Benefits to Empowerment: Understanding Social Security

Social Security stands as one of the most significant pillars of the United States' social safety net. Envisioned as a means to provide financial support to retirees, disabled individuals, and survivors, the program has a rich history and a critical role in safeguarding the economic well-being of the American population.

The inception of Social Security dates back to the 1930s, during a period of economic upheaval known as the Great Depression. President Franklin D. Roosevelt signed the Social Security Act into law on August 14, 1935, establishing a federal program designed to provide financial security to retirees and those facing disability or survivorship challenges. The overarching goal was to alleviate poverty among vulnerable segments of society and offer a safety net that would prevent destitution in old age or due to unforeseen circumstances.

Social Security Benefits

In the United States, the Social Security Administration offers types of benefits to eligible individuals, including retirement benefits, disability benefits, survivor benefits, and auxiliary benefits. It is important to understand each type of benefit has its own eligibility criteria and requirements.

1. Retirement Benefits:  Probably the most well-known type of Social Security benefits.   Retirement benefits provide a steady income to individuals who have accumulated the required number of work credits and have reached the eligible age.

• You need to have earned a minimum of 40 work credits, which is typically equivalent to 10 years of work subject to Social Security taxes.

• As of 2023, one work credit is earned for every $1,640 in covered earnings each year. You must earn $6,560 to get the maximum 4 credits for the year.

The retirement age to receive full benefits, known as Full Retirement Age (FRA), ranges from 65 to 67, depending on the birth year. If an individual starts receiving benefits before their FRA, the monthly benefit amount is permanently reduced. Delaying benefits beyond the full retirement age can lead to higher monthly payments.

• The benefit reduction is approximately 6.67% per year for the first three years before FRA.

• You can receive an additional 5% per year if the individual starts benefits earlier than three years before FRA.

These benefits provide financial support to individuals who have reached the designated full retirement age (FRA) or choose to begin receiving benefits as early as age 62. The amount of the benefit is based on an individual's average earnings over their working years, and it can vary depending on the age at which benefits are claimed. Individuals can choose to claim benefits as early as age 62, but claiming before full retirement age results in a permanent reduction in the monthly benefit amount. Delaying benefits beyond the full retirement age can lead to higher monthly payments.

2. Disability Benefits:  Social Security Disability Insurance (SSDI) benefits are intended for individuals who are unable to work due to a severe medical condition that is expected to last for at least one year or result in death. Eligibility is based on both the medical condition and the individual's work history.

• Generally, a person needs to have earned 20 credits in the ten years immediately preceding their disability onset. However, younger individuals may require fewer credits.

• The SSA adjusts the work credit requirement based on the individual's age at the time of disability onset. The general rule is that a younger person needs to have earned credits for half the time between age 21 and the time they became disabled.  

Here's a simplified example:

• If the individual becomes disabled at age 22, they would need to have earned credits for at least one year (since 22 - 21 = 1 year).

• If the individual becomes disabled at age 30, they would need to have earned credits for at least four years (since 30 - 21 = 9 years, and half of 9 is 4.5, rounded down to 4 years).

• This approach recognizes the unique circumstances of individuals who become disabled at a young age and may not have had the chance to accumulate a full work history. It ensures that even those with limited work history can potentially qualify for SSDI benefits if they experience a disabling condition.

In addition to the work credits, the individual's medical condition must meet the Social Security Administration's (SSA) definition of a disability. This definition involves having a severe medical condition that prevents substantial gainful activity, is expected to last for at least one year or result in death, and meets specific medical criteria outlined by the SSA.

3. Survivor Benefits:  The surviving family members of a deceased worker may be eligible for survivor benefits. This includes widows or widowers, dependent children, and dependent parents in certain circumstances. These benefits help ease the financial burden that can arise due to the loss of a breadwinner. To be eligible for survivor benefits, the deceased worker's work history and work credits play a crucial role.

• Similar to disability credits, the SSA has established a system that adjusts the work credit requirement based on the age of the deceased worker.  Each person’s situation is unique, and the SSA takes this into account. 

• This ensures that even individuals who may not have worked as long can still provide survivor benefits to their loved ones. The general principle is that the younger the deceased worker, the fewer work credits are required for survivor benefit eligibility.

