Understanding Social Security
People generally have two questions about Social Security: How does it work? And, will it be around when I retire? To get a better understanding of Social Security, it helps to break it down into three parts: the past, the present, and the future.

The Past
President Franklin D. Roosevelt signed the Social Security Act in 1935 as a direct result of the economic depression of the 1930s. Originally, only retirement benefits were paid to the primary worker. The law was amended in 1939 to add survivors’ benefits and benefits for the retiree’s spouse and children. Disability benefits were added in 1956.

Social Security is a “pay-as-you-go” program, which means that today’s workers are paying for the benefits to today’s beneficiaries through their payroll taxes. In 1940, there were 42 workers per retiree. In 1950, the ratio was 16-to-1. In 2010, there were 2.8 workers per retiree, and within 40 years, it’s projected that there will be just two workers per retiree¹. At the present rate, as the population ages and life expectancies continue to rise, the system will not be able to sustain itself into the future without major reform.

The Present
Currently, you and your employer each pay a percentage of a predetermined portion of your salary into the system (for 2011, 6.2 percent for employers, and 4.2 percent for employees). To be eligible for a Social Security benefit, you must have earned enough of what Social Security calls work credits by the time you’re ready to apply for a benefit. This usually means a total of at least 10 years of work in “covered employment.” Also, keep in mind that some people are not part of the Social Security system, like some local and state governmental employees. 

Your retirement benefits are calculated on a complex formula based on the “best” 35 years of your earnings. This amount is then adjusted up or down, depending on when you intend to start receiving benefits. Regardless of exactly when you begin your benefits, the dollar amount you receive will be a fraction of what you were earning. Social Security was intended to be one source of your income after retirement, but not the sole source. Keep that in mind when figuring out your retirement income needs and sources.

Retirement Benefits
When Social Security was initially set up, the full retirement age was 65, and it still is for people born before 1938. But as life expectancies have increased, the age for receiving full retirement benefits has crept up as well. If you were born between 1938 and 1960, your full retirement age is somewhere on a sliding scale between 65 and 67. Anyone born in 1960 or later will now have to wait until age 67 for full benefits.

You can begin collecting benefits as early as age 62, but they will be in a permanently reduced amount—up to a 30 percent reduction. You can also delay receiving benefits up to age 70, in which case your benefits will be higher for the rest of your life.

The Social Security Administration sends you an annual statement of your earnings on record and the projected amounts of your retirement, survivor, and disability benefits about three months before your birthday. If you haven’t received it, you can request a copy by following the instructions at the Social Security website at www.ssa.gov. Check this data against your own records (W-2s, income tax forms, pay stubs, etc.). If you find any errors or discrepancies, call the Social Security helpline at 800-772-1213 or visit your local Social Security office.

Disability Benefits
You may be eligible to receive disability benefits from Social Security at any age if you have enough work credits and qualify under their definition of disability. The SSA defines disability as a physical or mental condition severe enough to prevent you from doing “substantial” work for a year or more (generally, earnings of more than $800 per month are considered substantial).

Family Benefits
If you’re eligible to receive retirement or disability benefits, other members of your family might be eligible, too. Eligible family members include:

  • Your spouse if he or she is at least 62 years old and you were married at least one year
  • Your former spouse age 62 or older if you were married at least 10 years
  • Your spouse or former spouse at any age if caring for your child under age 16 or disabled
  • Your children under age 18, if unmarried
  • Your children under age 19, if full-time students (through grade 12) or disabled
  • Your children older than 18 if severely disabled

Survivors’ Benefits
When you die, certain members of your family may be eligible for survivor’s benefits if you earned enough credits during your working years. These family members include:

  • Your widow(er) or ex-spouse age 60 or older (or age 50 or older if disabled)
  • Your widow(er) or ex-spouse at any age if caring from your child under age 16 or disabled
  • Your children under age 18, if unmarried
  • Your children under age 19, if full-time students (through grade 12) or disabled
  • Your children older than 18 if severely disabled
  • Your parents if you were their primary means of support

Your widow(er) or children may also receive a one-time $255 death benefit.

You can apply for benefits or get more information at your local Social Security office or by calling 800-772-1213 or filling out an online application at www.ssa.gov. The SSA recommends planning ahead by contacting them the year before the year in which you plan to retire, to start the ball rolling. If you’re applying for disability or survivors’ benefits, apply as soon as you’re eligible.

The Future
Will Social Security be around when you retire? Maybe. Even the SSA recognizes that the current system is not sustainable over the long term at present benefit and tax rates without large infusions of additional revenue. Social Security taxes will need to be increased and/or benefits decreased in order to keep the system going for future generations. When planning for your retirement, keep Social Security in mind, but recognize that it may play a smaller part than you had anticipated, and plan accordingly.

¹ Source: Congressional Budget Office. August, 2011

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