How Does Social Security Work? 12 Common Questions Answered

You in all probability know that saving and investing are important to retirement planning. However simply as essential to the equation: Social Safety planning.

It’s unattainable to overstate the significance of Social Safety to retirees. The reality is, People aren’t saving or investing sufficient for a safe retirement. With out Social Safety, roughly 4 out of 10 folks age 65 and older would have incomes under the poverty line. That very same group depends on Social Safety for about one-third of their revenue on common.

However there’s loads of confusion surrounding Social Safety.

If you happen to’re approaching retirement, you’re in all probability doing the maths: Do you have to declare your advantages the second you flip 62, or wait so long as potential?

And for those who’re in your 20s or 30s, you might fear whether or not Social Safety will spend its approach out of existence lengthy earlier than you get a cent.

Right here’s a information to how Social Safety works — and why regardless of how previous you might be, you don’t have to fret about whether or not it is going to be round for you.

How Does Social Safety Work? 12 Questions Answered

Social Safety isn’t only a retirement program. It additionally offers for people who find themselves disabled, the survivors of employees who’ve died and the dependents of recipients.

Nonetheless, as a result of retirees are by far the most important group of individuals to obtain advantages, we’re specializing in Social Safety retirement advantages on this article.

1. How Are Social Safety Advantages Calculated?

Your Social Safety advantages depend upon three main components: your work historical past, your 35 highest-earning years and your age whenever you begin receiving advantages. Value of dwelling changes, or COLAs, are one other issue, however their affect is comparatively minimal.

Your work historical past: You earn one Social Safety credit score for each $1,510 you earn in 2022, however you possibly can’t earn greater than 4 credit a yr. So long as you earn $6,040 in 2022, you’ll obtain the utmost of 4 credit for the yr. When you’ve earned 40 credit, you’ll be eligible for advantages when you’re retirement age. That implies that after 10 years of working full time, you’re thought-about “absolutely insured” for retirement advantages.

Your 35 highest-earning years: Social Safety calculates your advantages primarily based on the 35 years you earned essentially the most cash — however solely as much as a restrict, which is $147,000 in 2022. (That’s up from $142,800 in 2021.) If you happen to earn $1 million, even $1 billion in 2022? For Social Safety’s functions, it’s the identical as incomes $147,000. That’s as a result of any cash you earn above $147,000 isn’t topic to Social Safety taxes, which we’ll get to shortly.

If you happen to work lower than 35 years, they’ll nonetheless base your advantages on 35 years of earnings, however they’ll use $0 to your non-working years.

So for those who began working at 20 and retired at 50, they’d use your 30 years of wages plus 5 years of $0. These zeroes may significantly drag down your month-to-month advantages for those who retire early or have been out of the workforce for an extended stretch.

Then, your wages are adjusted for inflation to calculate what Social Safety calls your Common Listed Month-to-month Earnings (AIME).

If you declare advantages: Your AIME is used to calculate your month-to-month profit whenever you attain full retirement age, which is the age at which you qualify for full advantages. It’s 67 for anybody born in 1960 or later and 66 years and alter for most individuals born earlier.

You possibly can take advantages as early as 62 — however you’ll obtain a diminished quantity. Or you possibly can delay till you’re age 70 in alternate for larger month-to-month checks.

• If you happen to take advantages early: Your Social Safety checks are diminished by five-ninths of 1% for each month you begin getting advantages earlier than your full retirement age. That provides as much as a 6.66% lifetime discount in month-to-month advantages for yearly of early advantages.

• If you happen to wait till you’re previous your full retirement age to say: When you attain full retirement age, Social Safety thanks you with an additional 8% for yearly you maintain off till you attain age 70, when advantages cap out.

The reward for ready till 70: a month-to-month profit that’s 76% larger in comparison with for those who’d began claiming at 62, based on the Social Safety Administration.

COLAs: Social Safety recipients obtain cost-of-living changes primarily based on inflation. COLAs are introduced in October for the next yr.

For 2022, the COLA was 5.9%, the most important Social Safety increase since 1982. This yr’s COLA gave the common retirement examine a $92 month-to-month enhance and added $76 to the common month-to-month incapacity examine.

2. Can You Take Advantages Based mostly on Your Partner’s Report?

Sure. You possibly can acquire advantages primarily based on the work file of your present partner, a deceased partner and even an ex-spouse in some circumstances. Nonetheless, you possibly can’t declare for each your self and a present or former partner. It’s important to determine whether or not you’ll get extra primarily based on their work file or your personal.

