By Boyce F. Lowery, CLU®, ChFC®
On the heels of the Great Depression, the Federal government vowed to find a better way to take care of the American people, specifically the elderly. What they then created was memorialized in the Social Security Act, which was signed into law by President Roosevelt on August 14, 1935. The act provided a social insurance program to pay workers after age 65 and set the foundation for what we call Social Security today.
What Benefits Does the Social Security Program Provide?
Today, Social Security provides much more than just retirement benefits for the elderly who have earned benefits. Actually, the program offers four main categories of benefits:
Most people think of Social Security as just retirement benefits. For those that have paid into the system long enough, they become eligible to begin receiving retirement benefit payments at age 62, if they choose to do so and have income low enough to qualify. While eligibility begins at age 62, the benefit amount increases the longer a worker waits to begin receiving payments, reaching a maximum at the age of 70. Payments are occasionally adjusted for cost-of-living increases and are guaranteed for the lifetime of the recipient, however long that may be.
Social Security also provides benefits for eligible workers who are disabled before reaching retirement age. Disability payments are usually similar to the retirement benefits the worker would be eligible to receive at full retirement age. Eligibility is based on years worked
and whether the disability meets the Social Security Administration’s medical guidelines.
Social Security benefits are not only for workers but for their dependents as well. Commonly called spousal benefits, married people are eligible for benefits based on their spouse’s work history. Minor or disabled children are also eligible for benefits when their parent becomes disabled or retires.
Just like life insurance, Social Security pays a death benefit when an eligible worker passes away, though very small. In addition, monthly survivor benefits are sometimes paid to the surviving spouse while there are minor or disabled children, depending on the surviving spouse’s income. Monthly survivor benefits are paid to minor and disabled children when an eligible worker is deceased, regardless of the surviving spouse’s income.
How is Eligibility for Benefits Determined?
Eligibility for Social Security benefits is based on how many years a worker has worked and paid into the system. Workers earn “credits,” and each type of benefit requires a certain number of credits for eligibility. A maximum of four credits can be earned each year, and for 2018, workers earn a credit for earning at least $1,320 in a given quarter.
Forty credits are required to become eligible for retirement benefits, so a worker has to have worked a minimum of 10 years. The number of credits required for disability benefits depends on the worker’s age when disabled. Usually, 40 credits are required, with 20 of them having been earned in the past 10 years. However, younger workers can qualify with fewer credits. Eligibility for survivor and dependent benefits are based on the deceased worker’s eligibility.
How Are Benefits Calculated?
Retirement benefits are calculated based on the worker’s 35 highest earning years. If a worker has worked less than 35 years, zeros are counted for the missing years. The Social Security Administration calculates the average indexed monthly earnings over those 35 years and then applies a special formula to come up with the basic benefit, or Primary Insurance Amount.
The Primary Insurance Amount (PIA) is the result of the calculation formula that determines the retirement benefits for a worker at full retirement age. Full retirement age has ranged from age 65 to age 67 during the history of Social Security, depending on when the worker was born. If benefits are taken early, the benefits are lowered as shown in the following chart:
1 If you were born on January 1st, you should refer to the previous year.
2 If you were born on the 1st of the month, Social Security (“SS”) figures your benefit (and your full retirement age) as if your birthday was in the previous month. If you were born on January 1st, SS figures your benefit (and your full retirement age) as if your birthday was in December of the previous year.
3 You must be at least 62 for the entire month to receive benefits.
4 Percentages are approximate due to rounding.
5 The maximum benefit for the spouse is 50 percent of the benefit the worker would receive at full retirement age. The percent reduction for the spouse should be applied after the automatic 50 percent reduction. Percentages are approximate due to rounding.
If an eligible Social Security retiree chooses to wait on receiving benefits after reaching the full retirement age, benefit levels will increase 8% for each year of delay (not compounded), but only to age 70. Working and earning above a certain limit while receiving benefits can also affect the retirement benefit for which a worker is eligible, if benefits are taken prior to full retirement age.
How Is Social Security Funded?
There is no free lunch. Who picks up the massive tab for all the benefits that have been promised through the Social Security program? Both workers and employers fund the Social Security program. Workers pay 6.2% of their W-2 wages up to $128,700 for 2018. Wages above that amount are not taxed for Social Security. Employers pay the same amount as their employees. Self-employed people have to pay both the worker and employer portions, for a total of 12.4% of their earnings up to $128,700 for 2018. Social Security taxes are only a part of the Federal Insurance Contributions Act (FICA) taxes that appear on a worker’s pay stub. The additional dollar amount charged in FICA taxes is to fund Medicare. Both the employee and employer fund the same percentage of the worker’s earned income.
How Do I Know What Benefits I May Receive?
Since benefit eligibility is based on work history, it is important to make sure that the Social Security Administration has your correct earnings records. You can open a personal account at www.socialsecurity.gov to review your earnings record and to also see what benefit level you have earned. If you are not yet eligible for benefits, information will be provided to you about how many more credits you need to earn in order to gain eligibility. It is a good idea to check regularly so that you know what benefits you are entitled to and so that you can catch any errors in your earnings record that may affect your future benefits.
If you have any questions about your Social Security eligibility or when you should apply to start receiving benefits, give us a call at Suncrest Advisors at 888-827-0146 and we will be happy to help.
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the managing partner of Suncrest Advisors, he, his partner, and their associates all aim to provide financial security and peace of mind to business owners, executives and professionals, and high net-worth individuals across the United States. Along with more than four decades of experience, Boyce is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit https://suncrestadvisors.com/ or connect with Boyce on LinkedIn.