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How Does Social Security Work? | Complete Guide Inside

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Millions of Americans receive Social Security benefits, although many people do not know how the Social Security system works. While Social Security retirement benefits are the most common type of benefit, there are also other benefits available through Social Security. Even if you are not yet approaching retirement age, it is helpful to understand how Social Security works so that you can plan for the future.

Keep reading as we give you all the details about Social Security, including how the system is funded, the types of benefits available, who is eligible for Social Security, and how to apply for benefits. This comprehensive guide will tell you everything you need to know about Social Security benefits.


How Does Social Security Work?

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Social Security began in 1935 because many retirees did not have enough money to pay for living expenses. The Social Security Act also included unemployment insurance and aid to dependent children. Today, Social Security includes disability benefits and medical coverage through Medicare. The program is administered through the Social Security Administration (SSA), and Social Security is the largest line item in the Federal budget each year. At a high level, here is how the Social Security program works.

During your working years, you are required to pay Social Security taxes on your earnings. You must contribute 6.2% of your earnings, up to the Social Security earnings maximum. In addition, your employer also contributes 6.2% of your earnings. Those who are self-employed will need to pay the full 12.4% on their own. These taxes are placed into the Social Security trust funds, and those funds will be used to pay benefits to Social Security recipients.

The amount of your retirement benefit is calculated based on your average earnings during your working years. If you wait until full retirement age to start your benefits, you will receive your full primary insurance amount. Starting your benefits early will reduce benefits, but you can also increase your benefits by waiting past retirement age. Once you start your benefits, you will receive the same benefit for life, except for an annual cost-of-living adjustment. When you die, a qualifying spouse can receive survivor benefits for the rest of their life.

In addition to retirement benefits, the Social Security Administration also pays Social Security disability benefits to those who are unable to work due to a disability. You must generally have worked for at least ten years to be eligible for SSDI payments. Those without a work history will not be eligible to receive SSDI benefits, although they might qualify for SSI payments.


Social Security Eligibility & How To Apply

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So, who is eligible to receive Social Security, and how do you apply? First, you should understand that you only qualify for Social Security if you have paid Social Security taxes during your working years. You must have enough work credits to qualify for the program. In most cases, you will need 40 work credits to qualify, and you can earn up to four credits per year. As long as you have enough work credits, you first become eligible for Social Security retirement benefits at age 62.

If your spouse qualifies for benefits, you might also qualify for Social Security spousal benefits, even if you don’t have your own earnings record. These benefits will be discussed in more detail in the next section. When it comes to disability benefits, you will also need a sufficient work history. If you become disabled, you can qualify for benefits if you have missed work or are expected to miss work for 24 months.

The easiest way to apply for Social Security benefits is online through your My Social Security account at Applying for benefits is easy, and it takes just a few minutes through the online system. If you do not have access to the online system, you can also apply over the phone or by visiting your local Social Security office. However, online applications are preferred in most cases.

Once you reach age 65, you also become eligible for Medicare. If you are already receiving Social Security benefits at that time, you will be automatically enrolled in Medicare. If you have not started your retirement benefits yet, you will need to apply for Medicare. This application can also be completed online through your My Social Security account, over the phone, or in person at a local Social Security office.


Social Security Benefit Amounts

Now that you know how Social Security works and who is eligible, you are likely wondering how much your Social Security check will be. Here is how much you can expect to receive, depending on the type of benefit for which you are eligible.


— Social Security Retirement Benefits

Retirement benefits are calculated based on your average indexed monthly earnings for your highest 35 years of earnings. The more money you make while working, the more money you will get from Social Security. The average Social Security beneficiary receives about $1,670 per month in retirement benefits. You can quickly see that this is not a huge monthly benefit. If you wait until full retirement age, you will receive your full retirement benefit. The maximum amount that you will receive from Social Security in 2022 is $3,345 at full retirement age or up to $4,194 if you wait until age 70 to start your benefits.


— Spousal Benefits & Survivor Benefits

If you qualify for spousal benefits, you can expect to receive 50% of the primary earner’s benefit amount. For example, if your spouse receives $2,000 per month in retirement benefits, you can receive up to $1,000 per month in spousal benefits. You can qualify for spousal benefits even if you do not have your own earnings record. Upon the death of the primary earner, the surviving spouse can switch to survivor benefits. These benefits are 100% of the primary earner’s benefit amount. This means that, in the same example above, the surviving spouse would start receiving $2,000 per month upon switching to survivor benefits.


— Social Security Disability Benefits

Similar to Social Security retirement benefits, Social Security disability benefits are calculated based on your earnings while working. The average SSDI payment in 2022 is about $1,360 per month. Even though this is the average amount, roughly 65% of benefit recipients receive less than this. Disability insurance payments are often the only source of income that some families have. Although dependent children can also receive benefits if a parent is on disability, some families struggle financially to survive on these benefit payments alone.


— Supplemental Security Income (SSI) Benefits

So, what about U.S. citizens that don’t have a work history? SSI benefits are designed to help low-income individuals who are older or who are unable to work due to a disability. No work history is required to qualify for SSI benefits, but there must be a financial need. An individual can receive $841 per month in SSI benefits from the federal government. In addition, those on SSI often qualify for other low-income assistance programs, such as Medicaid, housing assistance, food stamps, and others.


Tips For Maximizing Your Social Security Payments

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You might be wondering how you can maximize your retirement income from Social Security. There are a few things you can do to ensure that you get the maximum benefit possible from the Social Security Administration. First, you should try to maximize your earnings during your working years. The higher your lifetime earnings, the more money you will get during your retirement years. Make sure that you pay Social Security taxes on all your earnings, especially any self-employment earnings. Not only is it illegal to avoid paying those taxes during your many years of work, but it could also prevent you from receiving the maximum Social Security payment upon retirement.

