Social Security Basics

Social Security Basics
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Founded in ​1935​ under President Roosevelt, the Social Security Administration (SSA) offers a program that provides payments to people who are disabled, retired or survivors of qualifying individuals. Social Security gets funding through taxes that most employed Americans pay, and there are specific requirements for who can receive monthly social security benefits and when. Depending on the program, monthly benefit amounts can depend on various factors such as one's contributions to the system during the years of earnings, age, health conditions and other income received. Here are some Social Security basics you should know to learn how these retirement income and disability payments work and may help you.

Exploring the History of Social Security

The Social Security program arose in response to the economic troubles facing older Americans after the Great Depression. Many older Americans had lost their savings and were facing poverty, so they often relied on their families financially to get by. Other support services such as charities couldn't fully handle the needs of such people, and while many states had pension programs, cuts to these benefits would further complicate the poverty issue for older Americans.

The Social Security Act of 1935 created a social insurance program that provided retirement payments to workers ​65 and older​ in certain occupations only and would put the associated payroll taxes into place. However, it took until ​1937​ for the taxes to start applying and until ​1940​ for the first Social Security retirements to go out to qualified Americans. The program would undergo amendments later to provide spousal benefits and survivor benefits to surviving spouses, the disabled and dependents of recipients.

Understanding Social Security Funding

The money for Social Security comes through a payroll tax that both employers and employees pay up to the annual contribution and benefit base for the year. The tax rate is ​6.2 percent​ each for both parties (self-employed people pay the whole ​12.4 percent​). The tax applies to the ​first $142,800​ in income for 2021, so the total Social Security tax could be as much as ​$17,707.20​. There's a related Medicare tax of ​1.45 percent​ for both parties (​2.9 percent​ for self-employed) that goes toward funding the Medicare health insurance program.

Only certain individuals can get an exemption from paying the Social Security tax. Some examples include non-resident aliens, foreign government workers, students temporarily working for their university and people who are part of specific religious groups. While getting exempted can save on taxes now, keep in mind that those who don't pay into the system won't earn credits and miss out on having their work counted toward the minimum to get benefits later.

Learning About Social Security Credits

As you work and pay into the Social Security system, you earn credits that will eventually determine your eligibility for benefits. You can get as many as ​four credits​ annually based on your work earnings. You get one credit for each ​$1,470​ (maximum of ​$5,880​) that you make from your job in 2021, and the value changes yearly.

You'll need ​40 credits​ minimum (​at least 10 years​ of work) to get retirement benefits. On the other hand, those seeking regular disability benefits could need ​as few as six credits​ depending on their age, duration of working and recent work history (not applicable if blind). The credit requirements for survivors' benefits are based on when the person dies and top out at ​40​.

Covering Social Security Retirement Benefits

Social Security retirement benefits are designed to help provide a part of the income – often around ​40 percent​ – that the earner received while working so that you have a safety net when you reach retirement age. You'd usually use other retirement plan sources such as a 401(k), IRA or part-time employment to cover the remainder of your living expenses. Those who work enough to earn the ​40 credits​ needed to qualify will get a payment calculated based on the ​35 years​ of lifetime earnings during which they earned the highest wages as well as when they choose to retire.

You can start to get these payments at ​age 62​, but to get the standard full benefit amount, you'd need to start receiving benefits no sooner than when you reach full retirement age. People born ​1954 or earlier​ have a full retirement age of ​66​, while those born in ​1960​ and later need to be ​67​ for full benefits. People born in the years between those must add ​two months​ for each year after ​1954.​ Retiring before the full age means that you and your spouse will see reductions in your benefits based on the number of months remaining between age 62 and your full retirement age designated based on your birth year.

Note that retirement benefits can get reduced depending on how much you earn from employment. The 2021 income limits are ​$18,960​ for those under full retirement age and ​$50,520​ for those of full retirement age. Going over this means having the SSA take ​$1 for every $2​ over you earn if you're under the age or ​$1 for every $3​ you earn if you're at the age.

Exploring Social Security Disability Benefits

You can get Social Security benefits due to a qualified disability through the Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI) options. While the SSDI program goes by credits earned like the retirement program does, the SSI program is based on financial need instead. Some people can get funds through both programs, and either you or a qualified family member such as a spouse or child can receive disability benefits.

Any person applying for disability benefits would need to meet the medical requirement where they have a disability that affects them for one year or longer and creates major limitations in their ability to work their usual jobs or adjust to other work. This means people who may be disabled but still can earn ​$1,310 monthly​ or more in 2021 usually don't qualify unless they're blind. SSI applicants will need to show limited resources as well as limited income.

