Most people pay thousands of dollars each year into Social Security and nearly everyone of retirement age, 92 percent of individuals over age 65, receive benefits. The future of Social Security has been recently debated and may be in jeopardy. With so many people with a stake in Social Security it is important to understand how this complex program works. Social Security is actually made up of three parts.
- Retirement – Lifetime monthly income for qualified workers of retirement age and their spouses. A worker can start to collect Social Security as early as age 62, but cannot begin to receive full benefits until between age 65 and 67, depending on their date of birth.
- Survivors – Provides monthly lifetime income to the spouse of a deceased worker and benefits to minor children until they reach age 18.
- Disability – Lifetime monthly income to workers with a disability that lasts at least 12 months. The worker must not be able to do any kind of substantial work.
Who is Eligible?
To qualify for retirement benefits, workers must have paid at least the minimum level of Social Security taxes for ten years. For disability benefits, the requirements vary depending on the age at which one becomes disabled. Some jobs, especially government positions, are not covered by Social Security.
How Much of Your Paycheck Goes to Social Security
Social Security and Medicare taxes comprise the FICA deduction of your paycheck, which is currently at 15.3 percent of your income. Medicare accounts for 2.9 percent, 10.6 percent pays for the retirement and survivors program and 1.8 percent goes to the disability program. In 2005, the earning’s cap for Social Security taxes is $90,000.
The FICA amount listed on your pay stub is only half of what is contributed monthly because employers directly supply the other half on the worker’s behalf. Self-employed individuals must pay the full FICA tax.
Social Security taxes no longer end upon retirement. Since 1983, retirees with incomes above a certain threshold pay income taxes on a portion of their Social Security benefits.
How Benefits Are Determined
Workers have no true property rights to the money they have paid into Social Security. Rather, a very complex formula is used to determine each person’s benefits. The retirement benefit is based on a worker’s highest 35 years of earnings. Only those earnings that the worker paid Social Security taxes on are counted. The benefit amount is adjusted yearly to compensate for inflation.
The spouse of a worker qualifies for a spousal retirement benefit amounting to 50 percent of the worker’s benefit. If they are also eligible for retirement benefits on their own record, certain limitations apply as to how much of spousal benefit amount they will receive.
A deceased worker’s spouse is eligible to receive benefits if the marriage lasted more than 10 years. This requirement is waived if they are responsible for minor children under age 16. The benefit amount is a percentage of the deceased's basic Social Security benefit and varies depending on several factors. Surviving spouses also receive a one-time $255 death benefit.
Surviving minor children are eligible to receive some benefits until they pass age 18. The maximum that can be paid to the surviving spouse and minor children per month is generally equal to about 150 to 180 percent of the worker’s basic benefit rate. In many cases, the unmarried divorced spouse of a worker who dies is eligible for benefits as would a widow or widower.
Social Security is a very complex program with many exceptions to the stated rules. The rules are constantly being updated and revised and will likely be even more dramatically adjusted as leaders struggle with how to make the program viable into the future.