You possibly can acquire in your present partner’s file if:

• You’ve been married for not less than a yr.
• Your partner is already taking their advantages.
• You’re not less than 62, otherwise you’re caring for a kid who’s below 16 or disabled.

Profit quantity: 32.5% to 50% of your partner’s profit.

You possibly can acquire on the file of a partner who died if:

• You’re not less than 60 otherwise you’re age 50 and disabled. You can even qualify for those who’re caring for the deceased partner’s youngster.
• You have been married for not less than 9 months, until the loss of life was unintended or occurred within the line of navy obligation.
• You didn’t remarry earlier than age 60, or age 50 for those who’re disabled. If you happen to remarry later, you possibly can nonetheless acquire in your late partner’s file.

Profit quantity: 71.5% to 100% of your late partner’s profit.

You possibly can acquire in your ex-spouse’s file if:

• You have been married for not less than 10 years and haven’t remarried.
• You’ve been divorced for not less than two years.
• You’re not less than 62.
• Your former partner is eligible for advantages, although you possibly can nonetheless declare primarily based on their file even when they haven’t began taking advantages but.

Profit quantity: 32.5% to 50% of your ex-spouse’s profit.

Be aware that for those who’re claiming on the file of a partner you’re divorced from, their month-to-month advantages received’t be diminished consequently. Additionally, in the event that they’ve been married a number of occasions, there’s no have to race the opposite exes to the Social Safety workplace. You possibly can all declare primarily based on their file for those who select.

3. What’s the Common Month-to-month Social Safety Profit?

The typical Social Safety profit is $1,657 per 30 days in January 2022. The utmost potential Social Safety profit for somebody who retires at full retirement age is $3,345 in 2022. Somebody who waits till age 70 can obtain as much as $4,194 per 30 days.

Keep in mind, in fact, that solely the highest-earning employees will qualify for optimum advantages.

4. Is Social Safety Sufficient to Retire on?

Social Safety will change about 40% of pre-retirement revenue for a mean earner — and monetary planners normally suggest changing about 70% to 80% of pre-retirement revenue. Meaning it’s important to save lots of for retirement by contributing to a 401(ok) plan or funding a Roth IRA or conventional IRA.

Whereas Social Safety isn’t meant to be the one supply of revenue in retirement, that’s the fact for a lot of older People. About half of seniors depend on Social Safety for not less than 50% of their revenue and roughly 1 / 4 depend upon it for 90% or extra, based on the Heart on Funds and Coverage Priorities.

5. Who Pays for Social Safety?

You do, taxpayer. So does your employer.

Social Safety is funded through payroll taxes, that are additionally typically known as FICA taxes.

Most employees have 7.65% of their paychecks routinely deducted for FICA taxes. Your earnings are taxed at 6.2% for the primary $147,000 of earnings as of 2022. Something you earn above that isn’t taxed for Social Safety — which is why $147,000 is the utmost quantity thought-about for calculating your advantages.

The remaining 1.45% goes towards Medicare, however for that there’s no wage cap. The truth is, people who earn above $200,000 and married {couples} making greater than $250,000 get hit with an additional 0.9% Medicare tax.

Your employer matches your 7.65% contribution towards Social Safety and Medicare. Meaning self-employed folks pay 15.3% as a result of they must make each the worker and employer contributions.

6. Is It True That Social Safety Is Going Broke?

Not precisely.

What’s actually occurring is that Social Safety is at a tipping level. In 2021, Social Safety began taking in much less cash than it pays out, thanks principally to longer life expectations and folks having fewer kids — which implies fewer employees paying into the system.

Whereas Social Safety has a $2.9 trillion belief fund it may dip into, the funds are anticipated to be depleted by 2035. However that doesn’t imply this system is doomed. Social Safety is funded on a pay-as-you-go foundation.

Even because it begins depleting its belief fund, it can nonetheless be gathering payroll taxes from employees and employers. If the belief have been to run dry in 2035, payroll taxes would nonetheless generate sufficient to pay for about 79% of this system’s obligations if Congress does nothing.

However there are many actions Congress may take to keep away from Social Safety cuts. For instance, it may enhance the tax charge, get rid of the wage cap or increase the complete retirement age, because it did in 1983.

It’s fairly unlikely that Congress received’t take motion. A 2019 Pew Analysis Heart ballot discovered that 74% of People oppose slicing advantages. Lawmakers on each side of the aisle are keenly conscious of this system’s reputation amongst voters.

7. Can You Work and Declare Social Safety Advantages?

If you happen to’ve already reached full retirement age, be happy to work away for those who select. Your advantages received’t be affected, regardless of how a lot you earn.

