Social Security Benefits

Social security benefits refer to the payments received by eligible retired adults, persons with disabilities, and their children, spouses, and survivors. The government offers such benefits to enhance the quality of living, offer compensation for the lack of ability to earn post-retirement, and support independence.

The benefit amount received by eligible individuals depends on birth year, income history, and the age when one started claiming Social Security. The payroll tax contributions from employers and employees primarily fund the payments. Hence, a high workers-to-beneficiaries ratio is essential to provide full benefits. Such benefits are of four types — disability, retirement, dependent, and survivor.

• Social security benefits refer to guaranteed payments to eligible retired and disabled workers and their family members. These benefits replace a part of a worker’s income if the person stops working altogether or reduces work hours owing to a health condition.
• Eligibility parameters of such benefits include the birth year of the worker, the year in which they began claiming Social Security, and their earnings history.
• The income tax on Social Security benefits cannot exceed 85% of payments received from the SSA.
• There are four kinds of social security benefits. They are dependent, survivor, retirement, and disability.

Social security benefits refer to the partial replacement income provided to retired individuals, persons whose spouse or eligible ex-spouse has passed away, and people with disabilities. Under certain conditions, the recipients of the payments also include beneficiaries’ children. The benefits primarily aim to offer financial security to people with disabilities, aging workers, and children.

President Franklin Roosevelt signed the Social Security Act into law in 1935. The act was introduced following the Great Depression to safeguard individuals from financial risks associated with modem life, like disability, poverty, unemployment, etc.

One can become eligible for Social Security retirement benefits by making payments into the program while employed. Individuals must note that full insurance depends on collecting 40 credits or quarters from covered wages. Also, workers can get a maximum of four credits each year.

The SSA, or Social Security Administration, tracks individuals’ career earnings. Moreover, it indexes yearly income and utilizes the 35 highest-income years to compute the AIME or Average Indexed Monthly Earnings. Then, it utilizes the AIME to determine the PIA or Primary Insurance Amount, which one can begin accumulating after reaching full retirement age.

Retirement calculators offered by the SSA can assist individuals in determining the full retirement age and the SSA’s projection of their life expectancy for the computation of the benefits. Moreover, these tools can help them determine rough projections of their retirement benefits, actual estimates of their retirement benefits depending on their work record, etc.

Individuals must remember that retired adults with Self-Employed Contributions Act or SEC-taxed or non-FICA (Federal Insurance Contributions Act) wages require extra help as the rules for them are more complicated. The original act covered workers’ retirement income only. However, more benefits followed via amendments to the 37-page act.

The most convenient and straightforward way to apply for Social Security retirement benefits is by initiating the application procedure on the official website of the Social Security Administration. For that, individuals must sign in or create their personal Social Security accounts. If the SSA cannot process the applicant’s request, the latter will receive specific details regarding how to reach out to the former via phone or by scheduling an appointment.

Some of the information required to apply are as follows:

• Social Security number
• Date and place of birth
• Citizenship status
• The names and ages of current spouse and children
• Employer’s name and address
• The name and age of any former spouse
• Last and current years’ income, etc.

One must note that submitting certain documents during the application process is vital. Some of the documents are as follows:

• Original birth certificate
• Proof of lawful alien status or U.S. citizenship
• A copy of the applicant’s W-2 forms or/and self-employment tax return

One can visit the official website of the SSA to get more details.

There are four types of these benefits available. Let us look at them.

#1 - Survivor Benefits

If a worker dies, the eligible survivors can get this benefit. The survivors may include spouses aged more than 60 or 50 years in the case of a disabled person. There is no age restriction if the children of the deceased person’s minor children are dependent on the spouse). Moreover, survivor benefits are available to adult children who became specially abled before turning 22. Generally, the payout of this benefit occurs every month. However, there are a few restrictions in the case of divorced spouses.

#2 - Dependent Benefits

Children getting Social Security benefits on their deceased or disabled parent’s behalf can keep receiving the benefits until they become 18 years old. If a child is a student, typically, they can continue getting the benefits until they complete their high school graduation or two months after they turn 19.

#3 - Retirement Benefits

These benefits are available to workers or employees who made Social Security tax payments. One must remember that such benefits do not come with an expiry date. This means that once individuals start receiving retirement benefits, they get it for their lifetime.  

#4 - Disability Benefits

Employees with an eligible medical condition can benefit from Social Security’s disability insurance program. Like retirement benefits, disability benefits do not expire. One continues to receive the payments they keep suffering from the eligible health condition. The SSA regularly checks to ensure that the health condition continues to impact the individual’s work.

Individuals must note that one has to pay income tax on Social Security benefits based on their ‘combined income,’ which includes the following:

• Tax-exempt interest, for example, interest earned on municipal bonds
• Half of their Social Security benefit
• Adjusted gross income, which includes gross income, retirement plan withdrawals, and investment income

Most recipients of Social Security benefits earn higher than the minimum limit and end up paying taxes on the payments received. In fact, per SSA’s prediction, it is expected that 56% of the beneficiary families will make tax payments on the benefits received over a 35-year duration (2015-2050). One must remember that beneficiaries are subject to taxation for an amount of up to 85% of their benefits.

Let us look at a breakdown of the federal income taxes payable if persons file as individuals.

The table below shows the breakdown of the federal income taxes people owe if they file their taxes jointly.

Individuals unfamiliar with retirement plans and benefits often have confusion regarding the meaning and purpose of Supplemental Security Income(SSI), Social Security benefits, and 401(k). One must know their critical differences to steer clear of any confusion. So, let us look at how they differ.

Individuals unfamiliar with pensions and social security benefits might think they are identical. That said, one must note that they are not the same. Individuals must look at these concepts’ distinct features to understand their differences.

This has been a guide to Social Security Benefits and its meaning. We explain its taxation, how to apply for it, types, and comparison with 401(k) & pensions. You can learn more about it from the following articles –

• Social Capital
• Self-Employment Tax
• FHA Loan