Dive Deep into Social Security: Unraveling the Complexities

What is social security?

Social security is a government program that provides financial assistance to retired and disabled workers, their spouses, and their children. It is funded by a payroll tax that is paid by both employers and employees. The program is designed to help people who have worked hard and paid into the system to maintain their standard of living in retirement. The history of social security in the United States dates back to the 1930s. The Social Security Act was signed into law by President Roosevelt on August 14, 1935. It created a social insurance program designed to pay retired workers age 65 or older a continuing income after retirement. Taxes were first collected in 1937, and monthly benefits began in 1942.

Social security benefits are based on a person's earnings history. The more a person has earned, the higher their benefits will be. Benefits are also affected by the age at which a person retires. People who retire early will receive smaller benefits than those who retire at the full retirement age. This helps with reducing the amount that needs to be paid out as a whole while increasing the monthly amount for the retired individual to improve their standard of living in exchange for them not retiring for a few years.

Social security is an important source of income for many retirees. In 2021, the average monthly benefit for retired workers was $1,543. For disabled workers, the average monthly benefit was $1,288. Social security benefits can help retirees to pay for their living expenses, such as housing, food, and medical care. This money that gets spent by retirees gets recycled back into the economy into businesses that pay their employees and their future social security benefits.

Social security is a vital program that provides financial assistance to millions of Americans. It is a program that is funded by the contributions of workers and employers. Social security is a program that is designed to help people who have worked hard and paid into the system to maintain their standard of living in retirement. The current workers are incentivized to pay into this so that they also receive that benefit when they get to that age.

How much will I get?

The amount of monthly benefits distributed by social security vary by person. There are a variety of factors that go into how much a person will receive. The official calculations are found here: Social Security Benefit Amounts (ssa.gov) You can also create an account there and find out how much you have paid into the system and how much you will receive based on when you retire.

The gist of it is that the average monthly income from the highest 35 years that you have worked is first calculated. This is called the Averaged Index Monthly Earnings or AIME.

So, they take all the years that you have worked, and from the top 35 years, they sum up the total amount, then they divide by 35 which gives you your average annual salary. This is then divided by 12 for the average monthly income. From this they calculate your Primary Insurance Account or PIA. The full formula is found here Primary Insurance Amount (ssa.gov).

The short version of it is that it is the sum of the following:

• 90% of the first $1,174 of the AIME
• Full 1174 if the AIME is greater than that number
• 32% of the next amount up until $7,078
• 15% of anything above $7,078

Note that 1174 and 7078 are called bend points which vary every year. They are treated similar to how tax brackets work but are used for determining how much the government pays you.

These points are adjusted to account for inflation and other factors. They make sure that there is an upper limit on these wage benefits so that those that were better off from an income perspective throughout their lifetime aren’t paid out too much as they likely have more saved up and are in less need of social security benefits.

You will need to identify these points for the year in which you will retire or turn the age of 62 found on the table here: Benefit Formula Bend Points (ssa.gov)

Note: The family version has three bend points. 

So for some examples:

Average of highest 35 years salary: $10,800

AIME: $900

Calculation: $900 * .9 = $810

Average of highest 35 years salary: $24,000

AIME: $2000

Calculation: $1174 * .9 = 1056.6 + ($2000-$1174) * .32 = 264.32. 1056.6 + 264.32 = $1,320.92

Average of highest 35 years salary: $96,000

AIME: $8000

Calculation:  $1174 * .9 = 1056.6 + ($7078-$1174) * .32 = $1889.28. 1056.6 + 1889.28 = $2945.28

But we aren’t done yet!

Depending on the age when you decide to retire, your PIA is multiplied by a percentage relative to the national retirement age. If you wait till you are are older than the national retirement age, you receive more. If you opt to collect the benefits before the retirement age average, then you receive less. See the table here for reference: Early or delayed retirement (ssa.gov)

Note: There is a credit based system that requires you to meet a certain criteria in order to qualify for this in the first place.

You have to earn at least 40 credits to qualify.

Each credit given is $1640 contributed per year. You can earn a maximum of 4 credits per year.

So you need to have been working and contributing to social security for at least 10 years in order to receive benefits.

How is social security funded?

Social Security’s primary funding comes from payroll taxes. Each year every single taxable american pays into social security tax. For example, in 2022, the social security office collected 1.107 trillion in taxes. These taxes went to purchasing treasuries from the Federal Reserve and/or paying benefits out.

https://www.ssa.gov/policy/trust-funds-summary.html

When should I take social security?

This all depends on you. What are your needs? Do you need the supplemental income immediately? Are you okay with working a little longer? Will you actually benefit from working longer? What works for your spouse? 

What happens if I don’t use all of my social security up before I die?

If you don’t use your social security up before your death, your spouse and/or children may qualify to receive those benefits. You can call a number or you can send an application to receive survivors benefits. You can find all of the details here: https://www.ssa.gov/benefits/survivors/

Is any of this taxed?

Yes and No.

It all depends on your combined income from your other sources and your social security income.

If everything combined is between $25,000 and $34,000, you will have to pay income taxes on 50% of your combined income.

Anything more than that, over 85% will be taxable.

To be clear, this isn’t the tax rate but the amount that is subject to the tax.

For full details go here:

https://www.ssa.gov/benefits/retirement/planner/taxes.html

Will the amount I get go up with inflation?

Yes, each year there is a cost of living adjustment applied to keep up with inflation.

This year there was a 3.2% increase to about 7 million people’s benefits.

You can find this information here:Cost-of-Living Adjustment (COLA) Information | SSA

Conclusion

In summary, this guide has offered a comprehensive exploration of social security in the United States, covering its historical origins, benefit calculations, retirement age considerations, and the credit-based eligibility system. Understanding the intricacies of payroll taxes, benefit formulas, and the impact of inflation provides a solid foundation for navigating the social security landscape.

As you consider your own retirement plans, we encourage you to take proactive steps. Assess your social security statements, seek guidance from financial advisors, and stay informed about potential policy changes that could impact your future benefits. Social security is a complex system, and personalized advice can be invaluable in making decisions that align with your individual circumstances.

We appreciate your engagement with this guide, and we hope the insights provided empower you to make informed choices about your financial well-being in retirement. Remember, your financial future is a journey, and being well-informed is the first step towards securing a stable and fulfilling retirement.

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