What Is Social Security?

Social Security represents a critical foundation of financial security for millions in the United States. But what exactly is Social Security, and how does it work? This comprehensive guide explores the Old Age, Survivors, and Disability Insurance (OASDI) program. Overseen by the Social Security Administration (SSA), providing insights into its operations, benefits, and the significant role it plays in supporting Americans.

Understanding the Social Security Program

At its core, Social Security is an insurance program designed to offer financial assistance to individuals in their retirement years. As well as to those who are disabled or to the families of deceased workers. Funded through payroll taxes collected from workers and employers, this program plays a pivotal role in the economic stability of millions of Americans.

How Social Security Works

Social Security is funded by payroll taxes collected from employees and employers. Self-employed individuals pay these taxes through their federal tax returns. Each year, workers can earn up to four credits. The amount needed for a credit in 2023 is $1,640 and slightly higher at $1,730 in 2024. These contributions go into two trust funds: the Old-Age and Survivors Insurance Trust Fund (OASI) for retirees and the Disability Insurance Trust Fund (DI) for those receiving disability benefits.

A board of trustees, including key government officials and public representatives, oversees the financial operations of these trust funds, ensuring the program’s sustainability and reliability for future beneficiaries.

The Connection with Medicare

It’s also essential to understand Medicare’s relationship with Social Security. Medicare, a federal health insurance program, primarily serves people aged 65 and older, along with some younger individuals with disabilities. Like Social Security, payroll withholdings fund Medicare, highlighting the integrated approach to supporting the health and financial well-being of American citizens in their later years or in times of need.

Eligibility and Benefits

Who Can Get Retirement Benefits?

Eligibility for Social Security retirement benefits requires at least 10 years of contributions to the system. Early retirement benefits can be claimed starting at age 62, but waiting until the full retirement age (FRA), which ranges between 66 and 67, yields higher monthly benefits. Maximising benefits by delaying retirement up to age 70 can significantly increase the monthly disbursement, though there are no additional increases for delaying beyond this age.

Spouses, divorced spouses (under certain conditions), and children of retirees can also be eligible for benefits, highlighting the program’s comprehensive support for workers’ families.

How Much Can I Get in Social Security Benefits?

The amount of Social Security retirement benefits one can receive is based on the average indexed monthly earnings (AIME) over the 35 highest-earning years. This means that the benefit amount varies significantly among retirees. As of September 2023, the average monthly retirement benefit was $1,841. Importantly, delaying retirement past the full retirement age increases the annual benefit amount by 8% for each year up to age 70, allowing for a strategic approach to maximising retirement income.

Who Can Get Survivor Benefits?

Survivor benefits are a crucial aspect of the Social Security system, providing financial support to the families of deceased workers. This system, established as part of the New Deal in 1935, has evolved over the decades into a cornerstone of financial security for millions of Americans. Understanding who is eligible for survivor benefits can help families navigate their financial futures after the loss of a loved one.

The Eligibility for Survivor Benefits

Survivor benefits extend to the spouse and children of a deceased worker, relying on the worker’s earnings record. Here’s a breakdown of who can receive these benefits:

Spouses

• Surviving Spouses Aged 60 or Older: Those who have reached the age of 60 can claim survivor benefits.
• Disabled Spouses Aged 50 or Older: If the surviving spouse is disabled and aged 50 or older, they may also be eligible.
• Spouses Caring for a Child: A surviving spouse of any age who is taking care of the deceased worker’s child under the age of 16 or a disabled child can qualify for benefits.

Children

Children may receive survivor benefits if they are:

• Under 18 Years Old: Generally, benefits are available to children under 18.
• Disabled: Children who are disabled may also qualify for benefits.
• Other Dependents: Stepchildren, grandchildren, step-grandchildren, and adopted children might be eligible under certain circumstances.

Dependent Parents

Parents who are 62 or older and were financially dependent on the deceased worker for at least half of their income have the potential to collect survivor benefits.

Additionally, under some circumstances, surviving spouses and minor children may qualify for a one-time payment of $255.

The History of Social Security

The Great Depression, a time of significant economic hardship that hit older people especially hard, gave birth to the Social Security system in the U.S. On August 14, 1935, President Franklin D. Roosevelt signed the Social Security Act into law, establishing a system of retirement benefits for workers, as well as benefits for the unemployed and disabled.

