Social Security Benefits Explained

Social Security benefits can give you income during retirement, but here’s what you need to know before you rely on it completely to fund your golden years.

Written by Erin Gobler / February 16, 2022

Quick Bites

  • Social Security retirement benefits were created in 1935 to serve as a financial safety net for elderly Americans during retirement.
  • Social Security was never meant to be the only source of income in retirement but rather to replace a percentage of your pre-retirement income.[1]
  • You can start collecting reduced retirement benefits at age 62, but you’ll have to wait until age 67 to receive your full benefit, or age 70 to receive the elevated benefit amount.
  • Your Social Security benefit amount is based on your years of work, income during your working years, the age you claim your benefits and marital status.

Even if retirement seems like a long way off to you, it’s important to start planning and saving for it as soon as possible. And your Social Security benefits are a part of that.

It’s no surprise that many people expect Social Security to be a major part of their retirement plan. More than 64 million Americans collect Social Security benefits each month, which is about one in six U.S. residents.[2] And 80% of those recipients are older Americans receiving retirement benefits.

So how will Social Security retirement benefits fit into your financial future? Here’s a closer look at what these benefits are, how they’re calculated and when you can start collecting them.

Inside this article

  1. What’s Social Security?
  2. When can I collect benefits?
  3. How are benefits calculated?
  4. Are there income limits?
  5. What about taxes?
  6. How do you apply?
  7. Estimating benefits
  8. Social Security in the future

What’s Social Security and how does it impact my retirement?

Social Security benefits as we know them today were created in the Social Security Act that was signed into law in 1935 by President Franklin D. Roosevelt.[3] The law helped to create a social safety net for elderly, disabled and otherwise disadvantaged Americans by providing a regular income for them to live on.

It also established the Social Security Administration (SSA), which maintains these programs. The SSA collects taxes from U.S. workers and distributes those funds to qualified retirees, disabled workers and their families.

Social Security provides financial support to Americans in a variety of situations. There are actually three main types of Social Security benefits:

Retirement Benefits

This Social Security program is the largest. It provides a monthly benefit to American workers who have earned at least 40 work credits, or the equivalent of 10 years of work. The program is funded by payroll taxes that all workers are required to pay on their first $147,000 of income in 2022 (up from $142,800 in 2021).[4]

Disability Benefits

This program provides disability benefits for adults who are aged 18 years or older and unable to work due to a permanent disability.

Survivors Benefits

This program serves the family members of deceased workers who were eligible for Social Security. For example, the deceased worker’s spouse who is 60 or older and their children who are under the age of 18 can collect benefits.

At what age can you collect Social Security benefits?

Social Security retirement benefits are designed to provide a source of income for workers after they’ve retired. As a result, you’re not able to start receiving them until later in life.

Technically, workers can start collecting Social Security benefits as early as age 62. However, 62 isn’t considered the full retirement age, according to the SSA. So collecting benefits at age 62 will mean you’ll receive a reduced amount throughout your entire retirement benefit.

Workers can start collecting their complete benefits at full retirement age. Full retirement age depends on when you were born. For instance, for all workers born in 1960 or later, full retirement age is 67.

Finally, anyone who is still working or has another source of income during retirement can opt to delay their benefits even longer. By delaying until age 70, you’re able to increase your benefit amount even more throughout your entire retirement benefit. (But there’s no financial gain to waiting longer than that—because age 70 is when you reach maximum benefit.)

Tip: It’s important to consider your own situation when deciding when to collect benefits. Just because friends or family retire at a certain age doesn’t mean it’s the right time for you.

So how do you decide what the best age is to start collecting Social Security benefits?

“When to start taking benefits depends on two things,” says David Freitag, a financial planning consultant and Social Security expert with MassMutual. “Do you need the money, and what is your life expectancy? People who need the money will start earlier than those who have access to other resources.”

Those who don’t have to collect early “might want to delay taking the benefits,” continues Freitag, “so they can collect higher amounts for a longer period of time.”

“There is no one-size-fits-all rule here,” says Freitag. “Each situation is different and must be modeled based on unique needs and life expectancy projections.”

Consulting a financial planner can help you weigh your options and land on the right decision.

How are Social Security benefits calculated?

To qualify for Social Security retirement benefits, you must have contributed to the program through payroll taxes for at least 40 credits worth of work, which is the equivalent of 10 years working full-time. However, the amount someone can collect can vary significantly from one person to the next.

“The amount you receive in retirement benefits is driven by four factors: claiming age, marital status, amount paid into the system and longevity,” says Freitag. “All are important things that factor into the amount received in benefits.”

To ensure that low-income individuals will still receive enough benefits during retirement to help meet their needs, in 1972, the SSA enacted a program known as the Special Minimum Primary Insurance Amount (PIA). Under the PIA, in 2021, the special minimum benefit for someone with 30 years of work is $897.90. Only 0.05% of the nearly 65 million Social Security recipients receive the minimum benefit, since most receive a higher amount based on their income.[5]

On the other hand, in 2022, the maximum amount that someone can receive in Social Security retirement benefits is $4,194. Keep in mind this amount is only available to those who delay collecting benefits until age 70. For someone who retires at the full retirement age in 2022, the maximum available is $3,345.[6]

Ultimately, most retirees will receive a monthly benefit amount somewhere between the minimum and maximum available. In 2022, the average Social Security benefit amount is $1,657.[7] Be sure to note that these amounts are indexed for inflation, so they’ll be higher by the time many of today’s workers start collecting benefits.

Are there income limits for receiving Social Security benefits?

There’s no rule that says you can’t continue working while you collect Social Security retirement benefits. However, know that your benefit will be reduced by any earned income you have.

