According to the Social Security Administration, about 64 million Americans received over one trillion dollars in Social Security benefits in 2019. And an estimated 178 million workers are covered under Social Security.
For almost everyone who draws a reported paycheck, the government will withhold 6.2% of it and their employer will pay another 6.2%. Those who work for themselves will pay the entire 12.4% in what is called the "self-employment tax."
Everyone who has paid into this system can collect Social Security. Unlike private retirement schemes, there are no other credentials. If you paid enough, you get something back, although there are some exceptions.
How Social Security Is Calculated
The benefits you receive under Social Security differ based on several factors, not least of which include your work history, your collection status, and which type of benefit you collect. Note that, despite the language of retirement, this is the same formula used to calculate SSDI benefits.
As a result, the average disability benefit is less than the average retirement benefit as few disabled workers have as many eligibility years as long as their retired counterparts.
Base benefits are calculated as follows:
Average Indexed Monthly Earnings
To calculate your AIME, the administration takes each year's income throughout your working life and adjusts it for inflation ("indexing"). It then caps those adjusted incomes at the taxable maximum for Social Security. (This is the rate past which you do not pay Social Security taxes. For 2020 it was $137,700.) The agency then takes the 35 highest-earning years and calculates an average monthly income from them. This is your AIME.
For people who worked more than 35 years their lowest-earning years are dropped from the calculation. For people who worked less than 35 years the Social Security Administration calculates a "$0" in place.
Primary Insurance Amount
The PIA determines your base Social Security benefit. At all times it follows a three-tiered structure based on your AIME. In 2020 the PIA is as follows:
- 90% of your AIME up to the first $960,
- 32% of your AIME greater than $960, less than $5,785, and
- 15% of your AIME greater than $5,785.
If this amount is not already a multiple of $0.10, it is rounded to the next lower multiple.
The percentages remain constant, but the income levels (called "bend points") periodically change. Your Social Security bend points will be fixed on the year you become eligible for benefits. Under current law, this means that as soon as you turn 62 the bend points for your benefits will be set in stone.
The maximum Social Security benefit in 2020 is $3,790. To collect this you would have to have 35 eligible years of work earning the taxable maximum and waited until age 70 to file.
Social Security Calculation Example
Take someone who turned 62 in 2018. He has worked since he was 32 and each year earned an inflation-adjusted income of $60,000. His AIME would be:
- $80,000 x 30 + $0 x 5 = $2,400,000 (His total earnings adjusted for inflation, with five years of zeroes added in since he only worked for 30 years.)
- $2,400,000 / 35 = $68,571 (His average annual income)
- $68,571 / 12 = $5,714 (His average monthly income)
Since our sample recipient has turned 62 this year, benefits will be fixed to the 2018 bend points even if he doesn't retire until 67. His PIA would therefore be:
- 90% x $895 = 805.50, +
- 32% x ($5,397 - $895) = $1,440.64 +
- 15% x ($5,714 - $5,397) = $47.55
- Added together for a total monthly benefit of $2,293.60
How Social Security Works
The Social Security Administration uses a multi-step formula to calculate just how much any given American gets in benefits. Factors include marriage, lifetime contributions, work history and more. But the purpose is always the same: to make sure that everyone who works has a safety net for retirement. To understand just how important that is we have to recall how senior citizens lived before President Franklin Roosevelt's administration invented this program.
Although precise measurement hadn't yet begun, most estimates suggest that in 1934 (the year before Social Security began) approximately half of all seniors lived in poverty. Most estimates suggest that this figure would have changed little over the past 84 years without the Social Security program. Instead, by 1959 this figure had fallen to 35%. By the year 2000 only 1-in-10 seniors lived in poverty, a number that has stayed largely consistent to this day. In many very real ways, Social Security created the concept of retirement.
Of course, there's still far to go. Nearly a third of seniors still live within 200% of the poverty line, and many more still struggle to pay their bills.
Social Security Requirements
Almost all Americans can qualify for Social Security benefits. There are, ultimately, only three actual requirements:
- You must be older than 62,
- You must have enough eligibility credits, and
- You must not have come by your benefits through criminal activity.
That's it. Non-citizens, felons, and spouses who didn't work can all qualify for Social Security as long as they meet those three requirements. The third is a rare category but, for example, it would disqualify someone from getting survivor's benefits after killing their spouse or someone who gained their work credits fraudulently.
The third category also means those undocumented immigrants, even though many pay Social Security taxes, cannot collect benefits unless they are considered a "qualified alien."
