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Social Security

How does Social Security work?

Social Security is a compulsory system

Social Security is a compulsory system. Employers, employees, and self-employed individuals are required to participate and pay taxes that finance Social Security benefits. As an employee, you pay a Social Security tax of 6.2 % of your pay (matched by your employer) each pay period and you pay a Medicare tax of 1.45 % of your pay (matched by your employer). If you are self-employed, you pay a 12.4 % self-employment tax on your earnings to finance Social Security programs and you pay a 2.9 % tax to finance Medicare.

Tip: The Social Security tax on your earnings applies only to earnings under the maximum earnings limit ($118,500 in 2016 & $127,200 in 2017). No limit applies, however, to the Medicare tax on your earnings.

Your earnings are tracked by the Social Security Administration.

Your employer reports your annual Social Security earnings to the Social Security Administration. If you are self-employed, the IRS reports your earnings. They are compiled on a record known as a Social Security earnings record, which is identified by your nine-digit Social Security number. This earnings record is eventually used to calculate the amount of your Social Security benefit.

You receive benefits after meeting certain eligibility criteria.

To be eligible to receive Social Security benefits, you must be insured under the system. To become insured, you have to work for a certain amount of time in an occupation covered under Social Security or be the spouse, ex-spouse, widow or widower, or parent of someone who has. You also have to meet the eligibility requirements specific to the benefit.

Social Security Retirement Benefits

Providing retirement benefits was a key provision of the Social Security Act of 1935. Older Americans were especially financially vulnerable during the Great Depression, and Social Security was enacted partly to provide them with some continuing income after retirement. Today, although the scope of the program has been widened through amendments to include survivor, disability, and medical insurance benefits, Social Security remains synonymous with retirement benefits.

How much will you receive from Social Security?

The amount of Social Security benefit you receive is based on your Social Security earnings record. Your earnings are averaged according to a formula and then indexed. The resulting figure is called your primary insurance amount (PIA). Once your PIA has been calculated, all your benefits (and those of your family members who are dependent upon your Social Security record) will be based on this figure. Your PIA is the maximum benefit that you could receive once you become eligible. Your maximum benefit may be payable if:

  • You retire at normal retirement age
  • Your widow or widower is normal retirement age
  • You are disabled

In other circumstances, the benefits that you receive will be a certain percentage of your maximum benefit. For example, if you retire early, your maximum benefit will be reduced by a certain percentage for each month of early retirement. If you or your family members are eligible for reduced benefits, the reduction will be expressed as a percentage of your PIA.

Getting the most from the Social Security system

To get the most out of Social Security, you have to make some decisions. Deciding when to retire and begin receiving benefits is important because the age at which you elect to begin receiving benefits can greatly affect your monthly benefit and your overall lifetime benefit. You'll also need to decide whether you want to work after you begin receiving benefits, and if so, determine how your wages will affect your benefit. Finally, if you are a business owner or a self-employed individual, you need to consider how you can minimize your Social Security payroll taxes.

Several benefit calculators are available on the Social Security website (www.ssa.gov) that can help you estimate your future retirement, disability, and survivor's benefits. You can also visit the website to sign up for a “mySocialSecurity” account that gives you access to your Social Security Statement. This statement provides a detailed record of your earnings, along with estimates of future benefits. If you decide not to register for an online account and are not yet receiving benefits, you'll receive a statement in the mail every five years, from age 25 to age 60, and then annually thereafter. You may also call the Social Security Administration at (800) 772-1213 if you have questions.

How are your Social Security Benefits Calculated?

Ed Slott's Elite IRA Advisor Group, RMH Advisors LLC, IRA Focus and LPL Financial are separate entities.