What is Social Security?
Social Security is the nation’s federally-funded safety net program for retired or disabled persons and their families and survivors. Workers pay taxes on their current wages and self-employment earnings to the Social Security Administration (SSA) to qualify for future Retirement, Survivors, Disability and Hospital Insurance benefits.
Beneficiaries and potentially their dependent family members or survivors receive a monthly cash payment. The amount of the payment is based on the worker’s lifetime earnings. SSA also fully or partially administers other programs like Medicare and Supplemental Security Income.
What are Social Security benefits?
Social Security benefits are broken down into several categories.
- Retirement benefits for individuals aged 62 and older;
- Disability benefits for individuals aged 18-66 unable to work due to a medical condition;
- Auxiliary family benefits for the spouse and children of a retired or disabled worker; and
- Survivor family benefits for the spouse, children, and potentially parents of a deceased worker.
Hospital benefits, also known as Medicare, are sometimes also included colloquially in Social Security benefits as the taxation and eligibility rules are almost identical.
Who is eligible for Social Security?
To qualify for benefits individuals must earn Quarters of Coverage by paying Social Security taxes. Workers earn a Quarter of Coverage for each $1,510.00 in taxable earnings, and can earn up to four Quarters per year. Depending on the type of benefit, workers need to earn between 6-40 Quarters.
Workers become eligible for Social Security if they become disabled while still working or within a certain time frame after stopping work, or once they reach a specified age. The dependent family members of a retired or disabled person will also be eligible for additional benefits. The dependent survivors of a deceased worker may be entitled to benefits upon the worker’s death, and the dependent’s own age or disability.
Dependent family members includes minor children, high school students over 18, permanently disabled children and spouses, including divorced spouses. Survivors includes widow(er)s and divorced spouses, minor children, high school students over 18, permanently disabled children, and some dependent parents over 62.
What are Social Security taxes?
Social Security benefits are funded through the Old-Age, Survivors, and Disability Insurance (OASDI) tax. Together with Hospital Insurance (Medicare) tax, they are also sometimes known as the FICA or SECA tax (from the Federal Insurance Contributions Act and Self-Employed Contributions Act which authorized their collection).
Workers paying Social Security taxes earn up to four Quarters of Coverage per year based on those wages or self-employment earnings. Social Security taxes are only paid on the first $147,000 in annual wages in 2022 (Medicare taxes have no limit). These earnings are referred to as being ‘covered’.
Not all workers pay Social Security taxes. Employees of certain federal, state, local or tribal governments or international organizations may not be subject to Social Security and may have an alternate retirement or disability pension program. Certain religious organizations and their members may not pay Social Security taxes based on a philosophical objection. These earnings are ‘non-covered’. Some industries were also not included in Social Security initially prior to various amendments to the Social Security Act.
How much are Social Security benefits?
Social Security benefit amounts are based on the total amount of lifetime Social Security taxes paid. Each year’s earnings will be indexed for inflation and the highest years averaged through one of several formulas to determine the specific amount. Disability benefits may be based on as little as two years of earnings, while retirement benefits can use up to 35 years of earnings. The specific formula used to calculate benefits depends on the worker’s date of birth, and the law in effect at the time of their retirement, disability or death.
The full amount of the benefits is paid at Full Retirement Age or upon disability. The Full Retirement Age of individuals born before 1938 in 65 and for those born after 1960 is 67. It increases incrementally for those born between 1939-1959 (for specific years see this chart). If retirement benefits are claimed before Full Retirement Age, the monthly amount is reduced. The total lifetime benefits are not reduced, but the monthly payout will be correspondingly reduced to account for the additional time period in which benefits are paid. The reduction is a percentage (less than 1%) for every month that benefits are claimed prior to reaching Full Retirement Age.
Retirement benefits may increase an additional 8% per year between Full Retirement Age and age 70 if a worker is eligible for but does not receive the benefit. This additional increase may also carry over to widow(er)’s benefits.
The amount of Social Security benefits is recalculated annually through a cost-of-living adjustment (COLA). This is determined from the Consumer Price Index (for Urban Wage-Earners and Clerical Workers). If there is no inflation under the CPI or negative inflation, there will not be a COLA.
How do I calculate my Social Security benefits?
Social Security benefits can be calculated by a variety of different methods, depending on when a person started paying into the Social Security system, when he/she reached retirement age and the maximum average income an individual received. The Social Security Administration maintains a benefit calculator in order to estimate specific payouts.
The Social Security Administration has recently launched an expanded tool to help Americans manage their Social Security benefits. The ‘mySocialSecurity’ system allows both current beneficiaries and future Social Security recipients to create accounts that will track their Social Security contributions, payouts (including expected payouts) and eligibility. This service is also available to individuals receiving Supplemental Security Income and Social Security Disability Insurance. Any individual 18 years of age and older, with a US Social Security number, mailing address and e-mail address can sign-up for a ‘mySocialSecurity’ account. Simply go to the mySocialSecurity page and register for an account to get started.