Social Security has had many changes and amendments, such as adding disability insurance, supplemental income, and Medicare. But we’ll just focus on the retirement benefit in this show.
Laura reviews how the Social Security retirement benefit works, including how you qualify, how much you receive, and six common myths. Even if you’re nowhere near retirement age, getting familiar with the program is critical for sound financial planning.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Right now, the U.S. Congress is in a standoff about whether to increase the federal debt ceiling for the 90th time since 1959. Officials estimate that unless Republicans and Democrats strike an agreement, the country could run out of money and skip paying bills as soon as June 5.
While I’m optimistic that the government will raise the debt ceiling, at the last minute, for the 90th time, there’s been a lot of talk about who could get stiffed if it doesn’t happen. For instance, would it be the military’s paychecks or retirees’ Social Security benefits that get held back?
It got me thinking about how much this country relies on Social Security. This show will review how the retirement benefit works, which is the largest part of the system. We’ll cover how you qualify for benefits, how much you receive, and common myths. Even if you’re nowhere near retirement age, getting familiar with the program is critical for your financial planning.
Hey, everyone, and welcome back to Money Girl—I'm so glad you're spending some time with me! If you're a new listener, my name is Laura Adams. I'm an award-winning author and finance expert who's been bringing money tips and advice weekly on this podcast since 2008, with over 40 million downloads.
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Social Security is a mandatory U.S. federal program that provides financial assistance to qualifying citizens. It’s a group of benefits for those who are retired, disabled, or survive a relative who received benefits.
The program was conceived by President Roosevelt, who believed the country needed “social insurance” to provide economic security to older people. It was established as part of the New Deal legislation in 1935 during the Great Depression.
Since then, Social Security has had many changes and amendments, such as adding disability insurance, supplemental income, and Medicare. But we’ll just focus on the retirement benefit in this show.
You may be surprised that you’re not automatically eligible for Social Security retirement benefits. You must work and pay into the system for at least 40 quarters or 10 years. That’s because the program gets funded from payroll and self-employment (SE) taxes.
If you’re an employee, you’ve probably seen the deduction listed on your pay stub as OASDI, which stands for old-age, survivors, and disability insurance. If you work for yourself, you must pay SE taxes, which are similar to the Social Security and Medicare taxes withheld from most workers’ earnings.
Be aware that there are millions of state and local government workers–such as teachers, police officers, and firefighters–who don’t pay into Social Security. Workers not covered by the program usually get a pension plan from their government employer instead of receiving Social Security.
However, if you have various jobs that are and are not covered by Social Security, you could qualify for retirement benefits (as long as you paid in for at least ten years) and a pension.
Social Security taxes apply up to an annual income limit, known as a wage base, and have gradually increased over time. For 2023, the tax for employees is 6.2% of earnings on up to $160,200. Plus, your employer pays an additional 6.2% on your behalf for a total tax of 12.4%.
If you’re self-employed, you pay both the employer and employee tax or 12.4% on earnings up to $160,200. Therefore the maximum Social Security tax you could pay for business income in 2023 is just over $19,864 ($160,200 x 12.4%).
However, as the Social Security reserve fund draws down, it’s likely that the wage base, payroll tax rate, and self-employment tax rate will need to be raised to give the federal government enough revenue to keep the program healthy.
I'll also mention that you pay a separate Medicare tax of 1.45% for employees and employers. However, there is no wage base for Medicare, so the tax applies to all your earnings. And the self-employed also pay both sides of the Medicare tax for a total of 2.9%.
Remember that any earnings that don't have Social Security and Medicare taxes withheld or business income you don't pay self-employment taxes on won't appear on your statement or get factored into your future benefits.
Since how much you’ll receive in Social Security benefits should play a significant role in your retirement planning, it’s essential to track and verify it. The program was intended to be a safety net or supplement to other retirement income, not the sole source.
You can visit SSA.gov to sign up for an online account, check your earnings history, and see your estimated future retirement income and other benefits. It’s a good idea to regularly review your reported earnings for errors since mistakes could keep you from getting all the benefits you’re entitled to.
