The Social Security program has become the most successful and popular domestic government program in U.S. history. Funding for Social Security benefits comes from a compulsory payroll tax split equally between employee and employer. Social Security taxes withheld from wages are called FICA taxes (named for the Federal Insurance Contributions Act). The amounts withheld are put into the Social Security trust fund accounts from which benefits are paid to current program recipients.
Your Contributions to Social Security and Medicare
Wage earners pay both FICA and Medicare taxes to the SSA. The FICA tax is paid on wage income up to the maximum taxable yearly earnings (MTYE), which comprises the maximum amount to which the FICA tax is applied. The MTYE figure $97,500 for last year is adjusted annually for inflation.* The FICA tax rate has been 12.4 percent, consisting of 6.2 percent paid by employees and 6.2 percent paid by employers. Self-employed workers pay a FICA tax rate of 12.4 percent, twice that of wage earners, because they are their own employers. Thus, a self-employed person earning $97,500 per year would pay $12,090 ($97,500 x 0.062 x 2) in FICA taxes on that income.
Wage earners and their employers also pay a 1.45 percentMedicare tax on all earnings. The MTYE limit does not apply to the Medicare tax. Thus, the typical worker sends 7.65 (6.2 + 1.45) percent of his or her earnings to the SSA. For example, a person earning $35,000 pays a combined FICA and Medicare tax of $2678 ($35,000 x 0.0765) and a person earning $110,000 pays $6045 ($97,500 x 0.062) plus $1595 ($110,000 x 0.0145), or a total of $7640.
Your Contributions to Social Security and Medicare
Wage earners pay both FICA and Medicare taxes to the SSA. The FICA tax is paid on wage income up to the maximum taxable yearly earnings (MTYE), which comprises the maximum amount to which the FICA tax is applied. The MTYE figure $97,500 for last year is adjusted annually for inflation.* The FICA tax rate has been 12.4 percent, consisting of 6.2 percent paid by employees and 6.2 percent paid by employers. Self-employed workers pay a FICA tax rate of 12.4 percent, twice that of wage earners, because they are their own employers. Thus, a self-employed person earning $97,500 per year would pay $12,090 ($97,500 x 0.062 x 2) in FICA taxes on that income.
Wage earners and their employers also pay a 1.45 percentMedicare tax on all earnings. The MTYE limit does not apply to the Medicare tax. Thus, the typical worker sends 7.65 (6.2 + 1.45) percent of his or her earnings to the SSA. For example, a person earning $35,000 pays a combined FICA and Medicare tax of $2678 ($35,000 x 0.0765) and a person earning $110,000 pays $6045 ($97,500 x 0.062) plus $1595 ($110,000 x 0.0145), or a total of $7640.
How You Become Qualified for Social Security Benefits
You must be insured under the Social Security program before retirement, survivors, or disability insurance benefits can be paid to you or your family. The Social Security program covers nine out of every ten U.S. employees. Some federal, state, and local government employees are exempt because their employers have instituted other plans.
To qualify for benefits, a worker accumulates credits for employment in any work subject to the FICA taxes, including part-time and temporary employment. The periods of employment in which you earn credits need not be consecutive. Military service also provides credits. You earn Social Security credits for a certain amount of work covered under Social Security during a calendar year. For example, workers receive one credit if they earned $1000 during any one of the four 90-day periods during the year and the annual maximum of four credits if they earned $4000 (4 x $1000). The dollar figure required for each credit earned is raised annually to keep pace with inflation.
The number of credits you have earned determines your eligibility for retirement benefits and for disability or survivors benefits if you become disabled or die. Table 17.1 shows the length-of-work requirements to receive Social Security benefits. The SSA recognizes four statuses of eligibility:
Fully Insured Fully insured status requires 40 credits and provides the worker and his or her family with benefits under the retirement, survivors, and disability programs. Once obtained, this status cannot be lost even if the person never works again. Although it is required to receive retirement benefits, “fully insured” status does not imply that the worker will receive the maximum benefits allowable.
Currently Insured To achieve currently insured status, six credits must be earned in the most recent three years. This status provides for some survivors or disability benefits but no retirement benefits. To remain eligible for these benefits, a worker must continue to earn at least six credits every three years or meet a minimum number of covered years of work established by the SSA.
Transitionally Insured Transitionally insured status applies only to retired workers who reach the age of 72 without accumulating 40 credits (ten years). These people are eligible for limited retirement benefits.
Not Insured Workers younger than age 72 who have fewer than six credits of work experience are not insured.
How to Estimate Your Social Security Retirement Benefits
The actual dollar amount of Social Security benefits is based on the average of the highest 35 years of earnings during the working years. Your actual earnings are first adjusted, or indexed, to account for changes in average wages since the year the earnings were received. The SSA then calculates your average monthly indexed earnings during the 35 years in which you earned the most. The agency applies a formula to these earnings to arrive at your basic retirement benefit (or primary insurance amount). This is the amount you would receive at your full-benefit retirement age 67 for those born in 1960 or later. You can compute your own retirement benefit estimate using a program that you can download to your computer from http://www.ssa.gov/OACT/anypia/. You will have three choices concerning when you want to begin receiving Social Security retirement benefits.