However for those who take Social Safety early, your advantages can be diminished by $1 for each $2 you earn above $19,560 in 2022. You get extra leeway throughout the yr you attain full retirement age: You’ll have $1 withheld for each $3 you earn above $51,960, after which when you really hit that age, your advantages will not be diminished.

8. Are Social Safety Advantages Taxed?

When you have further revenue, whether or not it’s from a job or investments, there’s a superb likelihood not less than a part of your Social Safety can be taxed. Right here’s the way it breaks down.

If you happen to’re a single filer:

• 0% of your profit is taxable in case your revenue is under $25,000.
• As much as 50% of your profit is taxable in case your revenue is between $25,000 and $34,000.
• As much as 85% of your profit is taxable in case your revenue is above $34,000.

If you happen to’re married submitting collectively:

• 0% of your profit is taxable in case your mixed incomes are under $32,000.
• 50% of your profit is taxable in case your mixed incomes are between $32,000 and $44,000.
• 85% of your profit is taxable in case your mixed incomes are above $44,000.

Take into account that “taxable” doesn’t imply that’s what you pay in tax. Suppose you’re a single filer with $30,000 of revenue: $20,000 from Social Safety advantages and $10,000 from 401(ok) withdrawals.

That merely implies that your revenue can be $20,000 within the eyes of the IRS: $10,000 from the 401(ok), plus 50% of the $20,000 out of your Social Safety advantages. Uncle Sam can’t contact the remaining 50%.

In fact, for those who’re nonetheless working and saving to your retirement, right here’s the place we’ll give a shoutout to Roth IRAs and Roth 401(ok)s. By forgoing the tax break throughout your working years, you get tax-free revenue in your retirement years — revenue that doesn’t rely towards you for Social Safety functions.

Within the instance above, if the $10,000 of 401(ok) revenue had come from a Roth IRA as a substitute, your revenue could be $0 within the eyes of the IRS. The $10,000 wouldn’t rely towards you, which means that you simply’d fall under the $25,000 revenue threshold. Meaning 0% of your Social Safety profit could be taxable.

If Social Safety is your solely revenue supply, you in all probability received’t be taxed on it, contemplating that the common profit quantities to simply $19,884 per yr.

9. What’s the Finest Age to Take Social Safety?

There’s no excellent age to take Social Safety. And sadly, lots of people don’t have the choice to delay advantages as a result of they’re pressured to retire early because of well being issues, a job loss or the necessity to look after a partner or dad or mum.

Clearly, if you need larger month-to-month checks, you’d wait so long as potential. If you would like extra checks over the course of your lifetime and have been OK with them being smaller, you’d declare earlier.

When you have medical points or your dad and mom died comparatively younger, it’s price contemplating beginning advantages earlier. You’d wait so long as potential for those who’re in good well being, particularly for those who’re nervous about outliving your cash.

Generally spouses attempt to maximize their advantages by having the upper earner wait so long as potential whereas the decrease earner claims at 62. As soon as the higher-earning partner begins gathering, the decrease earner switches over from their profit and begins gathering half of the upper earner’s profit.

10. Can You Get Social Safety if You Haven’t Labored?

You possibly can nonetheless get Social Safety retirement advantages primarily based on a present, former or deceased partner’s file even for those who’ve by no means labored. In any other case, you’ll have to pay into the system to gather advantages.

Kids of a deceased employee qualify for survivors advantages till they’re 18 or 19 in the event that they’re nonetheless enrolled in highschool full time. If the kid is over 18 however has a incapacity that started earlier than age 22, they’ll additionally qualify for survivors advantages.

11. How Do You Apply for Social Safety?

You possibly can simply apply for Social Safety on-line in about quarter-hour. You can even go to your native Social Safety workplace or name 800-772-1213 between 8 a.m. and seven p.m. Monday via Friday.

12. Can You Reverse Your Determination to Begin Advantages?

Sure, however your choices for reversing your Social Safety resolution are extraordinarily restricted: If it’s been lower than a yr because you began advantages, you possibly can withdraw your utility and repay all of your advantages, together with Medicare premiums, taxes you opted to withhold and advantages your loved ones obtained in your behalf.

If you happen to’ve reached full retirement age, you possibly can droop your advantages in an effort to make the most of the additional 8% Social Safety offers you for yearly you delay past your full retirement age. When you hit 70, your advantages will routinely restart.

Robin Hartill is a licensed monetary planner and a senior author at The Penny Hoarder. She writes the Pricey Penny private finance recommendation column. Ship your tough cash inquiries to [email protected]