Social Security benefits started way back in 1935, and millions of Americans receive these benefits each month. The program is administered and managed by the Social Security Administration and is the largest program in the Federal budget. Even though many people receive benefits, few know all the details of how Social Security works. From Social Security taxes to Social Security Disability insurance, there are many pieces that work together to form the Social Security system. So, exactly what does Social Security do, and how does it work? Keep reading as we give you all the details.
How Does Social Security Work?
To fully understand how Social Security works, it helps to have a basic understanding of Social Security’s background and history. So, what is Social Security? Social Security started in 1935 because the Federal government saw the need to provide financial assistance to retirees. Upon retirement, many people found that they had not saved enough money to support themselves after they stopped working.
Social Security automatically withholds a 6.2% Social Security tax from your paycheck, and your employer also pays another 6.2% of your earnings in taxes. These taxes are placed into the Social Security Trust Funds. These trust funds earn interest income, and the funds are used to pay benefits to current Social Security recipients. There is a limit to the amount of tax that Social Security can withhold each year. This limit is known as the Social Security tax limit. For 2022, that amount is $147,000. This means that you will not pay the SS tax on any income above $147,000 during the year.
Social Security is a pay-as-you-go system. This means that the taxes being withheld from workers today are used to pay for today’s beneficiaries. The money withheld from your check is not placed into an account to be withdrawn when you retire. Once you reach retirement age, then your benefits will be paid by people who are currently working at the time. This presents some uncertainty about the future of Social Security. It is projected that there will not be enough workers to cover all the future benefits, and Social Security only has enough money in the trust funds to cover all its payments for another 15 years. After this, changes will need to be made.
Upon reaching full retirement age, you start your Social Security benefits and receive a monthly benefit payment. Your benefit amount is calculated based on how much money you earned during your working years. You can choose to start your benefits early, but your payment will be reduced. Similarly, you can delay starting your payments, and your benefit amount will be increased. We will go into more detail on benefit calculation later in this article.
Upon reaching age 65, you are also eligible for Medicare coverage. If you are already receiving Social Security benefits, then you will be automatically enrolled in this coverage. Medicare is also funded through payroll taxes, although the Medicare tax is separate from the Social Security taxes. Most people qualify for Medicare Part A with no premium, although you will need to pay a premium to receive Part B coverage.
Who Is Eligible For Social Security Benefits?
So, who gets Social Security benefits? First, let’s focus on Social Security retirement benefits. Retirees who have enough work credits have eligibility to receive retirement benefits. In most cases, you must have worked for at least ten years to be eligible for benefits. Many people wonder, “When do you get Social Security?” You can start your benefits as early as age 62, although you will see a significant reduction in your monthly amount. The full retirement age is either 66 or 67 for most people.
In addition to the retiree, qualified dependents are also eligible to receive benefits based on the work history of the primary beneficiary. Spousal benefits are one of the most common benefit types that people receive. These benefits allow a qualified spouse to receive 50% of the primary insurance amount. So, if you receive $1,000 per month in benefits, then your spouse could receive $500 per month based on your earnings record. Ex-spouses can also qualify for these benefits in some cases.
Upon the death of the primary beneficiary, the widow or widower can then switch to survivor benefits. Social Security survivor benefits allow a surviving spouse to receive 100% of the amount of the deceased’s benefits. So, in the previous example, the $500 would be increased to $1,000 per month upon the death of the primary earner.
In addition to spouses, children are also eligible for benefits. Children can receive 75% of the parent’s benefit amount. Often, there are multiple children who are eligible for benefits within a family. In that case, there is a family maximum that Social Security allows. That amount is usually capped at around 180% of the primary benefit amount. So, even if there were five eligible children, each one would not receive the full 75%. Each would be prorated so that the entire amount the family received did not exceed the family maximum. Children’s benefits can also extend to grandchildren, adopted children, and step-children.
When it comes to Social Security Disability (SSDI) benefits, you must have a sufficient work history to qualify for benefits. In addition, you must have a disability that has lasted or is expected to last at least 12 months. You will need to provide evidence of your medical condition in the form of medical records and doctors’ evaluations. Your disability must prevent you from performing meaningful, gainful activities. This means that you must be unable to work — not only at your previous job but at any gainful employment.
Applying For Social Security Benefits
So, how do you apply for benefits? The Social Security Administration (SSA) has made it easy to apply for Social Security benefits online. You can use their online services to apply for either retirement benefits or disability benefits. In addition, you can claim benefits for your spouse or dependents by having them complete an application through the online portal.
Since retirement benefits do not require an extensive amount of documentation, your benefits will usually start within a month or two of your application. As part of the application process, you will need to provide your direct deposit banking information so that your monthly payments will be deposited directly into your account. If you do not have an account to use, you can choose to have funds deposited onto a debit card each month. You can use these debit cards to pay for things or withdraw cash from an ATM, although there may be a fee for some services.
Finally, SSDI or Supplemental Security Income (SSI) benefits will take a little longer to get started. This is because you must provide extensive medical records to prove your disability, and many applications are initially denied. You may need to go through the appeals process to get your benefits approved and get your payments started.