1. Begin Receiving Benefits at Your Full-Benefit Age Once you have reached your full-benefit retirement age, you are eligible to receive your basic monthly retirement benefit. You can begin collecting these benefits even if you con-tinue working full or part time. Your level of employment income will not affect your level of benefits, though it may affect the income taxes that you pay on your Social Security benefits
You must be insured under the Social Security program before retirement, survivors, or disability insurance benefits can be paid to you or your family. The Social Security program covers nine out of every ten U.S. employees. Some federal, state, and local government employees are exempt because their employers have instituted other plans.
To qualify for benefits, a worker accumulates credits for employment in any work subject to the FICA taxes, including part-time and temporary employment. The periods of employment in which you earn credits need not be consecutive. Military service also provides credits. You earn Social Security credits for a certain amount of work covered under Social Security during a calendar year. For example, workers receive one credit if they earned $1000 during any one of the four 90-day periods during the year and the annual maximum of four credits if they earned $4000 (4 x $1000). The dollar figure required for each credit earned is raised annually to keep pace with inflation.
The number of credits you have earned determines your eligibility for retirement benefits and for disability or survivors benefits if you become disabled or die. Table 17.1 shows the length-of-work requirements to receive Social Security benefits. The SSA recognizes four statuses of eligibility:
Fully Insured Fully insured status requires 40 credits and provides the worker and his or her family with benefits under the retirement, survivors, and disability programs. Once obtained, this status cannot be lost even if the person never works again. Although it is required to receive retirement benefits, “fully insured” status does not imply that the worker will receive the maximum benefits allowable.
Currently Insured To achieve currently insured status, six credits must be earned in the most recent three years. This status provides for some survivors or disability benefits but no retirement benefits. To remain eligible for these benefits, a worker must continue to earn at least six credits every three years or meet a minimum number of covered years of work established by the SSA.
Transitionally Insured Transitionally insured status applies only to retired workers who reach the age of 72 without accumulating 40 credits (ten years). These people are eligible for limited retirement benefits.
Not Insured Workers younger than age 72 who have fewer than six credits of work experience are not insured.
How to Estimate Your Social Security Retirement Benefits
The actual dollar amount of Social Security benefits is based on the average of the highest 35 years of earnings during the working years. Your actual earnings are first adjusted, or indexed, to account for changes in average wages since the year the earnings were received. The SSA then calculates your average monthly indexed earnings during the 35 years in which you earned the most. The agency applies a formula to these earnings to arrive at your basic retirement benefit (or primary insurance amount). This is the amount you would receive at your full-benefit retirement age 67 for those born in 1960 or later. You can compute your own retirement benefit estimate using a program that you can download to your computer from http://www.ssa.gov/OACT/anypia/. You will have three choices concerning when you want to begin receiving Social Security retirement benefits.
1. Begin Receiving Benefits at Your Full-Benefit Age Once you have reached your full-benefit retirement age, you are eligible to receive your basic monthly retirement benefit. You can begin collecting these benefits even if you con-tinue working full or part time. Your level of employment income will not affect your level of benefits, though it may affect the income taxes that you pay on your Social Security benefits
2. Begin Receiving Reduced Benefits at a Younger Age You can choose to start receiving retirement benefits as early as age 62, regardless of your fullbenefit retirement age. If you do so, however, your basic retirement benefit will be permanently reduced. The check will be permanently reduced 30 percent for people born after 1960. If you choose to take the earliest Social Security retirement benefits, you will be ahead financially if you do not survive to about age 80. Sixty percent of retirees elect to take their Social Security benefits early. People considering early Social Security retirement benefits need to be aware that their checks will be reduced if they have earned income above the annual limit ($12,000 this year). Those who earn more than the annual limit have their Social Security benefits reduced $1 for every $2 in earnings. A person entitled to $750 per month ($9000 per year) in early retirement benefits who has an earned income ofmore than $30,000 should not apply for early Social Security benefits because he or she makes too much money to be eligible for any benefit.
3. Begin Receiving Larger Benefits at a Later Age You can delay taking benefits beyond your full-benefit retirement age. In such a case, your benefit would be permanently increased by as much as 8 percent per year. You can continue to work even after you begin taking these delayed benefits. Again, your level of employment income will not affect your level of benefits, but it may affect the income taxes that you pay on your Social Security benefits.
Check the Accuracy of Your Social Security Statement
The Social Security Statement is a document that the SSA periodically sends to all workers. It includes a record of your earnings history, a record of how much you and your various employers paid in Social Security taxes, and an estimate of the benefits that you and your family might be eligible for now and in the future. You can also request a Social Security Statement at any time at www.ssa.gov/statement/ or by telephone at (800) 772-1213. When reviewing this statement, make sure that the SSA’s records are up-to-date and accurate. Workers have three years to correct any errors.
3. Begin Receiving Larger Benefits at a Later Age You can delay taking benefits beyond your full-benefit retirement age. In such a case, your benefit would be permanently increased by as much as 8 percent per year. You can continue to work even after you begin taking these delayed benefits. Again, your level of employment income will not affect your level of benefits, but it may affect the income taxes that you pay on your Social Security benefits.
Check the Accuracy of Your Social Security Statement
The Social Security Statement is a document that the SSA periodically sends to all workers. It includes a record of your earnings history, a record of how much you and your various employers paid in Social Security taxes, and an estimate of the benefits that you and your family might be eligible for now and in the future. You can also request a Social Security Statement at any time at www.ssa.gov/statement/ or by telephone at (800) 772-1213. When reviewing this statement, make sure that the SSA’s records are up-to-date and accurate. Workers have three years to correct any errors.
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