WHAT IS SOCIAL SECURITY? Benefits, Taxes, and Retirement Tips

Social stability is the cornerstone of the financial stability of millions of Americans. This includes pensioners, the disabled, and the relatives of employees who have died or become disabled. 61 million Americans receive monthly benefits from Social Security, while around 169 million pay taxes into the system. Every fourth family receives money from Social Security. Read on to learn more about the social security tax, the social security retirement age, and spouse benefits.

The majority of Social Security is a pay-as-you-go system. As a result, beneficiaries receive monthly payments because of the Social Security taxes that today’s workers contribute to the program. Social Security is a pay-as-you-go system, as opposed to company pensions, which are “pre-funded.” In pre-funded retirement plans, money is saved up ahead of time. This is so that it can be paid out to current employees when they retire. To safeguard employees if the firm files for bankruptcy or ceases operations, the private plans must be funded in advance.

The greatest government social insurance program in the US is Social Security. Although the majority of people only associate Social Security with retirement, it also offers a social safety net for Americans who are disabled or in other vulnerable situations.

According to the Center on Budget and Policy Priorities, more than 22 million more Americans would be living in poverty without Social Security, with about 1 million of those being children under the age of 18.

The formula used to calculate Social Security benefits is “average indexed monthly earnings.” This average represents the indexed wages of a worker over the course of 35 years. We use this average to use a formula to determine the primary insurance amount (PIA). The benefits that are paid to an individual are based on the PIA.

The national average wage index determines changes in average wage levels, which the PIA formula takes into account. To demonstrate how retirement benefits are computed, we have created examples.

The types of social security benefits are as follows:

#1. Pension Benefits

Depending on your age when you begin receiving retirement benefits, you will receive a different amount. You will receive 70% of what you are entitled to if you take them at age 62. Depending on the year you were born, full retirement age (FRA), which ranges from 66 to 67, entitles you to a 100% payout. Your payout increases to 124% of your PIA if you wait until you are 70 years old.

#2. Additional Benefits

In some cases, dependents of retirees may be qualified for a monthly benefit. These include adult children who became disabled before the age of 22, as well as minor biological and adopted children. Current and some past spouses who are at least 62 years old can also receive spouse benefits.

The most you can receive as a spouse is 50% of what your spouse is receiving, and only if it exceeds what you are eligible for based on your own earnings history. This is getting more and more uncommon because couples in the Baby Boomer and younger generations have typically put in enough work to be eligible for more benefits on their own than they can as dependent spouses.

#3. Inheritance Benefits

Dependents of Social Security contributors who pass away are eligible for monthly survivor benefits.

These qualifying dependents consist of:

Young children
Children who became crippled as adults before turning 22
Widows over 50 became incapacitated within seven years of their spouse’s death.
Widows over 60
Widows who have children under the age of sixteen
elderly parents who received more than half of their monthly support from the deceased.

Despite the misleading term, these dependents are also qualified for a lump-sum death payment. Since 1955, the lump sum payment has remained at the same $255 amount.

#4. Benefits for Disabilities

People who have a chronic illness or injury that will keep them from working any type of job for the rest of their lives and is expected to last at least a year are eligible for disability benefits.

This requirement is more stringent than many private disability insurance policies. It entitles you to benefits if you can no longer perform your current job duties. If your application for disability benefits is successful, you will get the same payment as you would have at full retirement age.

Your minor children and spouse may also be eligible to receive an auxiliary disability payment based on your earnings history. This is similar to retirement benefits.

You must have had 20 quarters of coverage in the previous 40 quarters. This coverage must be equivalent to working for five out of the previous ten years to be eligible for disability benefits, in addition to the forty-quarters coverage requirement.

The full-benefit retirement age for Social Security is steadily increasing as a result of legislation that Congress passed in 1983. Early social security retirement benefits were initially made available at age 62, with a permanent decrease to 80% of the maximum benefit amount. Historically, the full benefit age was 65. For individuals who were born in 1955, the full benefit age is currently 66 years and 2 months. It will progressively increase to 67 for those who were born in 1960 or later. Early retirement benefits will still be offered up until age 62, but they will be significantly scaled back. Benefits started at age 62 will be decreased to 70% of the entire benefit at the full-benefit age of 67, while social security retirement benefits started at age 65 will be reduced to 86.7 percent of the full benefit.

A financial incentive exists for delaying retirement. Until the latest claiming age of 70, when benefits are 132% of what they would have been at the standard retirement age, a person who reaches full-benefit age in 2017 (66 years and 2 months old) receives a monthly benefit that is 8% higher for each year he or she waits to collect benefits. Benefits claimed at age 70 will be 24 percent more expensive due to the delay (when the full benefit age reaches 67). If a retiree waits until age 70 to begin receiving benefits, the maximum monthly amount in 2017 is $3,538.

The Federal Insurance Contributions Act (FICA) mandates that all employers withhold two levies, including the Social Security tax. The Medicare tax is another. Additional Medicare taxes are mandated by FICA as well, but only for those who make more than a certain threshold.

Self-employed people typically have to pay both income tax and self-employment tax (SE tax). A Social Security and Medicare tax known as the SE tax is mostly applied to people who work for themselves. It is comparable to the Social Security and Medicare taxes that are deducted from most wage employees’ paychecks. Whenever the phrase “self-employment tax” is used, it typically only refers to Social Security and Medicare taxes, not any other taxes (like income taxes).

Most employees, employers, and self-employed individuals are required to pay the Social Security tax. This is a portion of gross wages to support the federal program. The social security tax is waived for several taxpayer categories. Employers are responsible for deducting the appropriate amount of Social Security tax from each employee’s paycheck. They are also responsible for sending it to the federal government on time. There may be severe repercussions for doing otherwise.

