Social Security Benefits

By Katie Martens

Abstract: what are Social Security retirement benefits, how to view your earnings benefits, how social security credits work, the tax status of social security retirement benefits, and an example of how social security benefits work.

Whether you have a bucket list of items to check off in your retirement, plan to retire early, or have no idea what retirement will look like to you, one thing is for sure: you’ll need money to secure your retirement goals. A big part of Americans’ retirement money is a Social Security check from the federal government. In fact, over ⅓ of American households rely exclusively on Social Security income in their retirement.

This article is meant to give you an idea of what Social Security can do for you in different circumstances.

Social Security - What is It and How to Qualify

Social Security benefits are the largest public benefits program offered by the U.S. government. The Social Security Act was signed into law in 1935, and is funded through taxing working Americans. If you receive a paycheck, and see the “FICA” deduction from your paycheck, that is the Federal Insurance Contributions Act that is deducted from each paycheck to fund the Social Security benefits you receive after leaving the workforce.

With the exception of Supplemental Security Income, payroll deductions go toward the other 4 buckets administered by the Social Security Administration:

1. Retirement

2. Disability

3. Medicare

4. Survivors

5. Supplemental Security Income

For purposes of this article, we will focus on the Retirement benefits program.

Retirement

Social Security is part of the retirement plan for almost every American worker. It provides replacement income for qualified retirees and their families. Social Security replaces a percentage of your pre-retirement income based on your lifetime earnings. The portion of your pre-retirement wages that Social Security replaces is based on your highest 35 years of earnings and varies depending on how much you earn and when you choose to start benefits. Keep in mind that the money you pay in taxes isn’t held in a personal account for you to use when you become eligible to receive benefits.

When you work and pay Social Security taxes, you earn “credits” toward Social Security benefits. The number of credits you need to get retirement benefits depends on when you were born. If you were born in 1929 or later, you need 40 credits (usually, this is 10 years of work).

If you stop working before you have enough credits to qualify for benefits, the credits will remain on your Social Security record. If you return to work later, more credits may be added. Retirement benefits can’t be paid until you have 40 credits.

How to View your Earnings History

The amount of Social Security benefits you or your family receives depends on the amount of earnings shown on your record. Regularly checking your Social Security earnings history can help ensure there are no surprises when it’s time for you to start receiving benefits. You can find your earnings history with a personal my Social Security account. Here is an image of what you can expect:

Knowing what you will get every month in retirement benefits helps you plan for your retirement. If you have a personal my Social Security account, you can get an estimate of your personalized retirement benefits and see the effects of different retirement age scenarios.

How Social Security Credits Work

Just like my kids earn pom poms toward the pom pom jar to earn a party in their classrooms, each working American can earn Social Security credits that accumulate each year. In 2022, you earn 1 credit for each $1,510 in earnings, with a cap of 4 credits per year. The amount of money needed to earn 1 credit usually goes up each year. Most people need 40 credits (10 years of work) to qualify for benefits.

How to estimate your Social Security Benefits

You can always set up an account with the Social Security Administration to view your benefits, but you can also use a Quick Calculator tool on the SSA website to get a snapshot or rough estimate of what your benefits may be.

The Quick Calculator can be found here.

Tax Status of Social Security Benefits

Whether or not you pay taxes on your social security benefits will depend on whether you have other substantial income besides Social Security benefits, like wages, self-employment, dividends, and other taxable income that must be reported on your tax return.

No matter what your income level, the most you can be taxed on social security benefits are 85% of your benefits. The percentage goes down as your income goes down as reported on your tax return.

An Example

If some of this seems dense, it’s because it is. Discussing it in the context of an example may help make it more clear:

John Smith earns $50,000 each year in his job as a restaurant manager. John will pay, through his payroll taxes that are automatically deducted from each paycheck, $3,100 for Social Security (6.2% of $50,000) and $725 for Medicare (1.45% of $50,000) for a total of $3,825 for the year. His employer, the restaurant, pays the same amount, so John has a total of 12.4% going into his Social Security benefits.

John can check his Social Security benefits at any time, but he decides to start looking after about 15 years of working at the restaurant. He logs into his account, and sees a number of credits have accumulated. Say he looks at the year 2017 that he worked, and he sees that he has 4 credits for that year. John is likely hoping to see many more credits, amassed over each year he’s worked. Depending on the number of credits he has, he may decide that the working life is for him, and he needs to work longer in order to enjoy higher Social Security benefit payouts.