Social Security 101

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How Does Social Security Work?

A topic we get asked from folks in San Antonio, Texas and beyond revolves around Social Security. But what exactly is it? Well simply put, its a financial safety net for older Americans, and was established in 1935 by the Social Security Act. Before that, support for the elderly wasn’t a federal concern – it mostly fell to states, towns and of course, families.

The program is based on contributions that workers make into the system. While you’re employed, you pay into Social Security; you receive benefits later on, when it’s your turn to retire. Contributions take the form of the Federal Insurance Contributions Act (FICA) taxes that are withheld from most paychecks.

Medicare benefits are commonly considered part of Social Security benefits, although technically Medicare is a separate program. Medicare contributions are withheld from your paycheck in much the same way as your Social Security contributions; FICA taxes support Social Security and Medicare.

See below for a brief history of Social Security⇓

Does Social Security Cover Retirees Only?

No, as you just learned in the video above, disability and survivor benefits are included in the program. Contributions you make provide insurance in the event you become disabled; they also may cover your adult child if he or she becomes disabled before age 22. And, assuming you worked enough to qualify for retirement benefits, your spouse and children can receive  Social Security survivor benefits after you die.

Am I Eligible For Social Security?

Yes, so long as you’ve worked for at least 10 years (for those born in 1929 or later). Ten years is the minimum amount of time required to earn the mandatory 40 credits. Even if you have accumulated your 40 credits, however, you can’t start getting payouts until you’re 62 or older.

To learn more about how you earn credits, check out the latest 2020 guide from the Social Security Administration here.

How Do I Apply For Social Security Benefits?

A few ways. The easiest and most convenient way will be online, but you can also call Social Security at 1-800-772-1213 or visit your local Social Security office whether here in San Antonio, Texas or elsewhere.

See the helpful video below from the Social Security Administration on how to apply online ⇓

How Do I Know I’m Getting Credit For The Years Worked?

The Social Security Administration (SSA) mails out a summary of your benefits each year, about three months before your birthday. You can also request one by calling the SSA (1-800-772-1213) and asking for a form SSA-7004, or by downloading this form.

Your statement provides a record of your earnings history, the number of credits you’ve accumulated to date, and an estimate of the retirement benefits available if you wait until full retirement age. Because your benefits are dependent on your lifetime earnings, be sure to check the statement closely to make sure all the information is accurate.

What About My Eligibility For Medicare?

You are eligible for Medicare benefits once you reach 65, provided you have accumulated the necessary 40 credits.

When Can I Start Getting Payments?

The earliest you can start collecting Social Security retirement benefits is age 62; the latest is age 70. When you start collecting payouts in that eight-year span is up to you.

Your actual retirement date doesn’t matter. You can retire before 62 if you like, and you can retire after 70. If you retire before 62, though, you’ll have to make sure you have enough money set aside to support you until Social Security payments kick in.

Why Should I Wait Past Age 62?

This is a question that many folks wonder about, and we get asked this here in San Antonio, Texas quite a bit. The fact of the matter is the longer you wait to start getting payments, the bigger the payments will be.
This gets complicated – hang in there. The government makes you wait until “full retirement age” in order to start collecting the full retirement payout that you’ve earned. So what’s full retirement age? Good question. It used to be 65, but Congress voted in 1983 to raise it to 67 for everyone born in 1960 or later. For those workers born between 1938 and 1960, the full retirement age varies depending on your birth year. To find out yours, refer to the Social Security online retirement planner.

How Much Will My Payouts Be If I Collect At Age 62?

It depends on when you were born. For example, if you were born between 1943 and 1954, your payouts will be reduced 25% if you start receiving benefits at age 62. That reduction is permanent – that is, the 25% reduction applies not only to the money you collect between age 62 and 67, but all the money you’ll collect for the rest of your life. According to a recent article from “The Motley Fool”, the average Social Security benefit at age 62 is $1,130.16 a month in 2020, or roughly $13,561.92 a year. This is only $800 above the federal poverty line for a one-person household in 2020, and also well below the average retired-worker benefit of $1,514.13 a month in 2020. To figure out the reductions based on your age, check out the online table published by the Social Security Administration.

How Much Will My Payments Be If I Wait Until Age 70?

Your benefits payment goes up 8% for every year after full retirement age that you delay collecting payments. Until you turn 70, of course – that’s the longest you can delay. Currently, one would receive 132% of the monthly benefit because you delayed getting benefits for 48 months. There’s no benefit to delaying past age 70; you’d just be throwing money away.

Can I Start Collecting Benefits If I’m Still Working?

Sure. But collecting Social Security when you’re still working full-time is usually not a great move. That’s because if you decide to start collecting benefits when you’re not yet retired, the government will cut your payouts according to a formula based on how much you earn.

What Is The Best Age To Start Getting Payouts?

It depends on how long you’ll live. Since none of us has that particular crystal ball handy, you’ll have to assess the best age based on how long you think you’ll be around. If you think you’ll die relatively early – sorry, this gets morbid – you’ll obviously want to start getting payouts as soon as possible (right at age 62). However, if your grandparents lived to 100 and you think you probably will too, your best strategy is to put off taking payments until you turn 70.
If you live past a certain break-even date, waiting to receive your full benefit amount provides more money in the long run than if you retire early and take the reduced payment. If you were to die before that break-even point, however, you would have been better off going with the early (albeit reduced) benefits. See here on how to perform a break even analysis for your Social Security benefits.

How Big Will My Payouts Be?