The only tax with a wage base cap is social security. The maximum wage for that year that is liable to tax is known as the “wage base limit.” For information on the current maximum wage for social security wages, see “What’s New” in Publication 15.

Employers must keep a record of each employee’s name and SSN exactly as they appear on their social security card. The employee should ask the SSA for an updated card if their name is wrong on the card. Until the employee presents you with the revised social security card bearing the amended name, you should continue to report the employee’s pay under the previous name.

A retired worker’s spouse or ex-spouse is given a monthly payment through Social Security spousal benefits. Up to 50% of the retired worker’s Social Security base retirement or disability payment may be paid to the spouse.

Enrolling your spouse in spousal benefits does not result in a reduction of your retirement benefits if you are a retired employee in this scenario. Instead, in addition to your retirement benefits, your spouse also receives a Social Security benefit.

Making some assumptions is necessary when describing Social Security spousal benefits. When just one spouse of a married or divorced pair is eligible for Social Security retirement or disability benefits, or when one spouse is eligible for a payment that is much bigger than the other, spousal benefits are designed to be most favorable.

Social Security spousal benefits are available to both current and previous spouses of workers who are eligible for retirement or disability benefits.

Once a retired worker’s spouse turns 62, as long as their spouse (the retired worker) is receiving retirement or disability benefits, the spouse becomes eligible for Social Security spousal benefits.

If the marriage lasted 10 years or more and the ex-spouse is single, they are eligible for spousal benefits at age 62. Even if the person they were married to hasn’t started getting retirement benefits, an ex-spouse may start receiving spousal benefits if the divorce took place more than two years ago. A current spouse’s eligibility for benefits is unaffected by spousal benefits paid to an ex-spouse.

Regardless of whether they are eligible for Social Security retirement benefits based on their work history, a retired worker’s current or previous spouse may get spousal benefits. If the spouse is qualified, the amount of any spousal benefits will take their eligible work-based retirement benefits into account.

Events like your spouse’s death might have an impact on your benefits. A Social Security survivor payment equal to the full amount your husband was getting may be available to you. A surviving spouse can receive Social Security benefits based on their age, with benefits becoming available between the ages of retirement.

The surviving spouse could choose to take the larger benefit in place of their own. This could happen if the benefit to the deceased spouse was higher. If you were divorced and If your ex-spouse passed away and you are 60 years of age or older, you may still be eligible for survivor benefits. The marriage must have lasted for at least ten years to be eligible.

The advantages can vary if you remarry after the death of your spouse. You will not be able to get benefits based on the record of your deceased spouse or deceased ex-spouse if you remarry before turning 60 years old.

You’ll have options if you get married at 60 or older. Your deceased spouse’s or ex-spouse’s record may be used to obtain survivor benefits. You could decide to let your benefit increase until you’re 70 years old. You can switch to receiving your benefits at that point if your benefit is more than the survivor benefit.

You must have worked and paid “premiums” into the Social Security system for forty-quarters of your coverage to be eligible for benefits. Throughout your lifetime, this equates to about ten years of work.

The amount needed to obtain a quarter of coverage has gone up over time, yet it is still rather modest. To earn a quarter in 2023, you must make at least $1,640. The maximum earnings each year are four quarters.

This means that even if your Social Security benefit payments are modest, you will be qualified for some type of benefit. This is only if you have earned at least $6,560 per year for at least ten years of your life.

Except for dependent children and spouses, who receive benefits depending on what their parent or spouse paid in, how much you receive from Social Security depends on how much you paid into the system throughout your lifetime.

By creating a My Social Security Account at SSA.gov, you may view a complete summary of your contributions. You can also view your primary insurance amount (PIA) and the potential benefits your family may be eligible for.

According to the SSA’s calculations, since 2010, illegal workers have paid Social Security at least $13 billion a year yet are not entitled to any benefits. People must be U.S. citizens, permanent residents, or lawfully qualified for a Social Security number due to their immigration status, in addition to working and contributing to the system.

The surplus in the trust funds used to pay out retirement, disability, and other Social Security payments will run out by 2034, according to the Social Security Board of Trustees 2023 annual report.

Family members of workers who have paid into Social Security are the only individuals who are legally permitted to receive benefits without doing so. Based on the qualifying worker’s earnings history, nonworking spouses, ex-spouses, and children may qualify for spousal, survivor, or children’s benefits.

Your full retirement age is 66 if you were born between 1943 and 1954, according to the Social Security Administration. A hypothetical $1000 monthly retirement payment would be cut by 25% if you filed a claim at age 62. This leaves you with only $750. A spouse benefit of $500 per month would be cut to $350.

Employers and employees each contribute 6.2 percent of salaries up to the $160,200 taxable limit in 2023, while self-employed individuals contribute 12.4 percent. For OASI and DI, the payroll tax rates are set by law and are applicable to earnings up to a specific threshold.

Summary

One of President Franklin Delano Roosevelt’s most notable accomplishments was the establishment of Social Security in 1935. With roughly 71 million beneficiaries, the program continues to be a mainstay of retirement for the majority of Americans.

Benefit amounts vary based on income and employment history. In addition to retired workers, other people may also be entitled to receive benefits, including surviving spouses, children, parents, disabled workers, and their family members.

The program shouldn’t be relied upon as your only source of retirement income because the average retired worker receives a yearly payout of only approximately $20,000. It’s crucial to add additional retirement funding sources to it. Individual retirement accounts (IRAs), employer-sponsored plans like 401(k) or 403(b), and other savings and investments are some of the alternatives available.