Your estimated retirement benefit is based on the average of your highest 35 years of earnings. If you end up working fewer than 35 years, the missing ones get counted as $0 income, bringing down your average. And if you work over 35, only your highest-earning years are included in the benefit calculation.
So, how long you work and much you earn throughout your career plays a huge role in your retirement benefit. Plus, you can choose when to begin taking benefits, with 62 being the youngest age and 70 being the oldest.
Everyone has a "full retirement age" or FRA when you can first claim full or unreduced benefits. If you were born between 1937 and 1959, your FRA is 66. But if you were born in 1960 or later, your FRA is 67.
No matter your birthday, the longer you wait to receive retirement benefits, the higher your monthly payments will be. If you retire before your FRA, your benefits get permanently reduced. And when you delay benefits past your FRA, they increase 8% per year up to age 70. So, if you're in good health and can continue working, or have other income sources, waiting to claim retirement benefits is an easy way to boost your lifetime income.
For instance, the average monthly payment for someone at their full retirement age in 2023 is just over $1,800. But if you're 62 this year and want to start early retirement, the average payment would be $1,500. And if you waited to start receiving benefits until turning 70 this year, the average payment is over $2,200.
According to the Social Security Administration, if you turn 62 in 2023 and begin early retirement, your benefit would be about 30% lower than if you started at your FRA of 67. And if you're wondering what the maximum retirement could be, it was about $4,500 a month last year.
There are many factors to consider when deciding when to start retirement benefits, such as your income sources, life expectancy, and spouse's situation. So always get personalized advice from a financial advisor for help making the best decision.
In addition to the retirement benefits you get, your spouse and any ex-spouses you were married to for at least ten years are entitled to 50%, even if they never worked. You must be at least 62 and already receiving benefits or deceased for a spouse or ex-spouse(s) to be eligible for benefits based on your work history.
For example, if you receive $1,000 monthly, each current and previous spouse would receive $500–unless they're eligible for their own, higher retirement benefit.
Another good reason to delay taking retirement benefits, especially if you’re still working, is that depending on your combined income, known as provisional income, you may have to pay taxes on them. Your provisional income gets calculated by adding your gross income, tax-free interest, and 50% of your social security benefits.
If you're single with income over $25,000 or married filing a joint tax return with income above $32,000, some of your retirement benefits get taxed. For singles, up to 50% of your benefit is subject to tax if you earn up to $34,000. For higher earnings, 85% of your retirement benefit gets taxed.
For joint filers, up to 50% of your benefit is subject to tax when you have income up to $44,000. And for higher earnings, 85% of your retirement benefit gets taxed.
Let’s review some key points and clarify six common retirement benefit myths.
1. You must claim your retirement benefit at age 62.
You can claim retirement benefits as early as 62, but it gets permanently reduced. You can also claim as late as 70 for the highest possible monthly payment. The best time to start retirement benefits depends on many factors and should be carefully considered.
2. Social Security can fully fund my retirement.
Social Security was never designed to be your sole retirement income. For a comfortable retirement, you likely need several other sources, such as savings, investments, annuities, or a workplace pension.
3. Taking early retirement is always best.
Taking early benefits may not be wise because your monthly payment gets reduced for life. You may be better off waiting until you reach full retirement age.
4. Divorcees can't receive spousal benefits.
Divorcees may be eligible for Social Security benefits based on their ex-spouse's work record, if the marriage lasted at least ten years.
5. You can’t work and receive retirement benefits.
You can work and receive retirement; however, if you’re younger than your FRA, your benefits get reduced by $1 for every $2 you earn above $21,240 in 2023. You don’t lose the money because it eventually gets added to your monthly payment once you reach your FRA. And after your FRA, your retirement benefits are never reduced, no matter how much you make.
6. Retirement benefits don’t get taxed.
Your benefits may get taxed if your combined income exceeds certain thresholds, regardless of age.
Let's hope the nation's debt ceiling gets lifted soon, and there's no chance retirement benefits could get disrupted for over 66 million retirees in the program.