If retirement and Social Security seem one and the same to you, there’s good reason. More than 90% of US households with someone over 65 are part of the system. And, the monthly benefits check is the primary source of income for almost two-thirds of those households.

Since its introduction in 1935, in the wake of the Great Depression, Social Security has evolved from a safety net designed to relieve poverty to the mainstay of a secure retirement. But the role it will play for future generations is less certain. Fewer workers will be putting money into the system in the 21st century while more will be collecting benefits.

If you’re in the Social Security system—and more than 96% of the workforce is—you usually contribute 7.65% of your salary every year, 6.2% for retirement and disability benefits and 1.45% for Medicare coverage. Your employer contributes an equal amount, and if you’re self-employed you pay both shares. There’s an annual cap on contributions for retirement and disability but no cap on Medicare contributions. However, during 2019, employees were required to contribute just 4.2% of their earnings, up to the cap of $132,900. That reduction was part of the government’s economic stimulus program, so the percentage can vary.

The formula the Social Security Administration (SSA) uses to calculate your primary insurance amount (PIA)—the base on which your benefit is figured—is designed to give you credit for your 35 highest paying years, thereby increasing the amount you’ll receive.

Here's how it works:

1. Your lifetime earnings (to age 60) are adjusted for inflation, so they’re counted at their current value.
2. Your total earnings are divided by the number of months you worked, to find what’s known as your average indexed monthly earnings.
3. Your permanent base benefit is figured on your average indexed monthly earnings.

Where You Stand

You can start collecting Social Security benefits as early as 62 or as late as you wish, though there is no point in waiting past 70 since the base amount you're eligible for won’t increase any more.

The average benefit is about $1,400 a month.

Here’s how your decision could affect a $1,000 benefit:

Age of Retirement & Monthly Benefits

• 62 (early retirement) = $750
• 66 (full retirement age) = $1,000
• 70 (latest) = $1,320

You qualify for Social Security benefits in two steps:

1. You contribute to the Social Security system, usually with money your employer withholds from your salary
2. You accumulate 40 credits during the years you work. You can get up to four credits a year, one for each time you earn the minimum required for that year.

In 2020, you receive one credit for each $1,410 of earnings. Each year the amount needed for credits goes up slightly as average earnings increase. You can only earn up to four credits per year.

So a person who earns $10,000 a year and a person who earns $100,000 a year each accumulates four credits. If you work full time, you’ll be fully qualified in ten years, but you’ll also qualify if you gain the credits more sporadically.

However, the benefits you receive depend more on the amount you contribute to the system and how old you are when you begin taking benefits than on simply accumulating the credits to qualify.

Other Ways To Qualify

Social Security also pays survivor benefits. A survivor can begin collecting their deceased spouse’s full retirement benefit at age 60. The benefits kick in immediately if the survivor is caring for children under age 16. Disabled survivors can collect survivor benefits beginning at age 50.

Social Security pays disability benefits, too. The program is for people who can’t work for medical reasons. The definition of disability is very strict. For example, the condition must be expected to last one year or result in death. Generally, your disability must prevent you from working at all to be eligible for benefits.

Social Security Supplemental Income pays benefits to disabled adults and children with limited income and resources. The benefits provide cash to meet basic needs for food, clothing and shelter.

Looking at the Numbers
According to recent statistics, there are three people working—and putting money into the system—for every retired person. That’s a far cry from 1950, when there were 16 workers for every retired person. By 2030, estimates are that the number will decrease to two workers for every retired person.

You Have To Apply

You don’t get your benefits automatically. You have to apply to the SSA, and the time to begin is in the year before you plan to retire or take benefits. One reason to plan ahead is that you may be able to adjust your start date and increase the overall amount of your benefits.

You may have to pay tax on part of your Social Security benefits, reducing the amount you’ll have available to live on. That happens when your total income for the year, including half your Social Security payment, is more than the levels set by Congress.

What’s perhaps surprising is that you might find yourself in this situation even if your income seems modest. That’s because the income limits are relatively low and practically all of your income is counted, even earnings on tax-exempt investments.

If you’re single and your income is between $25,000 and $34,000, you must include 50% of your benefit in your taxable income, and if your income is over $34,000, you must include 85%.

If you’re married and filing a joint return, the income levels are slightly higher. If your income is between $32,000 and $44,000, you must include 50% of your benefit in your taxable income. If it’s over $44,000, you must include 85%. If you’re married but file separate returns, you must always include 85% of your benefit in your taxable income, regardless of income.

You may be eligible for the spousal benefit if you’re divorced. If your marriage lasted at least 10 years and you haven’t remarried, you can claim the spousal benefit as long as your ex-spouse is 62 or older.

Take Action

Plan for your retirement, estimate your benefits and more with a mySocialSecurity account, available online at www.ssa.gov.

Our partners at Greenpath are also here to help you answer your questions and help you analyze different routes to your goals. You can get a free consultation with a Greenpath financial expert today. No matter what your finances look like,  they can help improve your money management, aiding in your long-term success. If you're looking at decreasing debt to help get to retirement, Greenpath can assist in developing and executing a strategy tailored to your goals.