Many retirees rely on their Social Security benefits to help fund their retirement. But Social Security was never intended to be a retirement plan or the sole source of income in retirement. It’s important to understand how the system works and to estimate the amount of monthly income you will receive, so you can make sound decisions about when to take your Social Security benefits and how much additional to save for retirement to ensure you will have enough income to meet your needs.
These frequently asked questions and answers provide basic information about Social Security funding, eligibility, and timing (as of June 2021).
The Social Security Act, signed into law in 1935, was designed to supplement pension plans, private savings, and other sources of income to help support individuals after they retire. The program was later expanded to include survivor’s benefits and benefits for a retiree’s spouse and minor children. Disability benefits were added to the program in 1956.
Today, 9 out of 10 individuals aged 65 or older receive Social Security benefits. Social Security replaces between 35-40% of preretirement income for the average worker (earning $53,757 annually).
Social Security, as well as Medicare’s Hospital Insurance program, is financed primarily by payroll taxes. Both the employee and the employer pay a 7.65% tax, for a total of 15.3% tax, on compensation up to a certain limit – $142,800 for 2021. Compensation above that limit is not subject to this tax. Self-employed people are required to fund the full 15.3% tax themselves. Other sources of funding include income tax some people pay on their Social Security benefit and interest earned on bonds held by the Social Security trust fund. Individuals must file a claim with the Social Security Administration (SSA) to begin drawing Social Security when they are eligible.
As you work and pay Social Security taxes, you earn “credits” toward Social Security benefits. You must earn 40 credits to qualify for Social Security retirement benefits. You can earn up to four credits per year, so you generally need to work for at least 10 years over your lifetime. To earn 1 credit in 2021, you must earn $1,470. The SSA maintains an earnings record reflecting your work credits. The level of benefits you will receive in retirement is based on your lifetime earnings, not on how much you have paid in taxes.
You can find more information in SSA Publication 05-10072, How You Earn Credits.
The age when workers can receive full Social Security retirement benefits has been gradually increasing from age 65 to age 67. If you were born in 1960 or later, you can receive your full retirement benefit if you wait until you are 67 to begin drawing payments.
You can begin receiving Social Security as early as age 62, but your monthly benefit will be reduced by a certain percentage depending on your age to account for the longer time you will be receiving benefits. For example, if you start collecting at age 62 and your full retirement age is 67, your monthly benefit will be reduced by approximately 29%.
If you wait until after your full retirement age to claim your Social Security retirement benefits, you can increase your benefit by approximately 8% for each year you delay, until you reach 70.
You can find more information in SSA Publication 05-10147, When to Start Receiving Retirement Benefits.
The amount of your monthly benefit will depend on your earnings history and the age at which you begin collecting Social Security benefits. For most workers, payments are calculated based on an average of their 35 highest years of earnings. Generally, higher-income during your working years and delaying benefit payments until your full retirement age will result in larger Social Security benefit payments. In 2021, the average monthly benefit is $1,543, and the maximum monthly benefit is $3,148.
The SSA has developed a Retirement Estimator tool and other calculators that allow you to estimate the amount of your monthly Social Security retirement benefit. You can also explore how different claiming ages or future earnings will impact your benefit.
If you are younger than your full retirement age (generally 67), you can earn up to $18,960 in 2021 without affecting your benefits. If you earn more, there will be a $1 reduction in benefits for each $2 earned in excess of the dollar limit in effect for the year. In the year you reach your full retirement age, the reduction in benefits is $1 for each $3 earned, and the earnings limit increases to $50,520 for 2021. This reduction in benefits occurs until the month you reach full retirement age. At full retirement age, there is no more reduction in benefits no matter how high your earnings. Earnings after reaching full retirement age can increase your SSA benefits but will never reduce benefits.
You can find more information in SSA Publication 05-10069, How Work Affects Your Benefits.
For married couples, each spouse is eligible for a Social Security retirement benefit based on their own earnings history and based on the work history of their spouse. One spouse may receive up to as much as 50% of the other spouse’s full benefit. To receive a spousal benefit, the claiming spouse must be at least age 62 and their spouse must have already filed for benefits.
If a spouse is eligible for their own benefit and a spousal benefit, they will receive their own benefit first. If their benefit as a spouse is higher than their own benefit, they will receive a combination of benefits equaling the highest benefit. For example, Mary Ann qualifies for a retirement benefit of $1,250 and a spouse’s benefit of $1,400. At her full retirement age, she will get her own $1,250 retirement benefit and $150 of her spousal benefit, for a total of $1,400, which is her maximum benefit. If she takes her retirement benefits before her full retirement age, both amounts will be reduced.
A person who divorces after at least 10 years of marriage retains certain Social Security benefit rights based on their former spouse’s earnings history if that would yield a higher benefit than the individual’s own earnings history. To qualify for benefits as a divorced spouse, you must be at least age 62 and unmarried.
A widow or widower who begins receiving benefits at full retirement age is entitled to a benefit equal to the full benefit the deceased spouse would have received. Reduced benefits are available as early as age 60, or age 50 if you are disabled. Widows and widowers can take a reduced benefit on the deceased spouse’s record and switch to their own benefits at full retirement age.
According to the SSA, approximately 40% of those who receive Social Security pay federal income taxes on their benefits. Currently, joint filers must pay taxes on up to 50% of their benefits if the spouses have combined annual income between $32,000 and $44,000. If combined income is more than $44,000, up to 85% of Social Security benefits are subject to income tax. For single filers, the income limit is $25,000 – $34,000. Combined income for purposes of these calculations is the sum of adjusted gross income, nontaxable interest, and ½ of Social Security benefits.
The 2020 Social Security Trustees Report estimated that, under the current model, benefits paid out will exceed tax revenue beginning in 2021, and trust fund reserves will begin to be used to pay full scheduled benefits. Full benefits are projected to be paid until 2035 and ¾ of scheduled benefits thereafter. It is expected that the record unemployment caused by the COVID-19 pandemic could negatively affect these figures further.
Multiple proposals have been explored by think tanks and members of Congress to resolve the shortfall under the current model. Solutions being explored include reducing benefits, raising the full retirement age, increasing the Social Security payroll tax rate, and/or increasing the amount of compensation that is taxed for Social Security.
The SSA recommends that people apply for Social Security retirement benefits approximately 3-4 months before the date they want benefits to begin. For example, if you want your benefits to start at age 62, you should apply at age 61 and 9 months. The application can be made on-line at www.ssa.gov or by calling 1-800-772-1213.
Social Security Fact Sheet, Basic Facts, https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
Social Security Fact Sheet, 2021 Social Security Changes, https://www.ssa.gov/news/press/factsheets/colafacts2021.pdf
The 2020 OASDI Trustees Report, https://www.ssa.gov/oact/tr/2020/