Macro Mondays: Social Security
Welcome to another edition of Macro Mondays! Today I think we would address a topic that is of great importance to millions of Americans, yet many might not fully understand the implications behind it. I'm talking, of course, about Social Security -- the program that helps keep millions of seniors funded in retirement as well as providing them with survivor and medical benefits. It is NOT an entitlement program, as we have mentioned on GradMoney many times before, but acts a national 'insurance' measure if you will.
This article is meant to provide you with the bare bones basics of the Social Security program. For more information on Social Security and associate programs, visit Investopedia by CLICKING HERE.
What is 'Social Security'?
A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits include retirement income, disability income, Medicare and Medicaid, and death and survivorship benefits. Social Security is one of the largest government programs in the world, paying out hundreds of billions of dollars per year.
Based on the year someone was born, retirement benefits may begin as early as age 62 and as late as age 70. The amount of income received is based on "your average indexed monthly earnings" during the 35 years in which you earned the most. Spouses are also eligible to receive Social Security benefits, even if they have limited or non-existent work histories. A divorced spouse can also receive spousal benefits, if the marriage lasted 10 years or longer.
How did 'social security' begin?
The original program was part of President Franklin D. Roosevelt's New Deal plan to lift the U.S. out of the Great Depression. Today, the program is funded through payroll taxes collected by employees and companies; monies are placed into the Social Security Trust Fund and payments are managed by the government along with the Federal Reserve Board.
Social Security has faced serious solvency issues for many decades; today's payments are made from current payroll contributions by workers who may not have money available for them when they retire. Social Security reform – whether through legislation, tax law changes, or privatization – has been a major political issue that draws strong opinions from different demographic segments.
Social Security faces the real threat of becoming insolvent because of factors such as longer life expectancies, a large Baby Boomer population currently entering retirement age, and inflation.
What are the different types of Social Security benefits?
Social Security isn’t just for retired people. The program also pays benefits to the disabled, widows and widowers, children, stepchildren, divorced spouses and others. Below is an explanation of the benefits Social Security provides.
Of the 58 million people receiving benefits, about 41 million, or 71%, receive retirement benefits. To qualify for benefits, you must first meet the age requirements and have paid into Social Security. If you were born between 1943 and 1954, you can begin receiving full benefits at age 66. If your birthday is between 1955 and 1959, two months are added for each additional year until people who were born in 1960 or later receive full benefits at 67 years of age. Beyond full retirement age, your check will rise each year you delay receiving benefits up to age 70.
You can receive partial benefits at age 62. Because you stopped paying into Social Security four or five years before your full retirement age, your benefits are lower – around 25% less.
In addition to meeting the age requirement, you have to earn 40 credits if you were born in 1929 or later. You can earn a maximum of four credits each year. Credits are based on earnings. The number may change each year but in 2014, $1,200 in earnings equals one credit. To get the maximum amount of credits, you had to make $4,800 in a single year. If you earn more than 40 credits, and most people will, you won’t receive additional benefits.
When you retire, you will receive about $1,294 on average, based on "your average indexed monthly earnings during the 35 years in which you earned the most."
Your spouse may file for benefits if he or she is at least 62 years old – or is any age but caring for your child, if the child is under 16 or is receiving Social Security disability benefits. The benefit can be as much as half of your benefits amount.
Spouses who are also eligible for retirement benefits on their own will receive the higher of the two benefit amounts for which they qualify. Use the calculator on this page to see if spousal benefits are your best course of action.
Children under the age of 18, high school students under 19 or adult disabled children (if they became disabled before age 22) may also receive benefits.
Social Security can also serve as a life insurance policy. According to its website, the survivor benefits from Social Security are as good or better than private insurance policies. Spouses of deceased workers are entitled to benefits as early as age 60, but it’s important to note that they never receive two Social Security checks. Once widows or widowers reach retirement age, they will either receive a check based on their individual financial situations or the deceased’s; sometimes they can receive widow/widower benefits first, then switch to their own (higher) benefits when they reach full retirement age or beyond.
Children under the age of 18, high school students under 19 and adult disabled children (if they became disabled before age 22) may also receive benefits.
Stepchildren, grandchildren, step-grandchildren and adopted children may qualify as well.
The deceased’s spouse or children may qualify for a one-time death payment of $255 if they meet certain requirements. Survivors may apply up to two years after the date of death.
If the deceased provided at least 50% support for his or her parents, the parents may qualify if they’re age 62 or older.
Divorced spouses who are 60 or older may qualify for benefits if the marriage lasted at least 10 years. There are, however, other rules that may affect eligibility.
According to Social Security, the rules for survivor benefits are highly individualized and complicated. Widows and widowers should talk to a caseworker to determine if it makes financial sense to take survivor benefits if they qualify, and for determination of the monthly amount.
If you have a qualifying disability, you can receive Social Security benefits at any age. First you have to pass a “work test.” If you become disabled before you turn 24, you need 1.5 years of work during the three-year period ending when your disability began. As you get older, these requirements change.
After submitting the required documents, the Social Security office will determine if you qualify for disability benefits. Social Security considers a variety of factors to determine if your condition qualifies you for disability benefits.
Spouses of disabled workers can receive benefits if they have children under 16 or disabled children in their care, or if they’re at least 62 years old. The same rules apply to divorced spouses.
Children under the age of 18, high school students under 19 and adult disabled children under 22 might also qualify for disability benefits.