To collect Social Security benefits you must have enough eligibility credits. For almost all workers this requires 40 credits. There is no sliding scale. No Social Security benefits are paid if you don't have enough credits and additional credits do not increase your benefits.
Credits are earned through income. For every $1,320 of reported income, you earn in a year you get one credit. You can earn a maximum of four credits per year. This can be done either over time or all at once. A worker who collects a $5,280 paycheck will earn all four credits at once. As a result, most people will earn enough credits to qualify for Social Security in 10 years of work. Once you earn enough credits you are considered insured.
Types of Social Security Benefits
There are two categories of Social Security Benefits:
The most traditional form of Social Security, retirement benefits are based on age. All retirees can start collecting reduced benefits at age 62. Those born after 1960 qualify for full benefits starting at 67. This "Normal Retirement Age" changes depending on the recipient age.
Spouses of a retired worker can collect a portion of retirement benefits as long as they are at least 62 years old or care for a child either younger than 16 or disabled. Qualifying children (see below) also can collect a portion of benefits.
Social Security Disability Income (SSDI) is given to workers who can no longer work due to physical disability. The worker must have earned enough credits to be considered insured and must have been employed at the time of disability. Note: Often Supplemental Security Income (SSI) is discussed alongside SSDI. Although administered through the same agency, the SSI program is not considered Social Security as it is funded through general Treasury revenue.
Spouses of a disabled worker can collect a portion of disability benefits as long as they are at least 62 years old or care for a child either younger than 16 or disabled. Qualifying children (see below) also can collect a portion of benefits.
There are two more conditions under which you can collect someone else's Social Security benefits:
This is paid to the dependents or widows/widowers of Social Security beneficiaries. Spouses can collect survivor benefits if they are at least 60 years old or if they care for a child who is either disabled or under 16. Disabled spouses can also collect survivor benefits if they are at least 50 years old.
Qualifying children can collect survivor's benefits, as can parents who were both dependents of the deceased worker and who are older than 62.
A beneficiary counts as a "qualifying child" if he or she meets one of three requirements: They are under the age of 18, they are a high school student under the age of 19, or they are a disabled adult who became disabled before the age of 22. The last is considered an "Adult Child."
Costs of Living Adjustment
The COLA is an annual adjustment to your Social Security benefits based on inflation. It changes each year based on the Consumer Price Index for Urban Workers and Clerical Workers (the CPI-W). For workers who do not retire at their earliest retirement age, it is applied cumulatively to the PIA.
For example, the COLA in 2018 was set at 2%. If the worker from our example above chooses not to retire at 62, his PIA will still be adjusted upward to a resulting PIA of 2,339.40.
Stages of Retirement
There are three stages of Social Security Retirement: Early, Normal and Late. The age you choose to retire can permanently change your benefits. As of 2018 the earliest age at which you can begin collecting benefits is 62. The Normal Retirement Age depends on when you were born. For everyone born after 1960, it is currently 67.
Retiring before your Normal Retirement Age will permanently reduce your PIA by a percentage for each month you retired early. The precise formula for 2018 is given here, but a worker who retires at 62 could reduce their lifetime monthly benefits by as much as 30%.
Retiring late, on the other hand, increases your monthly benefits. Workers who qualify for Social Security at their Normal Retirement Age and choose to continue working will increase their benefits for each additional year that they work. For someone born in 1943 or later, each additional year of work will increase their lifetime benefits by 8% up to a maximum of 24% at age 70.
Spouses, Survivors, and Dependents
Spouses, survivors and qualifying dependents can collect Social Security benefits based on the primary insured's PIA.
A spouse can claim 50% of the primary worker's full PIA if they retire at the Normal Retirement Age or if they are caring for a qualified child. A spouse who is not caring for a qualified child and who retires after 62 but before their Normal Retirement Age will get reduced benefits down to a low of 32.5% of the primary worker's benefit.
A qualifying child can claim up to 50% of a retired worker's benefits or, if they are a surviving child, up to 75% of a deceased worker's benefits. However, in cases where a family has multiple claimants (such as a spouse and several children), the combined family benefit is capped at between 150 - 180% of the primary worker's benefits.
Finally, a surviving spouse who has reached their Normal Retirement Age can opt to collect their deceased spouse's benefits instead of their own. In this case, they will receive 100% of the primary worker's benefits. A younger widow/widower who is caring for a qualified child can collect 75% of the primary worker's benefits.
You can only collect under one benefits program. Any beneficiary who qualifies for multiple sources of income will receive the higher of their qualifying benefits.