HOW DOES SOCIAL SECURITY WORK?

A financial safety net for older Americans, Social Security was established in 1935 by the Social Security Act. Before that, support for the elderly wasn’t a federal concern—it mostly fell to states, towns, and of course, families.

The program is based on contributions that workers make into the system. While you’re employed, you pay into Social Security and then you receive benefits later on when it’s your turn to retire. Contributions take the form of the Federal Insurance Contributions Act (FICA)

taxes that are withheld from most paychecks.

• The following is a general overview of Social Security:
• Of the 15.3% paid on your behalf, if 7.65% is paid by you, 7.65% is paid by your employer.
• You earn 1 credit for every $1,890 in annual earnings, up to a maximum of 4 credits per year.
• Must work at least 10 years; 40 credits are necessary to become eligible to receive benefits.
• The 2026 average Social Security individual benefit is $994, for a couple it is $1,491.                                                                                                                     The 2026 maximum benefit is $4,152, if you retire at the full retirement age.
• Your Social Security benefit is determined by your highest 35 years of earnings.
• In 2026, the maximum taxable income is $184,500
  •                                                

WHEN SHOULD YOU APPLY FOR SOCIAL SECURITY?

Although Social Security has been around for more than seven decades, most Americans admit they really don’t have a basic understanding about the rules that affect the size of their retirement benefit. Deciding how to claim Social Security is arguably one of the largest financial

decisions a person will make in his or her lifetime. Making a mistake could cost you hundreds and sometimes even thousands of dollars over your lifetime and impact your loved ones after you are gone.

There are calculators to help you examine benefits available to you at various ages and help you determine what strategy will fit best for your individual circumstances. It’s a complicated decision and warrants careful consideration. This is one time when the help of a trusted financial

professional could be invaluable. The decision you make regarding when to begin taking your Social Security benefits could potentially be even more important than in the past due to a new rule change implemented by the Social Security Administration. Effective December 8, 2010, a new time restraint has been placed for when individuals can “redo” their Social security Income election. Recipients now have only 12 months from the date they file their income application claim to make an election fix or “redo”.

SOCIAL SECURITY FULL RETIREMENT AGE

The age at which you can receive your full retirement benefit is called your full retirement age. Full retirement age determines when you can receive your full retirement benefit. If you choose to begin receiving retirement benefits earlier, your benefit will be a reduced percentage of the amount you would have received if you had waited. You can also receive an increased benefit by delaying further still until after your full retirement age.

FULL RETIREMENT AGE

For a long time, full retirement age was fixed at 65 years. In a major overhaul designed to improve the solvency of the system back in 1983, Congress passed a law that increased the full retirement age for people born after 1937. The age in which you are eligible to receive full

retirement benefits will depend on when you were born. The following table gives the full retirement age under current law: Full Retirement Age

SPOUSAL BENEFITS

As a spouse, you may be able to claim Social Security benefits based on your own work record, or you can collect a “spousal benefit” that may provide you with 50% of the amount of your spouse’s Social Security benefit. If you are eligible for both your own retirement benefits and spousal benefits, you will receive whichever is higher. As a non-working spouse,

you are allowed to file for benefits prior to full retirement age, but those benefits would be paid out at a reduced rate.

Keep the following in mind:

• You must be at least age 62 to qualify for benefits
• Your spouse must file for benefits. Unless you are divorced, you can’t collect spousal benefits until your spouse has filed for their own benefits.
• The maximum benefit is 50%. At full retirement age, you will receive 50% of your spouse’s benefits.
• If you claim any benefit before full retirement age, that benefit will be permanently reduced
• If you qualify and apply for your own retirement benefits and for benefits as a spouse, we always pay your own benefits first.
• If your benefits as a spouse are higher than your own retirement benefits, you will get a combination of benefits equaling the higher spouse benefit.

WIDOWED - SURVIVOR BENEFITS

As a survivor, your benefit as a widow or widower can start any time between age 60 and full retirement age. If your benefits start at an earlier age, they will be reduced a fraction of a percent for each month before full retirement age.

If you are over full retirement age, your benefit will be 100% of your deceased spouse’s benefit. Bear in mind that if your deceased spouse elected early benefits, your benefits will be based on that reduced amount. Consequently, if they delayed benefits to a later age (up to age 70),

your benefit will be based on that increased amount. If you were both full retirement age at the time of death, you will receive the greater of either your benefit or 100% of your deceased spouse’s benefit.

If you receive a widow’s or widower’s benefit and will qualify for retirement benefits that’s

more than your survivor’s benefit, you can switch to your own retirement benefit as early as

age 62 or late as age 70.

Note: Keep in mind that the maximum survivor’s benefit is limited to what the worker would have received if they were still living.

DIVORCED SPOUSE BENEFITS

If you are divorced, but your marriage lasted 10 years or longer, you can receive Social Security benefits on your ex-spouse’s record

(even if he or she has remarried). Although you can apply for benefits as early as age 62, benefits would be paid out at a

reduced amount. Following your divorce, after a two year period, it is no longer necessary for your ex-spouse to apply for

benefits for you to receive yours. If you remarry, you generally cannot collect benefits on your former spouse’s record unless

your later marriage ends by death, divorce, or annulment.

If you were born before January 2, 1954, and have already reached full retirement age, you can choose to receive only

the divorced spouse’s benefit and delay receiving your retirement benefit until a later date. If your birthday

is January 2, 1954 or later, the option to take only one benefit at full retirement age no longer exists.

If you file for one benefit, you will be effectively filing for all retirement or spousal benefits

THE TAXATION OF SOCIAL SECURITY BENEFITS

Due to tax amendments that were passed first in 1983 and again in 1993, the rules changed regarding the taxation of Social Security benefits. Today, some individuals are placed in the position of paying taxes on as much as 85% of their Social Security benefits. This occurs if

you have too much PROVISIONAL INCOME that must be reported on your tax return. Provisional income includes all items which are normally part of your adjusted gross income which includes: wages, pensions, dividends, and interest. In addition to these

amounts, tax-exempt interest income AND 50% of your Social Security benefits are included.

The chart below illustrates how much of your Social Security benefits are subject to taxation

and at what levels.

Filing Status Provisional Income Percentage of Social Security that is taxable