What are social security benefits? How do they work? Do they come with any unique advantages that one can look forward to utilizing? Can you rely on it to be your salvation when are in need of emergency funds? Welcome to today’s article in which we shall dive into a very interesting topic that you ought to know about. Read on to discover more about what social security benefits entail.
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What are social security benefits?
Social security benefits refer to payments that are made to those who are qualified retirees and disabled people, as well as to their spouses, children, and survivors. Social Security is actually a well-structured federal benefits program that is designed to offer partial replacement of income for retirees, their spouses, the disabled, along those whose ex-spouses qualify for such payments.
The social security act was signed into law back in 1935, by President Franklin Roosevelt. The law we have today has undergone a couple of amendments, to ensure that it encompasses several social insurance and social welfare programs, which include the provision of social security benefits. The benefits received are usually determined by unique criteria that are issued by the Social Security Administration (SSA).
How do social security benefits work
The payroll taxes collected under the Federal Insurance Contribution Act (FICA), as well as the Self-employed Contributions Act(SECA), are used to fund Social Security along with all its benefits. The internal revenue service (IRS) is responsible for the collection of tax deposits, after which it formally entrusts them to the Social security trust fund. The social security trust fund comprises of two separate funds, which are:
- Old-age and Survivors Insurance Trust Fund
- Disability Insurance Trust Fund
For you to qualify for social security benefits during your old age, you have to make the required contributions to the program during your working years. Currently, full insurance is based on the accumulation of 40 credits (also known as quarters) from the covered wages. As a worker, you can earn up to 4 credits annually. One credit is usually awarded every time the contributor earns $1470 (2021). In 2022, one credit will be awarded when a worker earns $1510. The amount of money required for a worker to earn one credit is usually adjusted so that it can keep up with inflation.
There is a payroll tax cap that sets the highest amount of income that one can earn subject to the social security payroll tax. As of 2021, the cap is at $142,800. This will increase to $147000 in 2022.
Average Indexed Monthly Earnings
The Social Security Administration is charged with keeping track of your earnings throughout your career so that they can index your total earnings each year. Eventually, they use the 35 highest-earning years to calculate your average indexed monthly earnings (AIME). Your AIME is then used to calculate your primary insurance amount (PIA), which is the monthly amount that you begin to collect upon reaching your full retirement age. Workers can collect their social security retirement benefits at the age of 62, though the amount of the benefits will be reduced in a bid to compensate for the early reception, and presumably, for the reception of the benefits for a longer period.
In 2021, the highest amount of social security payments that are retired workers is $3148, a figure that is expected to rise to $3,345 in 2022. You can use the SSA retirement calculator to help you determine:
- Your full retirement age
- Life expectancy ( this is used for the calculation of expected benefits)
- Estimates of your retirement benefits.
- The projections of your retirement benefits (these are based on your past work records)
Note that retirees who have SECA-taxed wages require additional help since the rules that apply to them are more complex.
How much social security income can I expect to receive?
This is such a frequently asked question and one that I would like to answer before moving on to anything else. In most cases, the amount of social security income you end up receiving is dependent on several factors, which we have already discussed, including:
- Your lifetime earnings
- The age at which you begin to receive the benefits
- Your eligibility to receive your spouse’s benefits instead of your own.
The benefits accorded to spouses and survivors
According to SSA, the spouses who did not work or didn’t manage to earn a sufficient number of credits for them to qualify for social security on their own can start receiving benefits at age 62, based on the nature of their spouse’s work records. As is the case with one claiming benefits before reaching their full retirement age, the spouse’s benefits are usually reduced if they claim their benefits before hitting their full retirement age. The highest amount of spousal benefit your spouse is entitled to is half that of the benefits that you are entitled to at your full retirement age.
In the event that a spouse dies, their surviving spouse is usually entitled to file for survivor benefits, which can happen when they are aged as early as 60. Even in this case, the benefits will still be reduced, if they file before reaching their full retirement age. The SSA allows them to switch to their own benefits at any given time that they wish to, starting at age 62 through to age 70 if they realize that their social Security benefits are higher than the survivor’s benefits.
Considerations are also made for people who are married for 10 or more years and are divorced (without having remarried). Such people can collect spousal benefits, or spousal survivor benefits, depending on the situation.
Taxes paid on social security benefits
Individuals who have an income that exceeds $25,000, or married couples that file jointly and have an income of over $32,000, are required to pay taxes on the social security benefits they receive. Usually, the portion of their benefits that is taxed, is dependent on their income level, though no one pays taxes on over 85% of their social security benefits.
The good thing is that the benefits that are received due to disability are often tax-free. If one or all of your children receive dependent or survivor benefits, the funds they receive are not perceived as your taxable income.
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Thank you for making it to the end of this article and which we have answered the question “ what are social security benefits?” I hope that you found it informative and beneficial. I would recommend that you also have a look at the reviews of the gold IRA service providers I have linked above, to see how you can secure your nest egg of retirement investments. Let me know if you have any questions with regards to today’s topic, or how you can add gold to your retirement investment portfolio.
I wish you well,
Eric, Investor and Team Member at Gold Retired!