With all these types of benefits, you may choose to apply over the phone or in person as well. However, in-person appointments are extremely limited due to the COVID pandemic. Walk-ins are not currently accepted at local Social Security offices. If at all possible, you should apply for your benefits online.
Social Security Benefit Calculation
So, how much does Social Security pay? The easiest way to see how much your benefit is going to be is by registering for a My Social Security account at www.ssa.gov. This account will allow you to see your earnings records and get an estimate of your future benefits. This Social Security statement is a great tool for retirement planning, and you should take advantage of it.
You can also calculate Social Security benefits on your own or simply gain a better understanding of how your benefits are calculated. Retirement benefits are based on the amount of money that you earned during your working years. First, you need to take your highest salary from 35 years of work. If you worked less than 35 years, then you will use zero for the years in which you did not work. These amounts are then indexed to the current year to account for inflation. This allows you to find your Average Indexed Monthly Earnings or AIME.
Once you have your AIME, you calculate your primary insurance amount using the Social Security Administration’s “bend point” system. Your primary insurance amount is based on full retirement benefits, assuming you start them at full retirement age. This amount will then need to be adjusted for early retirement or any delayed retirement credits. This means that your benefit amount will be reduced for starting your Social Security payments early, but your amount will be increased if you delay starting them. Once you reach age 70, you have maxed out your delayed credits, and that is the maximum that Social Security will pay you. Once you have your benefit amount, you will receive this payout each month for the rest of your life, with one exception. SSA makes annual cost-of-living adjustments to the payment amounts to account for inflation. If the consumer price index shows an increase in prices, then your benefits will be adjusted accordingly.
Social Security Disability (SSDI) Benefits
Applying for SSDI benefits is similar to applying for retirement benefits. The main difference is that you will need to provide documentation that proves your disability. Just like retirement benefits, you must have a sufficient work history to qualify for the program. Depending on your age, you must generally have worked 5-10 years to qualify. In addition, you must have properly paid your Social Security taxes during this time. If you worked but did not pay taxes or participate in the SSDI program, then you will not be eligible to receive benefits. People who worked part-time might be able to qualify, but they will need to have worked longer to accrue the required number of work credits. If you are self-employed, it is extremely important to properly pay your taxes to qualify for these benefits in the future if you need them.
The payments for SSDI are calculated much like retirement benefits. They are based on the amount that you earned prior to your disability. In most cases, SSDI payments are lower than retirement payments. This is because retirees worked longer and paid more money into the system than someone who became disabled before retirement age.
Are Social Security Benefits Taxable?
So, do you have to pay income taxes on your Social Security benefits? The answer really depends on how much total retirement income you have. The average Social Security check in 2022 is $1,657. American workers who rely solely on Social Security for their only source of income will not have to pay income taxes on it. As long as your income is below $25,000, then you will not owe taxes on your Social Security payments. If your income is between $25,000 and $34,000, then you will be required to pay taxes on 50% of your benefits. Finally, if your income is above $34,000, then you will be taxed on 85% of your benefits. These amounts increase for a married couple filing jointly.
When filing your tax return, remember that income is not only money earned from working a job. This could also be income from an IRA, 401k, or other retirement accounts. You should always consult a professional for help with your personal finances and tax questions. They can assist you with strategies to help maximize your income and minimize the taxes that will be due.
The Bottom Line
Social Security payments help millions of Americans cover expenses during retirement. The amount you receive is based on your lifetime earnings, and applying for benefits is easy. If you become disabled before retirement age, you may be able to qualify for Social Security disability benefits. Don’t forget about spousal benefits or other family benefits, as you might be losing out on money if you are not receiving those.
Frequently Asked Questions
How many years do you have to work to get maximum Social Security?
Generally, you need to work full-time for ten years to qualify for retirement benefits. However, if you want to receive the maximum amount possible, then you will need to work for at least 35 years. Your monthly payment is based on your earnings history. The calculation uses your 35 highest years of earnings. If you worked less than 35 years, then you will have to use zero in your calculation for the years you did not work.
What is the average Social Security benefit per month?
The average Social Security retirement benefit in 2022 is $1,657. This is nearly a 6% increase from the payments in 2021. The COLA for 2022 was the highest adjustment in decades. When it comes to SSDI, the average payment in 2022 is $1,358. As you can see, these payments are a little lower than retirement payments.
How does Social Security work for people who work part-time or as a freelancer?
If you work as a freelancer, then you must appropriately claim your income and pay taxes each year. Make sure that you pay the appropriate amount of Social Security tax, and you will be eligible for benefits just like a worker who is a regular employee. If you work part-time, the same message applies. You will also need to work longer to accrue the appropriate number of work credits to be eligible for benefits.
When do Social Security benefits stop?
Social Security retirement benefits last for your lifetime, so they do not stop until death. Even upon death, qualifying family members will be able to receive survivor benefits based on your earnings record. Social Security disability benefits, on the other hand, will stop once you recover from your disability. If your disability does not improve, then those benefits will continue until you qualify for retirement benefits. If you never qualify for retirement benefits, then you will continue to receive SSDI payments.