SOCIAL SECURITY

How do you qualify for social security retirement benefits?

When you work and pay social security taxes, you earn credits for every 3 months that you pay and need 40 credits to become eligible to receive benefits. In 2023, the minimum earnings you need in a 3-month period to earn a credit is $1,640. If you earn less than this in 3 months, you will not earn a credit to count towards the total 40 required. These credits do not have to be consecutive; they just need to total 40 credits. Essentially, it takes 10 years of work to become eligible.

How much does social security pay?

The portion of your pre-retirement wages that Social Security replaces is based on your highest 35 years of earnings. If you work less than 35 years, the years you did not work are counted as having a $0 earning. The average Social Security Retirement benefit is currently $1,779.16 a month (As of January 2023). Currently Social Security replaces roughly 40% of pre-retirement income for individuals making under $118,000 a year. The reason for this dollar amount is that you do not pay social security taxes for income earned over $118,000. Those who have earned over this amount will still receive benefits, but their annual earnings when calculating their highest 35 years will be capped at $118,000 even if they earned significantly more than this since no social security taxes were paid on that amount.

If you are curious about seeing a quick estimate of what your benefits could be without providing your information, you can use this estimate calculator:
https://www.ssa.gov/OACT/quickcalc/

If you want a more accurate estimate of future benefits or want to create a my Social Security account to see your own information, you can create your account with the Social Security Administration using this link: https://www.ssa.gov/myaccount/

How much do taxpayers pay for Social Security taxes?

Social Security tax is currently 12.4% for earnings up to $118,000. If you work for someone else, you typically pay 6.2% of your income towards paying for social security and your work pays the other 6.2%. Self-employed or contractual employees typically pay the entire 12.4%. 

When can you start collecting?

– Early Retirement Age – Currently 62
– Full Retirement Age – Currently 67
– Delayed Retirement Age – Currently 70

The longer you wait to retire, the more money you will receive from social security. Each year you delay receiving funds increases your annual payout by 8% until the age of 70. The earliest you can receive it is currently set to 62 years old and most individuals start at this time. If you continue working after this age and before the full retirement age, you may lose some of your social security benefits if you earn more than the earnings limit set for that year. Full retirement age is currently set to 67 years old and earnings after this will not lower your social security benefits. Delayed retirement age for benefits is 70 years old and waiting longer than 70 does not increase your funding based off this formula. 

Examples of Payout:

$1,000 monthly payout at the full retirement age of 67 would be $700 monthly if you retire early at 62 and $1,240 if you wait till the delayed retirement age of 70.

Social Security Funding Issue 

From the Social Security Office – After 2035, social security tax will only be able to pay for 75% of scheduled benefits. If this happens, this means that after 2035 benefits will only replace 30% of pre-retirement income for individuals making under $118,000 a year. One of the primary reasons for this is that not enough social security tax is collected to pay for retired individuals. Consider that current individuals receiving social security benefits are receiving money collected from current individuals paying social security tax. From 1945-1965 the Baby Boomer generation had 3 children or more per family and they are currently retirees being supported by working families that now have less than 2 children per family. More retirees and fewer children are resulting in less funding for those needing social security benefits. 

Possible Solutions to Fix Social Security Funding

– Raise the Earnings Cap from $118,000. We could have people who earn more than $118,000 continue paying the 12.4% social security tax. Research supports that this is the best possible solution to fixing the funding issue, however, it is considered the least likely to happen as high-income earners lobby the government to avoid having to pay this tax.
– Raise the tax from 12.4%. The social security tax rate has been 12.4% since 1990. 
– Cut Benefits Amount. Social Security office may be doing this in 2035 by dropping benefits to 75%. 
– Adjust Cost of Living Adjustment (COLA) for inflation. Social Security payouts are adjusted and increased due to inflation every year. If these adjustments were made every few years instead of every year, this would reduce the overall payouts.
– Raise the Full Retirement Age. The last time this was done was in 1983, when it was raised from 65 to 67. This would reduce the overall payouts since people start receiving benefits later and this would also increase funding due to individuals working and paying social security taxes longer. 

How Much Do You Need for Retirement