The limit you can earn without a reduction of benefits is $19,560 per year for early retirement, meaning for those collecting benefits before age 67. What you earn above this limit will reduce your Social Security benefits by $1 for every $2 earned.

In the year you reach the full retirement age, you can earn considerably more before your benefits will be reduced. For instance, in 2022, you can earn up to $51,960 per year without a benefit reduction. Once you reach the income limit, your benefits will be reduced by $1 for every $3 you earn above the limit.

When you reach full retirement age, which is 67 for anyone born in 1960 or later, your benefits will no longer be reduced by any earned income you have. Whether you earn $10,000 or $100,000 per year, you can collect your full Social Security benefits.[8]

How are Social Security benefits taxed?

Depending on your annual income, you may have to pay income taxes on your Social Security retirement benefits. Whether you’ll pay taxes on your benefits—and what percentage of your benefits will be taxed—is based on your combined income. Your combined income consists of your adjusted gross income, tax-exempt interest income and 50% of your Social Security benefits.

If you’re single, you can earn up to $25,000 in combined income without paying income taxes on your retirement benefits. If you earn between $25,000 and $34,000, you’ll pay income taxes on up to 50% of your benefits. Finally, if your combined income is more than $34,000, you’ll pay income taxes on up to 85% of your benefits.

If you’re married and file taxes jointly with your spouse, you can have up to $32,000 in combined income before you’ll be taxed on your benefits. If you earn between $32,000 and $44,000, you’ll pay income taxes on up to 50% of your benefits. Finally, if your joint combined income is more than $44,000, you’ll pay income taxes on up to 85% of your benefits.

Finally, the SSA notes that if you’re married and you and your spouse file separate returns, you’ll most likely end up paying income taxes on a portion of your benefits.[9]

How do you apply for Social Security benefits?

When you’re ready to apply for Social Security retirement benefits, there are some pieces of information you’ll need to provide. This is what you’ll need to have on hand:

  • Social Security number

  • Birth certificate

  • W-2 forms or tax returns for last year

  • Military discharge papers (if applicable)

  • Spouse’s birth certificate and Social Security number, if they’re also applying for benefits

  • Proof of U.S. citizenship or residency (if you weren’t born in the United States)

  • Financial institution routing and account numbers for direct deposit

Once you’ve gathered all the necessary information, you can easily sign up using the application on the SSA’s website. To apply, you’ll need to be at least 61 years and 9 months old (though you won’t receive benefits until at least 62).

Keep in mind that the earlier you apply, the lower your monthly benefit amount will be.

How can you estimate your Social Security benefits?

The SSA has made it easier for people to learn about their future Social Security benefits. By creating a “my Social Security” account, you can see personalized retirement benefit estimates for you, and if you’re married, for your spouse (they need to create their own account).

No matter how old you are, you’ll be able to see estimates once you’ve earned enough work credits to qualify. Once you qualify to receive Social Security benefits, the site then allows you to do everything from set up or change your direct deposit to print your SSA-1099 form for filing your tax return.

What’s the future hold for Social Security benefits?

If you watch the news or talk about current events with friends and family, you may have heard fears that Social Security is running out of money and won’t be around to support many of today’s workers. While there isn’t a never-ending amount of money, the good news is Social Security is not likely to go away before you retire.

Tip: If you’re worried about the uncertainty of Social Security benefits when you retire, focus on boosting your own retirement accounts so you’re prepared for a comfortable retirement no matter what.

As mentioned, Social Security retirement benefits are funded through payroll taxes, also known as FICA (Federal Insurance Contributions Act) taxes. However, they are supplemented by the Social Security trust fund, which serves as a reserve account.

According to the latest annual report from the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, those reserves will become depleted in 2057.[10]

That doesn’t necessarily mean that benefits will end. As long as payroll taxes are still being collected, there will still be some money available to pay out benefits. At that point, the SSA would have a few different options, including increasing payroll taxes, reducing benefits by 25% or a combination of tax increases and benefits reductions.

Article Sources
  1. “Securing Today and Tomorrow: Understanding the Benefits,” Social Security Administration, https://www.ssa.gov/pubs/EN-05-10024.pdf.
  2. “Policy Basics: Top Ten Facts About Social Security,” Center on Budget and Policy Priorities, https://www.cbpp.org/research/social-security/top-ten-facts-about-social-security.
  3. “Social Security Act,” History Channel, https://www.history.com/topics/great-depression/social-security-act.
  4. “Maximum Taxable Earnings,” Social Security Administration, https://www.ssa.gov/benefits/retirement/planner/maxtax.html.
  5. “Social Security: Minimum Benefits,” Congressional Research Service, https://sgp.fas.org/crs/misc/R43615.pdf.
  6. “What is the maximum Social Security benefit?” AARP, https://www.aarp.org/retirement/social-security/questions-answers/maximum-ss-benefit.html.
  7. “How much Social Security will I get?” AARP, https://www.aarp.org/retirement/social-security/questions-answers/how-much-social-security-will-i-get.html.
  8. “Receiving Benefits While Working,” Social Security Administration, https://www.ssa.gov/benefits/retirement/planner/whileworking.html.
  9. “Income Taxes and Your Social Security Benefit,” Social Security Administration, https://www.ssa.gov/benefits/retirement/planner/taxes.html.
  10. “The 2021 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds,” Social Security Administration, https://www.ssa.gov/OACT/TR/2021/tr2021.pdf.

About the Author

Erin Gobler

Erin Gobler

Erin is a personal finance expert and journalist who has been writing online for nearly a decade. Erin’s work has appeared in major financial publications, including Fox Business, Time, Credit Karma, and more.

Full bio

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