Ida M. Fuller, a retired legal secretary from Vermont, was the first person to receive a Social Security benefit check on January 1, 1940. Her first check was for $22.54. Marking the beginning of a program that would grow to become one of the world’s largest government initiatives. Paying out hundreds of billions of dollars each year to nearly 71 million people as of 2023.

The Future of Social Security

Despite its success, the Social Security system faces challenges. The ageing U.S. population and a declining worker-to-retiree ratio have raised concerns about the program’s long-term viability. The Social Security Board of Trustees reported in 2023 that the retirement fund’s reserves depleted by 2033, leading to a possible reduction in benefits.

Moreover, the Hospital Insurance Trust Fund, financing Medicare Part A, should face depletion by 2031. Although the system is under strain, reforms and policy adjustments could help secure its future.

What Is the Full Retirement Age (FRA)?

Full Retirement Age (FRA) is the age at which a person can claim full retirement benefits from Social Security. This age varies depending on the year of birth, from 66 years and two months for those born in 1955, gradually increasing to 67 for anyone born in 1960 or later. Understanding FRA is essential for planning retirement and maximising benefits.

A Beacon of Hope: Pulling Millions from Poverty

Recent estimates from the Center on Budget and Policy Priorities paint a vivid picture of the program’s impact: Social Security lifts 22.7 million Americans above the federal poverty line every year. Among these are 16.5 million adults aged 65 and above. Without this guaranteed income, the older adult poverty rate would skyrocket to an alarming 39% from the current 10.2%. This statistic alone highlights how the program critically serves as a lifeline for millions, ensuring dignity marks the golden years of life rather than desperation.

More Than Just a Check: Social Security’s Role in Retirement

Social Security’s significance goes beyond just poverty alleviation. For over two decades, Gallup polls have consistently shown something important. Between 80% and 90% of retirees rely on their Social Security benefits. These benefits serve as either a major or minor source of income. This reliance highlights the program’s crucial role. It helps retirees manage their finances. Additionally, it bridges the gap between personal savings and the cost of living in retirement.

The Waiting Game: A Strategy That Pays Off

An intriguing aspect of Social Security is the potential benefit of delaying claims. The program incentivises patience; for each year benefits deferred beyond the early eligibility age of 62 (up to age 70), monthly payments increase by as much as 8%. This can significantly boost retirement income. Early filers face a permanent reduction of up to 30% in their monthly payout, while those who delay until age 70 can see their benefits increase by 24% to 32% over the full retirement age payout.

Evidence Backs Patience

The value of waiting is more than anecdotal. A comprehensive study by United Income, utilising data from the University of Michigan’s Health and Retirement Study, analysed the benefit claims of 20,000 retired workers. The findings were telling: optimal claiming decisions, those that resulted in the highest lifetime income, were typically at or beyond full retirement age, with age 70 being the optimal choice for 57% of claimants. This contrasts sharply with the majority of workers who claim benefits before reaching their full retirement age.

Maximising Benefits: The Long Game

To maximise Social Security benefits, working beyond the traditional 35 years can be advantageous. The Social Security Administration (SSA) calculates monthly benefits based on your 35 highest-earning years, adjusted for inflation. For those with fewer than 35 years of earnings, the SSA includes years of zero income in their calculation, reducing potential benefits. Therefore, extending one’s career not only provides immediate financial benefits but also enhances future Social Security payouts. This approach allows older workers to replace lower-earning years with higher wages earned later in life. Also reflecting a culmination of experience and skill.

The Path Forward

As we look to the future, the challenges facing Social Security are manifold. Demographic shifts, including an ageing population and longer life expectancies, threaten the program’s solvency. Yet, the importance of Social Security in the lives of Americans cannot overstated. It remains a critical component of retirement planning, offering not just financial security but peace of mind.

Advocacy and Adaptation

Ensuring the longevity and effectiveness of Social Security will require concerted efforts from policymakers, advocacy groups, and the public. Proposed reforms range from raising the full retirement age to adjusting the formula for calculating benefits. What remains clear is the importance of a balanced approach that preserves the program’s foundational role in supporting older adults, individuals with disabilities, and survivors. Also, without placing undue burden on future generations.

Social Security stands as a testament to the United States’ commitment to supporting its citizens through retirement, disability, and loss. By providing a financial safety net, the program helps ensure that Americans can face the future with confidence. Also, knowing that they and their families are supported in times of need.