The annual benefits statement that the Social Security Administration sends you gives an estimate of how much you’ll get if you wait until full retirement age. You can also estimate your benefits by using the SSA’s online calculators and/or worksheet. The younger you are, the less accurate your estimate will be, because your as-yet-unknown future earnings will play an important role in all of this.

What If I Want To Work Part-Time?

That’s a crucial question we hear from folks locally in San Antonio, Texas and beyond. When you earn some income and you haven’t yet reached what Social Security considers full retirement age, your payouts will typically be smaller during the period that you’re working.

Notably, if you start receiving your Social Security payouts early, but you’re still working and earning more than $18,960 (the annual limit for 2021), your benefit is reduced by $1 for every $2 above that limit. However, Social Security will make an adjustment when you reach full retirement age to reflect the additional income you earned.

In the last year before reaching your full retirement age, the earnings limit rises to $50,520 (for 2021) and your benefits are reduced $1 for every $3 above that limit. As of the month you reach full retirement age, your benefits are not affected by any earnings limits.

Will My Spouse And Kids Receive Benefits When I Die?

Survivor benefits are available for certain family members as long as you accumulated the 40 credits before dying.

Your children may qualify for 75% of your Social Security benefits based on your record of contributions, up until they turn 18 years old (or 19, in the case of a child still in elementary or secondary school). As for your spouse, he or she can receive a reduced benefit (71-99%) as early as age 60, of the worker’s basic benefit amount. Those benefits will continue indefinitely unless your spouse remarries.

Benefits for your spouse and kids are also limited by a family maximum, which is the maximum amount that can be paid from your earnings record. The limit varies between 150% and 180% of the deceased worker’s benefit amount. For more details on survivor benefits, check out the Social Security Administration’s website or check out the latest survivor benefits guide from Social Security here.

How Do Social Security Disability Payments Work?

Your eligibility for these benefits works on the same credit system as for retirement payouts, but there are slightly different rules about who is eligible. Eligibility for disability benefits depends on how old you are when you become disabled, as well as the nature of your disability. You can’t qualify for disability benefits if you are able to work and earn more than $1,310 a month (in 2021). Your disability also must be considered severe enough to affect your everyday work-related activities. Check out the online version of the process the Social Security Administration (SSA) uses to decide whether or not you qualify as disabled.

Disability benefit payments start only after you have been disabled for five months, and they continue until your condition has improved enough that you can start working again. To estimate your disability payments, check out the online benefits calculator offered by the SSA.

If your adult child is disabled before the age of 22, he or she can qualify for benefits based on your earnings record. Anyone who becomes disabled after turning 22 needs to pass the recent work test, a measure of how many years of work you have performed depending on your age.

If one is disabled and receiving Social Security disability benefits for 24 months, they would be eligible for Medicare coverage. Here in San Antonio, Texas and beyond, we meet folks who are well under 65 years old (traditional age to qualify for Medicare), and because they met this waiting period (24 months), we are able to assist them with Medicare coverage, such as a Medicare Advantage plan.

Will I Get Taxed On My Social Security Payouts?

Maybe, depending on how much other income (such as self-employment income, pension or IRA distributions) you receive in retirement.

Your benefits generally are not taxable if half of your benefits, plus all your other income, is less than $25,000 if you are single or $32,000 if you are married filing jointly.

If your income as a single individual is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits, while married folks earning between $32,000 and $44,000 also run into the same scenario of potentially being taxed up to 50% of your benefits.

Lastly, if half of your benefits, plus all of your other income, is more than $34,000 (for singles) or $44,000 (married filing jointly), then up to 85% of your benefits are subject to income tax.

Will Social Security Still Exist When I Retire?

Ah, the question everyone loves to debate. It’s true that Social Security will soon start paying out more benefits than it receives in contributions, as the bulk of the baby-boom generation phases into retirement.

According to the latest 2020 annual report of the Social Security Board of Trustees, there is enough money saved to pay benefits at the currently scheduled amounts until 2035. The Social Security Administration admits on it’s website that benefits will likely be reduced after that, barring changes that improve the financial strength of the system.

Social Security’s cash flow has been negative since 2010, meaning that the program has paid out more than it takes in via taxes. Right now it is covering that shortfall with interest on its treasuries, but that can’t continue indefinitely. While it’s unlikely Congress will do away with Social Security, to close the gap it’s going to have to scale back benefits for future recipients, increase taxes, or both.

See below for a recap⇓

How Does Social Security Fit Into My Retirement Plan?

If you’re 55 or older now, you’ll probably get the full benefit you’re supposed to. Most of the recent discussions about reforming Social Security doesn’t propose to change the benefits of current retirees or near-retirees. If you’re younger, that’s a different story, as you could face a 23% reduction in your payouts after 2035, with the likelihood of further reductions each year thereafter.

It’s likely that political leaders will try to make changes in the system to improve its long-term financial health, but such changes are impossible to predict. And even in the best possible scenario, Social Security almost certainly won’t pay you enough to live on in retirement.

So if you’re under 55 and want to be conservative, don’t factor in Social Security when making your calculations about how much to save and invest for retirement. Set aside as much of your own money as you can in retirement savings accounts and invest it wisely. Bottom line: Your financial security in retirement is your own responsibility.

In the short video below, you will learn various tricks and tips for getting the most out of your Social Security benefits, such as opting for spousal benefits. Such a benefit might yield you and your family an additional $50,000 in benefits.

Sources: Wikipedia, The History Channel,  The Social Security Administration, The Motley Fool, Dummies.com, USA Today, Fool.com, PBS News Hour