How Does Social Security Work? 12 Things You Can’t Afford Not to Know
Social Security is a government program that provides benefits to eligible individuals, including retired workers, disabled individuals, and survivors of deceased workers. The program is funded by payroll taxes, and while it is often associated with retirement benefits, it also provides benefits to disabled workers and their families, as well as to survivors of deceased workers.
- Social Security is a pay-as-you-go program
Social Security is a pay-as-you-go program, which means that current workers’ payroll taxes are used to fund the benefits of current beneficiaries. This means that the amount of benefits you receive in retirement will depend on how much payroll taxes were collected and paid out to other beneficiaries when you were working.
- Eligibility for Social Security benefits
To be eligible for Social Security benefits, you must have worked for a certain number of years and paid into the system through payroll taxes. The amount of time you need to have worked to be eligible for benefits varies depending on your age and the type of benefit you are applying for.
- Social Security benefits are based on your earnings history
The amount of Social Security benefits you are eligible to receive is based on your earnings history. Specifically, it is based on your highest 35 years of earnings, adjusted for inflation. This means that if you have worked for more than 35 years, the lower-earning years will not be included in the calculation.
- Full retirement age and early retirement age
Full retirement age (FRA) is the age at which you are eligible to receive your full Social Security retirement benefits. The FRA is currently between 66 and 67, depending on the year you were born. If you choose to retire before reaching your FRA, your benefits will be reduced. However, if you wait to retire until after your FRA, your benefits will be increased.
- Delayed Retirement Credits
If you delay your retirement past your full retirement age, you can earn Delayed Retirement Credits (DRCs) that will increase your monthly Social Security benefits by 2/3 of 1% for each month you delay, up to a maximum of 8%.
- Social Security benefits are subject to income tax
Depending on your income, a portion of your Social Security benefits may be subject to federal income tax. The amount of benefits that are subject to tax depends on your “combined income,” which is calculated by adding your adjusted gross income, non-taxable interest, and one-half of your Social Security benefits.
- Medicare and Social Security
Most people who are eligible for Social Security benefits are also eligible for Medicare, the federal health insurance program for people who are 65 or older, as well as some younger people with disabilities. If you are receiving Social Security benefits, you will automatically be enrolled in Medicare when you turn 65.
- Social Security Disability Insurance (SSDI)
Social Security Disability Insurance (SSDI) is a program that provides benefits to eligible individuals who are unable to work due to a disabling condition. To be eligible for SSDI, you must have a work history and have paid into the Social Security system through payroll taxes.
- Supplemental Security Income (SSI)
Supplemental Security Income (SSI) is a need-based program that provides benefits to eligible individuals who are aged, blind, or disabled, and who have limited income and resources. Unlike SSDI, you
do not need to have a work history or have paid into the Social Security system through payroll taxes to be eligible for SSI. However, SSI benefits are generally lower than SSDI benefits.
- Survivor benefits
Social Security also provides benefits to the surviving family members of deceased workers. Eligible survivors include a widow or widower, children, and even dependent parents. The amount of benefits a survivor can receive depends on the deceased worker's earnings history and the age and relationship of the survivor.
- Social Security benefits and working
If you are receiving Social Security benefits and decide to return to work, your benefits may be affected. If you are under full retirement age, there is a limit to how much you can earn while receiving benefits. For 2021, the limit is $18,960 per year. If you earn more than that, your benefits will be reduced by $1 for every $2 you earn above the limit. Once you reach full retirement age, there is no limit on how much you can earn and your benefits will not be reduced.
- Planning for retirement
Social Security is an important part of your retirement plan, but it should not be the only source of income. Experts recommend that you aim to have a retirement income that is at least 80% of your pre-retirement income. This means that you should plan to supplement your Social Security benefits with other sources of income, such as personal savings, investments, and pensions.
In conclusion, Social Security is an important program that provides benefits to eligible individuals, including retired workers, disabled individuals, and survivors of deceased workers. It is funded by payroll taxes and provides benefits based on an individual's earnings history. Understanding how Social Security works, as well as its eligibility requirements, can help you plan for your retirement and ensure that you have the income you need to maintain your standard of living. However, it is always advisable to consult with Social Security Administration or financial advisor for a personalized advice and plan.
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