Survivor benefits under the Social Security program are calculated based on the earnings of the deceased worker and the relationship of the survivor to the worker. The benefit amount is derived from the deceased worker's basic benefit amount, with the percentage survivors can receive being determined by their age and their relationship to the worker.

• A widow or widower who is at full retirement age or older generally receives 100% of the deceased worker's basic benefit amount.

• A widow or widower between the ages of 60 and full retirement age receives between 71% and 99% of the worker's basic benefit amount.

• A widow or widower of any age with a child younger than 16 receives 75% of the worker's benefit amount.

• An unmarried minor or child with a disability receives 75% of the worker's benefit amount.

Divorced spouses and dependent parents may also be eligible for survivor benefits. The eligibility criteria and benefit percentage for dependent parents are as follows:

• A dependent parent who is age 62 or older can receive a benefit equal to 82.5% of the deceased worker's basic benefit amount.

• If both parents are eligible, each parent can receive 75% of the worker's benefit individually.

To be eligible for survivor benefits as a divorced spouse, the marriage must have lasted at least 10 years, and the divorced spouse must be unmarried and not eligible for an equal or higher benefit based on their own work history.  The benefit percentage for divorced spouses are similar to those for widows and widowers:

• A divorced spouse who is at full retirement age or older generally receives 100% of the deceased worker's basic benefit amount.

• A divorced spouse between the ages of 60 and full retirement age receives between 71% and 99% of the worker's basic benefit amount.

Planning Opportunities 

• Restricted Application for Spousal Benefits: Unlike spousal benefits, if you are a surviving spouse and you are eligible for both your own retirement benefit and a survivor's benefit, you may have the option to claim only the survivor's benefit first and delay your own retirement benefit. This can allow your own retirement benefit to grow until you decide to switch to it later. This strategy can help maximize your total benefits over time.

• Delaying Benefits for a Higher Survivor Benefit: Just like with regular retirement benefits, surviving spouses can benefit from delaying their survivor benefits beyond full retirement age. Survivor benefits can increase by about 8% per year for each year you delay between full retirement age and age 70.

• Remarrying After Age 60: If you are a divorced spouse and remarry after age 60, your eligibility for survivor benefits based on your previous marriage is retained. However, if you remarry before age 60, you generally won't be eligible for benefits based on your ex-spouse's record while you're married.

4. Spousal Benefits: Designed to provide financial assistance to spouses who have not worked or earned sufficient Social Security credits on their own but are married to someone who is eligible for Social Security retirement benefits. These benefits allow a non-working or lower-earning spouse to receive a portion of their working spouse's retirement benefits.

• The recipient must be at least age 62 or older to claim spousal retirement benefits.

• The working spouse (the primary beneficiary) must have already filed for their own Social Security retirement benefits in order for the spouse to be eligible for spousal benefits.

• The spousal benefit amount can be up to 50% of the primary beneficiary's full retirement benefit amount.

• If the spouse claiming the spousal benefit starts receiving it before their full retirement age, the benefit amount is reduced.

• Importantly, spousal benefits do not impact the working spouse's retirement benefit amount.

5. Dependent Children's Benefits:children of eligible Social Security recipients can receive benefits until they reach a certain age, typically 18 (or 19 if they are still in high school) or 21 if they are disabled. These benefits are intended to provide financial support for children whose parents are receiving Social Security retirement, disability, or survivor benefits.

The amount of dependent children's benefits is typically based on a percentage of the eligible worker's Social Security benefit amount. The total family benefit amount that can be paid to all eligible family members is subject to a maximum limit.

• Each eligible child can receive up to 50% of the worker's full retirement or disability benefit amount.

• The total family benefit amount cannot exceed the maximum family benefit limit, which typically ranges from 150% to 180% of the eligible worker's benefit amount.

Confidence and Empowerment

Understanding the various types of Social Security benefits is essential for effective financial planning, especially as individuals transition into retirement or encounter life-changing events.  The wisdom to master these intricacies leads to informed choices, fueling better financial planning. Decisions about when to claim benefits can significantly affect monthly payouts, creating a vital dynamic for strategizing retirement income.  It goes beyond financial figures; it empowers individuals to navigate their financial future with confidence.