Social security is an essentially a government-sponsored program to provide economic assistance to individuals and families. It functions as a social safety net. It prevents those that are no longer able to economically sustain themselves from falling prey to the worst repercussions of poverty.
However, social security was never meant to be the only source of income for people when they retire. Savings accounts, retirement accounts, and other financial assets are supposed to play their part. Still, retired Americans make up about 80% of recipients while another 20% of beneficiaries are disabled or young survivors of deceased workers.
If you’re reaching retirement age, recently became disabled, or suffered a major loss in your family, you probably have a ton of questions on social security and whether you qualify. So exactly what does social security do? And how old do you have to be to get the benefits? Take a look at our guide to get the answers you’ve been looking for.
How Does Social Security Work?
Social security works by pooling a small percentage of the working population’s income through taxes. It is then distributing those funds to individuals that qualify for the benefits. Another way you can think about it is by paying into the system during your working years, you’re able to collect the benefits when you become eligible for retirement. In this way, social security helps replace a percentage of your pre-retirement income based on your lifetime earnings.
Social security affects almost every person in the United States at some point in their lives. The modern-day American system was signed into law by President Roosevelt on August 14, 1935. It was originally designed as a social program to pay retired workers income once they’ve retired. Since its early days, modern-day social security has evolved to help people suffering from disabilities and surviving families of a deceased spouse or parent.
How Old Do You Have to Be To Get Social Security?
You can start to receive social security benefits when you are 62 years old. However, there are some special circumstances that would allow you to apply earlier. For instance, you qualify for social security benefits if your spouse or parent has passed away. You may also be able to receive benefits if you become disabled. You must meet the Social Security Administration (SSA) definition of “disabled”.
The SSA defines a disability as “the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment(s) which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.”
More often than not, you will also need to have enough work credits to be eligible for the benefits. Social security work credits are measured by your annual income. You can only earn up to four credits each year.
How work credits are calculated varies year by year. For example, in 2020 you would earn one work credit for each $1,410 of income earned. Once you’ve earned $5,640, you’ll have four credits and will have reached your maximum limit for the year.
Age Ranges For Work Credits
Depending on the age when you become disabled, the number of work credits you need to qualify for social security benefits will vary. More often than not, you’ll need 40 credits and 20 of those credits will need to have been earned 10 years prior to the year you become disabled. However, if you’re a younger worker, your work credit requirements will look like the following:
- Before age 24: You may qualify if you earned at least six work credits in the three years prior to when your disability started.
- Age 24 to 31: You may qualify if you earned at least 12 work credits in the six years prior to when your disability started.
- Age 31 and older: You may qualify if you earned at least 20 work credits in the 10 years prior to when your disability started.
If you’re the surviving child or spouse of someone who has passed, your eligibility for social security will not be based on your work credits. Instead, you may receive a percentage of your family member’s benefits — typically between 75% to 100%.
How Is Social Security Calculated?
If you’re planning your retirement, it’s important to know how social security is calculated. For the most part, benefits are calculated based on your lifetime earnings. The SSA takes into account inflation and other factors to calculate your average monthly earnings during the 35 years in which your earnings were highest. From there, they apply a formula to these earnings to find the full benefit you would receive if you retired at 66 or older.
There are some factors that will affect the amount of your social security benefits. For example, you can opt to start receiving benefits once you are 62. However, your benefits will be lower by a certain percentage if you retire before the full retirement age, which is 66 as of 2020.
You may also choose to delay applying for social security benefits. In this case, the amount you will be eligible to receive will increase each month that you delay receiving benefits. This will continue from the age of 66, up until you are 70 years old.
Is Social Security Taxed?
Most people that are beginning to apply find themselves asking the same question, “Is social security taxed?”. Whether or not your benefits will be taxed depends on your unique financial situation.
If these benefits are your only source of income, you will not need to pay taxes on your benefits. On the other hand, if you have additional sources of income, you may need to pay taxes on your benefits.
For instance, if you are earning wages, self-employment income, interest, dividends or other taxable income, you will need to report these earnings on your tax return. The amount you will pay in taxes will depend on your income bracket. This is also dependent upon whether you are married and filing a joint tax return.
Suppose you file an individual federal tax return and your annual income is between $25,000 and $34,000. Up to 50% of your benefits might be taxable. If your income is over $34,000, you may have to pay taxes on up to 85% of your benefits.
On the other hand, if you file a joint return, and you and your partner have a combined annual income between $32,000 and $44,000 — you could pay taxes on up to 50% of your benefits. If you are both bringing in more than $44,000 a year, you’ll pay taxes on up to 85% of your benefits.
Do You Have to Apply for Social Security?
Wondering do you have to apply for social security, and if so, can you apply for it early? If you’re planning on claiming retirement benefits, the earliest you can apply for social security is 4 months before you turn 62. Once you’re of age, you’ll need to apply either online, over the phone, or in-person at a social security office.
You only need to apply once for retirement benefits, there’s no need to have to continuously apply again every year. You can apply for social security as well as read about the application process on the SSA website. In order to apply for social security you will need the following documents and information.
- Your social security number
- Your original birth certificate or another proof of age
- Proof of U.S. citizenship
- Your W-2 tax form or self-employment tax return from a year prior.
- Information such as dates and locations of previous marriages
- The names and dates of your employer over the past two years
- Information about self-employment income
- Information about your business
- Bank information for setting up direct deposits
- Information on family members that may qualify for benefits based on your record.
The Current State of Social Security
Social security has been a hot topic in the political arena. Estimates continuously point to social security funds running low and eventually running out. Data from the The 2020 OASDI Trustees Report approximates social security’s combined trust fund reserves that pay retirement and disability benefits will be depleted by 2035. If policymakers take no action to revitalize the program, after 2035, social security could still pay about three-quarters of scheduled benefits through ongoing public taxes.
There may be a lot of pressure on policymakers to enact laws to continuously support the economic social safety net that provides for millions of Americans. There is no guarantee, however, that these benefits will remain the same after 15 years.
Planning for Retirement with Social Security
The truth of the matter is that this was never designed to supplement a full-time income during retirement years. In fact, it is only meant to cover about 40% of someone’s expenses. Because the current state of social security seems unstable, it’s in your best interest to contribute to a retirement plan. You should also get information on life insurance, as well as stay up to date with policy changes.
It’s important to take the initiative while you are young to build up retirement savings through a 401(k) or IRA. As well as consider other forms of income that could support you during your retirement years. Rental income, home equity, dividend payouts, royalties, annuities, and even part-time wages can play a role in helping you sustain yourself and your family throughout retirement.
In the meantime, try to delay your retirement as much as possible — up until 70 years old. Delaying your retirement or refraining from retiring before you reach the official retirement age can help ensure you receive the maximum social security benefits you are eligible for.
If you are approaching your retirement age, it would be wise to consult with a financial advisor. A professional could help you save money. They can help you develop a strategy for ensuring you are well-supported throughout your retirement years.