Social Security Information You Should Know
Qualifying for Benefits
To qualify for Social Security benefits, you need to have a total of 40 credits paying into the Social Security system. In 2023, you receive 1 credit for each $1,640 of earnings, up to the maximum of 4 credits per year.
Additionally, nonworking spouses, unmarried ex-spouses, parents or children may be eligible for Social Security benefits. Your qualifying worker's earnings record is the basis for their potential eligibility. These Social Security benefits are known as spousal, survivor or children's benefits.
Calculating Benefit Amount
The Social Security benefit calculation uses your average Indexed Monthly Earnings. Moreover, it does so for 35 of your highest earning years. For clarification, Indexed Monthly Earnings are your actual monthly earnings adjusted to account for changes in average wages over time.
You can receive an estimate of your future full Social Security benefit. Just create, and login to, your free "my Social Security" account. The estimate utilizes your earnings record to date. Furthermore, you can also use the online benefits calculator to determine alternate estimates. It allows you to try various retirement scenarios. Undoubtedly, the benefits calculator can be very useful for retirement planning.
Full Retirement Benefits
Full Retirement Age (FRA) is the age you must reach to receive full retirement benefits from Social Security. The FRA was 65 for most of Social Security's history. With the 1983 overhaul of Social Security, the government gradually raised the FRA to 67 for those born in 1960 or later. This change effectively cut Social Security benefits by 13 percent. This cut represents the difference compared to what the benefits would have been if the retirement age had remained at 65.
Early Retirement Benefits
Providing that you meet the Social Security benefit qualifications, you can elect to start receiving Social Security benefits before your Full Retirement Age, as early as age 62. However, in doing so, you reduce your benefit amount 5/9 of one percent for each month you start before your FRA, up to 36 months. If the number of months you start before your FRA exceeds 36, you reduce your benefit amount 5/12 of one percent for each of these additional months.
Therefore, a retiree with an FRA of 67 receives 80% of his/her FRA benefit amount at age 64. Or, this same retiree receives 70% of his/her FRA benefit amount at age 62.
Late Retirement Benefits
Providing that you meet the Social Security benefit qualifications, you can also elect to start receiving Social Security benefits after your Full Retirement Age. If you were born after 1942, you increase your benefit amount 2/3 of one percent for each month after your FRA, up to age 70. There is no increase in benefit amount for electing to start receiving Social Security benefits after age 69.
Therefore, a retiree with an FRA of 67 receives 124% of his/her FRA benefit amount at age 70. Or, this same retiree receives 108% of his/her FRA benefit amount at age 68.
Future Benefit Reduction
The Social Security trust fund is projected to be exhausted in 2033, according to a recent report by the Congressional Budget Office. A retiree who had higher earnings in his/her lifetime could see a 22% reduction in Social Security benefits in 2034. This is a possible scenario if no changes are made to the Social Security system before this time.
Social Security Information You Need to Know!
Benefit State Taxation
Some state governments tax Social Security benefits. This is the case if you live in the following states: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont or West Virginia.
Benefit Federal Taxation
Furthermore, what few people are aware of, the federal government also taxes Social Security benefits. During 1983, when Social Security was facing exhaustion of reserve funds, the federal government made a change to implement taxation of Social Security benefits. Additionally, in 1993, the federal government made another change. This change implemented a second tier of taxation.
Accordingly, today we have a two-tier Social Security benefit taxation system. Even worse, the system uses income tier threshold values that have never been updated to account for inflation. Your Combined Income determines the percentage of the Social Security benefit that is taxable. To clarify, your Combined Income is the total of your Adjusted Gross Income (AGI), plus any nontaxable interest (such as from municipal bonds), plus one-half of your Social Security benefit.
As a result, individuals with a Tier 1 Combined Income of $25,000 to $34,000 will pay federal taxes on up to 50% of their Social Security benefit. For married couples, the Tier 1 thresholds are $32,000 to $44,000. Whereas individuals with a Tier 2 Combined Income above $34,000 will pay federal taxes on up to 85% of their Social Security benefit. For married couples, the Tier 2 threshold is above $44,000.
Calculating Federal Taxes
For 50% Social Security benefit taxpayers (Tier 1), the exact amount of the Social Security benefit that is taxable is the lesser of 50% of the Social Security benefit, or 50% of the difference between the Combined Income and the income base. The Tier 1 income base is $25,000 for individuals and $32,000 for married couples.
Correspondingly, for 85% Social Security benefit taxpayers (Tier 2), the exact amount of the Social Security benefit that is taxable is the lesser of 85% of the Social Security benefit, or 85% of the difference between the Combined Income and the income base. The Tier 2 income base is $34,000 for individuals and $44,000 for married couples.
The IRS has created Publication 915 to help figure your Taxable Social Security.
Social Security Help
The Social Security Administration (SSA) is an independent agency of the U.S. federal government that administers Social Security. In addition to retirement benefits, the SSA also handles disability and survivor benefits. The SSA Website contains a vast amount of useful Social Security information. Also, the SSA Social Security benefits publication (downloadable below in PDF format) provides a great summary reference.
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