Navigating the Social Security Waters

The Social Security Act was passed in 1935 and the retirement benefits program was enacted in 1937. The program was and still is designed to serve as a financial safety net for retirees and those receiving benefits as a surviving spouse, surviving dependent child or as a person who is permanently and totally disabled.

Most people know of the financial troubles the Social Security System faces, and some younger beneficiaries may wonder if there will be anything left for them. It is uncertain how long Social Security will remain solvent, so it is prudent to err on the side of caution and focus on personal savings and investments as well as insurance for retirement, disability and premature death. This article aims to address some common questions and confusions surrounding the Social Security System, assuming benefits will continue to be paid to those who have earned them.

How the System is Funded

Social Security is funded through payroll taxes; employees and employers each pay a percentage (6.2 percent) of up to $106,800 in wages into the system. The system, in turn, uses these funds to pay current beneficiaries and retains any excesses for future beneficiaries. Participants earn credits towards Social Security based on “calendar quarters”. A calendar quarter means any three month period ending with March 31, June 30, September 30, or December 31. When you have contributed to the system based on income of at least $1,120 (in 2011), you have earned a calendar quarter’s worth of coverage. If you earn $4,480 in a two month period, you will have earned four quarter’s worth of coverage. These quarters determine what benefits you are entitled to, as detailed below.

What Benefits are Available & Who is Covered

“Currently insured” means you have acquired at least six quarters of coverage during the last thirteen-quarter period when you either died or became eligible for disability benefits. You must be currently insured to be eligible for disability benefits and, upon your death, for your surviving spouse to receive the $255 death benefit and Mother’s/Father’s benefits along with any surviving dependent children’s benefits.

“Fully insured” means you have acquired forty quarters of coverage. (There are other calculations that consider fewer quarters of coverage and years of work after a certain age which are beyond this article.) Once you are fully insured, you are not required to work any longer to qualify for benefits (although working longer may increase your benefit.) You must be fully insured to receive retirement benefits.

Benefit Basics for Retirement

• Full retirement age is based on your date of birth, starting at age 65 if you were born in 1937 or earlier and increasing to age 67 if you were born any time after 1938. (Note that although the full retirement age is rising, you should still apply for Medicare benefits within three months of your 65th birthday.)
• You may receive a reduced benefit as early as age 62, however. In addition, you may choose to delay receiving payments to increase your benefit payment amount. Depending on the year you were born, this increase will be added in automatically from the time you reach your full retirement age until you start taking benefits or reach age 70, whichever comes first. This delayed strategy is especially helpful for women and both genders with expected longevity.
• A spouse may receive a retirement benefit based on (roughly) the greater of his/her benefit or half of the primary working spouse’s benefit. They may receive this benefit as early as age 62 as well, whether or not the primary working spouse has attained age 62 or is receiving benefits.
• Social Security benefits may be federally taxable, but most states do not tax Social Security benefits. 
  • If half of your benefits plus your other income exceed $25,000 ($32,000 if married, filing a joint return), then 50 percent of your Social Security benefits are taxable.
  • If half of your benefits plus your other income exceed $34,000 ($44,000 if married, filing a joint return), then 85 percent of your Social Security benefits are taxable.
• If you work while receiving benefits, your benefits may be reduced. According to The Social Security Administration’s website, in 2011:
  • If you are below full retirement age, the annual limit is $14,160. $1 in benefits will be deducted for every $2 you earn above the annual limit.
  • In the year you reach full retirement age, the annual limit is $37,680. $1 in benefits will be deducted for each $3 you earn above the annual limit.
  • Starting with the month you reach full retirement age, there are no limits on the money you can earn.
  • If a child or spouse on your record works while receiving benefits, the same earnings limits apply. 

This is just a basic description of the benefits available to you. Additional rules and benefits apply if you are divorced, widowed or disabled. Further questions you have should be addressed with your personal advisers along with a representative from the Social Security Administration.

FPA member Amy Jo Lauber, CFP^®, is President, Lauber Financial Planning in West Seneca, NY.