As with retirement benefits, disability benefits come with earnings limits for which your benefits could be reduced or stopped. Specifically, this applies to SSI benefits since they're based on financial need. For example, if you're an individual earning ​$1,673​ monthly from a job in 2021, you could lose benefits entirely, and they start to be phased out once you make beyond the ​$794​ individual SSI payment for 2021.

Receiving Social Security Survivor's Benefits

While one's benefits discontinue upon death, certain survivors may be able to start receiving Social Security retirement or SSDI payments based on that person's work history. Those survivors already getting benefits can get an adjusted payment for a higher amount. Further, the SSA offers a ​$255​ additional lump-sum payment to the qualified person.

Some family members who could qualify include the recipient's widow or widower who's aged ​50​ (if disabled) or ​60​ (all others) and unmarried children still in school or with a disability. Some divorced spouses can get benefits if their marriage to the person was for a minimum of ​10 years​ and they didn't remarry ​before 50​ (if disabled) or ​before 60​ (all others). Some other family members who could qualify include grandchildren, stepchildren and dependent parents.

Since the rules on receiving survivors' benefits can be complex, you'll want to reach out to the SSA or personal finance advisor to find out if you'd qualify and how much you could receive. Generally, widows and widowers of full retirement age can get the whole benefit amount, while people in other categories can get ​71 1/2 to 99 percent​ of it.

Determining Your Benefit Amount

For retirement and SSDI payments, the amount you receive is based on your earnings history and age upon becoming a retiree or disabled. The maximum benefit possible for most individuals is ​$3,148 monthly​ in 2021, but people who retire beyond full retirement age can receive ​up to $3,895​ due to delayed retirement credits. On the other hand, unmarried SSI recipients get maximum monthly payments of ​$794​, while disabled couples would get ​$1,191​ in 2021. Benefit amounts experience cost-of-living adjustments annually, and this increase was ​1.3 percent​ for benefits to be received in 2021.

Keep in mind that any work income you receive can lower your specific payment amount. For example, if you opt to start receiving Social Security retirement payments at age 62 and make ​$60,000​ (​$9,480​ more than the limit of ​$50,520​ in 2021), then you'd see a ​$3,160​ cut in your benefits that year due to the SSA taking ​$1 for every $3​ over the limit. However, you don't have to worry about the SSA counting common forms of unearned income like interest or investment income for either retirement or SSDI benefits.

You can access the various benefit calculators on the SSA's website to estimate how much in benefits you might receive given your current earnings record and expected age of disability or retirement. You'll be able to enter expected income sources in the calculator to account for the various rules on earned income limits and associated exclusions that can be complex to calculate on your own. You'll also find calculators to estimate survivor's benefits, help you plan for early or late retirement as well as determine whether you pass or fail an earnings test required to keep receiving your current type of Social Security income.

Applying for Social Security Benefits

You can conveniently use the ssa.gov website to apply for Social Security retirement and disability benefits in most cases. For example, you can request disability benefits for yourself online, and you can request retirement benefits online as long as you're seeking benefits within the ​next four months​ and you're aged ​61 years and 9 months​ or older. However, you can't complete the application for survivors' or children's benefits online. The SSA allows people to apply by phone at ​1-800-772-1213​, or they can get an appointment at the nearest Social Security office and do the process in person.

Regardless of the method used, you'll want to check the SSA's website (www.ssa.gov) to make sure you gather the right information and documentation for a successful application. For example, you'll need basic personal information along with details about your income sources, any health condition that may qualify for disability benefits and your banking details if you opt for direct deposit versus a debit card. If you're applying because you're eligible due to a spouse or parent, then you'll need information about that person as well so the SSA can determine whether you can benefit.

The SSA will process your application, contact you if they have questions or need documentation and provide a final decision about your approval and payment amount. For your convenience, you can track the application status through the SSA's website. Once approved, you'll start receiving payments on the specified date using the method chosen. If you are denied disability benefits, you can appeal that decision within ​60 days​ through the SSA's website.

Managing Your Social Security Account

Whether you want to determine how much in benefits you could receive, see your Social Security earnings record or get important documents, consider setting up a My Social Security account.

After you go through the process of inputting your personal information, verifying your identity and completing the activation process, you can log in to perform various actions. For example, you can get your Social Security card replaced, estimate what you might receive in retirement, print letters showing benefits received, find out how many credits you've earned or change banking information.

You can also visit the SSA's website to get more information about Social Security in general. You'll find sections for retirement, disability, Medicare and SSI along with helpful calculators, a library of helpful publications and answers to FAQs plus multiple ways to contact the SSA for help.