Next, you should wait as long as possible to start your retirement benefits. Taking an early retirement and starting your benefits early will significantly reduce your monthly payments, and you should remember that the reduction lasts for the rest of your life. However, waiting past full retirement age will allow you to accrue delayed retirement credits and increase your payment amounts. Your delayed retirement credits will reach their max at age 70, so you should wait until then to start your benefit payments if possible.

Finally, try and take advantage of any Social Security loopholes that might exist to maximize your spousal benefits. While most of the loopholes have been closed by recent legislation, there are still some things you can do to ensure you get the most benefit possible. Finally, make sure you engage a financial planner to assist you with retirement planning if necessary. Even though you might maximize your Social Security benefits, those benefits might still not be enough to support you and your family members during retirement. You might also need to consider saving for retirement through other means, such as an IRA or 401k account.


Is Social Security Taxable?

Many people wonder, “Are my Social Security benefits taxable?” The answer depends on your total income filed on your tax returns. To calculate your total combined income, you will need to add your adjusted gross income plus any nontaxable interest plus half of your Social Security benefits. This could include income from annuities or other retirement accounts. If your combined income is less than $25,000, you will not owe any income tax on your Social Security benefits.

For those with a combined income of between $25,000 and $34,000, half of their Social Security benefits will be taxed. Individuals with a combined income of over $34,000 will have 85% of their benefits taxed. No more than 85% of Social Security benefits will ever be taxed. For couples, the amounts rise to $32,000 and $44,000.

For people who have no other income besides Social Security, their benefits will likely not be taxed. Since the average Social Security payment is only about $1,670 per month, those people would only have a total income of about $19,000 per year. If you earn an average wage throughout your working career, you can expect to receive the average benefit amount each month.


The Future Of Social Security

The future of Social Security is a hot topic in the news and with many politicians. Likewise, many people nearing retirement age wonder whether Social Security will still exist when they get ready to retire. While no one knows for sure what the future of Social Security holds, a few things are for sure. First, the Social Security trust funds likely have enough money to pay current beneficiaries through 2034. Beyond that, the trust funds only have enough money to fund about 79% of Social Security payments.

So, what will happen to Social Security when it can no longer fund its obligations? No one knows for sure, but many possible scenarios have been discussed. One thing is for sure—changes will be necessary to keep the Social Security program functioning as it is today.

First, some people think that Social Security taxes might have to be raised. Instead of the 6.2% tax, it might need to be raised to collect more money for the trust funds. More money in the trust funds would allow Social Security to continue paying current beneficiaries without a reduction in benefits.

Another option that has been discussed is raising the full retirement age. This is not as likely a scenario since the retirement age has already been raised before. While no one knows exactly which scenario will end up happening, Congress will need to take action sooner rather than later. Politicians will need to come to an agreement on the best course of action, and they will need to act before Social Security runs out of money. In addition to changes to Social Security, changes to Medicare benefits might also be necessary.


The Bottom Line

Millions of Americans rely on Social Security during retirement, although many people don’t know exactly how Social Security works. To qualify for Social Security, you will need a sufficient work history. Generally, this means that you must have worked and paid Social Security taxes for at least ten years. Your Social Security benefit amount will be based on your earnings record. The more money you make during your working years, the higher your monthly benefit will be.

Starting your Social Security benefits early will lead to a reduction in your payment amount, and waiting past retirement age to start your benefits will lead to an increased payment each month. Applying for benefits is easy. Once you are ready to start your benefits, you simply need to submit your application online through a My Social Security account, over the phone, or at your local Social Security office.


Frequently Asked Questions


How many years do you have to work to get maximum Social Security?

To get maximum Social Security, you will need to work for at least 35 years. Social Security benefit payments are based on the highest 35 years of earnings from your work history. If you worked less than 35 years, then your calculation will include a zero for each year that you did not work. For instance, if you only worked for 30 years, your Social Security calculation will include zero earnings for five years. Receiving the maximum amount of Social Security will require that you earn at least the amount of the Social Security earnings limit each year for 35 years.


How is it determined how much Social Security you get?

Your Social Security payments are calculated based on your earnings history. The Social Security Administration will use your highest 35 years of earnings to determine your monthly benefit amount. Your earnings will be indexed to the current year based on the index table published by the SSA. After indexing, the average amount will be calculated to arrive at your average indexed monthly earnings (AIME). Once your AIME is calculated, Social Security will adjust the amount based on bend points and your retirement age to arrive at your monthly benefit amount.


What is the maximum amount of income you can earn and still qualify for Social Security?

As long as you are at full retirement age, there is no limit to how much you can earn and still qualify for Social Security. However, if you start your retirement benefits early, your benefits could be reduced as a result of other income. Even if your benefits are reduced due to other income, that reduction will no longer apply once you reach full retirement age.


What is the average Social Security payment?

The Social Security Administration releases data about the average Social Security payment amounts each month. In August of 2022, the average monthly payment to retired workers was $1,672. The average survivor benefit during the same time was $1,330. Finally, the average payment to disabled workers for August 2022 was $1,362. As you can see, these amounts are not extremely high, and many people receive less than the average. When planning for retirement, it is important to consider other sources of income besides Social Security. Likewise, it is important to have additional insurance in the event of disability besides SSDI coverage.

Elliot Marks

Elliot Marks

Elliot has spent years providing clear and concise information to help navigate the complex nuances of social security and many other government services in the United States. Elliot has a passion for helping those in need of these services to be able to find timely access to news and information that is relevant and helpful to their daily lives.