pay taxes on social security benefits. As more and more people rely on government subsidies like social security, Congress may tax these benefits at higher levels than they currently do. While this is speculation, it’s essential to keep an eye on any changes that might affect your retirement plans.
Increase in Retirement Age
Another potential change down the line is an increase in retirement age. You can retire as early as 62 if you’re willing to take a penalty on your social security benefits. If Congress passes legislation raising the retirement age, however, your ability to retire early could be drastically impacted.
Social security benefits play an important part in planning for retirement and ensuring you have sufficient funds during those years. By understanding how it works and what types of benefits are available, retirees can take advantage of this valuable program from the federal government and make sure they stay financially secure during their golden years. If you’re ready to start planning for your future and want to know more about your social security benefits, visit the official social security website for more information or become a member of Planning Made Simple.