Social Security is a federal program designed to provide financial assistance to retirees, disabled individuals, and surviving family members. Established in 1935, the program is primarily funded through payroll taxes, with workers contributing 6.2% of their wages, an amount matched by their employers. Self-employed individuals pay a higher rate of 12.4% since they cover both portions. Benefits are determined based on a worker’s lifetime earnings and play a vital role in supporting millions of Americans during retirement and financial hardship.
Qualifications for Social Security
To receive Social Security retirement benefits, individuals must earn enough work credits through employment. A total of 40 credits—equivalent to about ten years of work—is required to qualify. The earliest age at which benefits can be claimed is 62, but choosing to do so results in a permanent reduction in the monthly payout. Full retirement age (FRA) is set at 67 for those born in 1960 or later, and delaying benefits beyond this age can increase payments by 8% per year, up to age 70.
In addition to retirement benefits, Social Security provides financial assistance through disability and survivor benefits. Social Security Disability Insurance (SSDI) supports individuals who are unable to work due to severe medical conditions, while survivor benefits assist spouses, children, and other dependents of deceased workers. Spousal benefits are also available, allowing individuals to claim benefits based on their spouse’s work record. Even divorced individuals may qualify for spousal benefits if they were married for at least ten years.
Calculation of Social Security Benefits
A worker’s Social Security benefit amount is determined by their highest 35 years of earnings. Claiming benefits before full retirement age results in a lower monthly payout, while delaying benefits beyond this age leads to an increase in payments. Additionally, those who continue working while collecting benefits before reaching their FRA may see their benefits temporarily reduced if their earnings exceed $22,320 in 2025. However, once full retirement age is reached, the withheld benefits are recalculated, leading to a higher monthly payment.
Taxation of Social Security Benefits
Depending on an individual’s total income, Social Security benefits may be subject to taxation. For single filers, up to 50% of benefits are taxed if income falls between $25,000 and $34,000, while up to 85% is taxable if income exceeds $34,000. Married couples filing jointly may see up to 50% of their benefits taxed if their combined income is between $32,000 and $44,000, and up to 85% taxed if their income surpasses $44,000. Understanding these thresholds is essential for retirement planning, as taxation can impact the overall benefit received.
The Future of Social Security
The Social Security program faces financial challenges due to an aging population and fewer workers contributing to the system. Current projections estimate that by 2033, the program will only be able to pay 77% of scheduled benefits unless legislative changes are made. Potential solutions include raising the retirement age, increasing payroll taxes, or modifying benefit formulas to ensure long-term sustainability. While these changes remain uncertain, individuals should plan for retirement with these potential adjustments in mind.
Conclusion
Social Security serves as a vital financial safety net for retirees, individuals with disabilities, and surviving family members. However, understanding how benefits are calculated, when to claim them, and how taxation and potential policy changes may affect payouts is crucial for effective financial planning. While Social Security provides an important source of income, it should be part of a broader retirement strategy that includes personal savings, investments, and other sources of financial security.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Katherine Sullivan, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security, or any security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary.
