Social Security Retirement Benefits Explained
Social Security retirement benefits play a major role in most people’s retirement plans. For many Americans, Social Security retirement benefits are their sole source of retirement income. The Social Security Administration (SSA) oversees all such benefits.
The History of Social Security Retirement Benefits
On August 14, 1935, President Franklin Delano Roosevelt signed the Social Security Act into law. The Act provided for a social insurance program designed to provide a continuing income for retired workers over 65.
The movement toward a national old-age pension plan was strong. Various plans, such as Louisiana’s Governor Huey Long’s “Share Our Wealth” program was put forward. And other being the Townsend Old Age Revolving Pension Plan. In the depths of the Great Depression, many senior citizens found themselves destitute.
Upon signing the Act, FDR said, ”We can never insure 100 percent of the population against 100 hundred percent of the hazards and vicissitudes of life. But we have tried to frame a law which will give some measure of protection to the average citizen. And protection to his family against the loss of a job and against poverty-ridden old age.”
How are Social Security Retirement Benefits Calculated?
During your working life, Social Security taxes are taken out of your paycheck. If self-employed, you must pay these taxes quarterly. To qualify for these benefits, you must earn at least 40 credits.
For 2022, you receive one credit for every $1,510 in taxable Social Security earnings. This will add up to four credits annually. You’ll need to earn a minimum of $6,040 annually for at least 10 years to receive the required 40 credits. This example pertains to those just starting out in their career. Without earning 40 base credits, you cannot receive Social Security retirement benefits. The amount of earnings necessary to receive credit may change annually.
After eligibility determination, Social Security calculates your monthly average earnings. And they do this via the 35 years in which your taxable wages were highest. These amounts are adjusted for inflation. If you did not work for a total of 35 years, Social Security enters “zero” for the years you did not receive wages. For example, if you worked for 30 years, Social Security enters zero for five years when making calculations.
When Can I Start Taking Social Security Retirement Benefits?
It is possible to take Social Security retirement benefits upon reaching age 62. However, those taking benefits at an earlier age receive considerably less than if they waited until their full retirement age.
Why Is It Best to Wait?
Make the most of your Social Security benefits. You can do this by waiting as long as possible to claim them. Anyone taking benefits before their full retirement age receives a lesser amount. For instance, they receive less than they would had they waited until qualifying for full retirement.
Say you take Social Security retirement benefits at 62. For example, when you do not reach full retirement age until 67. For anyone born after January 1, 1960, that is the full retirement age. Retire at 62, and you will discover your monthly benefit reduced by a half percent every month until your full retirement age. That means you will end up with about 75 percent of what could have been your full monthly benefit had you waited.
In round numbers, someone who would have received $1,000 a month if waiting until full retirement age receives just $750 if taking benefits early. That really cuts into retirement income. Of course, there are situations where someone has little choice. And they will need to take Social Security retirement benefits as soon as they can. You never know what life is going to throw at you.
What if you wait until age 70 to take benefits? You will receive benefits 32 percent higher than had you taken them at full retirement age.
Every extra year you work also adds another earnings year for your Social Security record. That can increase your ultimate Social Security benefit amount.
How Much Will I Receive?
How much you will receive in Social Security retirement benefits depends upon how long you worked and how much you earned. In 2022, the estimated average Social Security retirement benefit is $1,627. The maximum benefit is $3,345 monthly for someone filing in 2022 at their full retirement age.
You can determine the exact amount you will receive by checking with the Social Security Resource Center.
What Are Spousal Social Security Retirement Benefits?
What if a spouse never worked, or did not earn the 40 base retirement credits? They may still qualify for Social Security spousal benefits. These benefits are based on their husband or wife’s earnings record. The base spousal benefit is half of the working spouse’s primary insurance amount.
A lot depends on when the spouse decides to start taking Social Security retirement benefits. Should they decide to take benefits as early as possible, at age 62, that may reduce their benefit. In such cases, the reduction is less than one-third of the working spouse’s primary insurance amount. That’s because spousal benefits are reduced 25/36 of one percent for every month prior normal retirement age. And this would be for a period of up to 36 months. Should the number of months go beyond 36, there is a further benefit reduction of 5/12 of 1 percent per month.
Social Security Retirement Benefits and Taxes
You may have to pay federal income taxes on these benefits. The IRS limits taxation up to 85 percent of Social Security benefits. Most people who must pay income taxes on their benefits also have other taxable income. This includes wages, self-employment income, interest income and dividends.
If you file singly, and your income is between $25,000 and $34,000, you may have to pay tax on up to 50 percent of your Social Security retirement benefits. Above that amount, and you may have to pay tax on 85 percent of Social Security earnings.
If you are married and filing jointly, the range is $32,000 to $44,000 for paying taxes on 50 percent of Social Security income. Above $44,000, and it jumps to 85 percent.
Other Social Security Benefits
Social Security retirement benefits aren’t the only benefits offered by the SSA. Other benefits overseen by the SSA include those for workers with disabilities, the children and surviving spouses of deceased workers and Supplemental Security Income. SSI is designed for those with over age 65, or younger people who are blind or disabled. Eligibility is limited to people with limited income and limited resources.
About Jane Meggitt
Jane Meggitt specializes in writing about personal finance. Besides investing and planning for retirement, she writes about insurance, real estate, credit cards, estate planning and more. Her work has appeared in dozens of publications, including Financial Advisor, Zack’s, SF Gate and Investor Junkie. A graduate of New York University, Jane lives on a small farm in New Jersey horse country.