Social Security affects the lives of hundreds of millions of Americans. About 60 million people receive monthly benefits from the program, and roughly 168 million workers pay Social Security taxes to cover those benefits, according to the Social Security Administration. Yet despite those numbers, many people don't have a fundamental idea of what Social Security is. Below, we'll look at the basics of the Social Security program and what impact it could have on you and your finances.
What Social Security is
Social Security is a public government program that provides assistance to retired and disabled workers and their families. It's composed of two parts. The Old Age and Survivors Insurance program pays benefits to workers after they retire, as well as spousal and children's benefits to family members who qualify. It also provides funds to the surviving spouse and other qualifying family members after the worker's death. The Disability Insurance program makes similar payments of benefits to those who become permanently disabled.
How Social Security works
At its most basic level, Social Security is a simple program. Workers in jobs that participate in the system pay Social Security taxes to the federal government, and employers match the taxes that are withheld from workers' pay with an equal amount of their own money. The Social Security Administration then uses the tax money that it collects to pay benefits to those who are currently eligible to receive them.
Currently, most employees have 6.2% of their pay withheld from their paychecks to cover Social Security taxes. The employer then pays 6.2% of its employees' pay toward those taxes as well. If you're self-employed, then the federal government puts you on the hook for the total 12.4% amount as part of the self-employment taxes that you pay.
How do I become eligible for Social Security?
To receive Social Security benefits, you have to meet minimum work requirements. For retirement benefits, you have to earn 40 credits under the program. You can earn up to four credits each year, and it takes $1,260 in earnings during 2016 to collect a single credit. For most people, 10 years of work is enough to get full retirement benefits. If you qualify for retirement benefits, then your family will also potentially be eligible for spousal, children's, and survivor benefits on your work record.
Disability benefits work differently in terms of eligibility. Having 40 credits is always enough to get disability benefits, but lower requirements that vary according to age apply to younger workers to receive disability benefits for themselves and survivor benefits for family members after their death.
How much does Social Security pay?
The amount of benefits that you'll receive from Social Security depends on a number of factors. The most important is the amount of income you earn over the course of your career. The Social Security Administration takes into account up to 35 years of work history in determining your monthly benefit amount. In general, the higher your wages, the greater your benefits will be. However, in pursuing its policy goal of providing baseline financial assistance to participants, Social Security pays a higher percentage of average earnings in the form of benefits to those with lower incomes than to those with higher incomes.
In addition, when you claim Social Security benefits can affect how much you receive. For instance, with retirement benefits, you can start receiving payments at any age between 62 and 70, but the amounts are adjusted depending on when you claim. For example, someone who's eligible to receive $2,000 in monthly Social Security retirement benefits if they start collecting at age 66 would get $1,500 per month if they collected early at age 62, or $2,640 per month if they collected late at age 70. Similar adjustments may apply to spouses collecting spousal or survivor benefits.
How do I apply for Social Security?
To get Social Security benefits, you'll need to apply with the Social Security Administration. The easiest way to do so is to use the online application process at this SSA website. However, you can also visit a local Social Security office or use the toll-free number of 1-800-772-1213 (TTY 1-800-325-0778).
Social Security is a vital program that protects the financial security for millions of Americans. Knowing the basics will help you ensure that you get all the benefits that you've earned from Social Security.