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Social Security
While Social Security is likely to have challenges in the future, it's still a major factor in the retirement of most Americans.
Q. What is Social Security?
A. Social Security benefits are based upon the Social Security Act of 1935. The original intent was to encourage workers to retire at the age of 65 by providing payments to them. At the time of the Great Depression, this was done to remove these people from the workforce and thereby lower unemployment.
Coverage
Social Security coverage has changed over the years. In addition to old-age benefits, Social Security now also provides:
- disability benefits
- aid to dependents and survivors
- medical insurance
- death benefits
The proportion of the workforce covered has also expanded over the years. In order to pay for this expansion, the tax has gone up over the years. Let's take a look…
| 2000 | 2026 |
|---|---|
| Only the first $76,200 in earnings was taxed. | The first $184,500 in earnings is taxed. |
Year 2026 Federal Insurance Contributions Act (FICA = Medicare + Social Security) tax rates are shown below:
| Medicare | |
|---|---|
| Employee | 1.45% on all wages |
| Employer | 1.45% on all wages |
| Self-employed | 2.9% on net earnings |
| Social Security | |
|---|---|
| Employee | 6.2% on first $184,500 of wages |
| Employer | 6.2% on first $184,500 of wages |
| Self-employed | 12.4% on first $184,500 of net earnings |
Eligibility
Most workers are eligible for Social Security. (There are some organizations that are exempt from Social Security because they provide a retirement plan that is sufficient for Social Security to be unnecessary.)
In order to receive benefits, a worker needs to earn a certain number of credits. This number varies depending on when the employee was born.
| Year of birth | Necessary SS credits |
|---|---|
| Before 1929 | Less than 40 credits (1928: 39; 1927: 38; 1926: 37, etc.) |
| 1929 or later | 40 credits (or 10 working years) |
How are Social Security credits earned?
Wages are reported to Social Security. One credit is earned for each quarter of coverage if the earnings threshold for a quarter is reached. Each year, the amount of earnings needed for a credit goes up as the average earnings level increases.
Benefits
Social Security benefits are based on earnings averaged over most of a worker's lifetime.
Here's how it works…
Actual earnings are first adjusted or "indexed" to account for changes in average wages since the year the earnings were received. Then the average monthly indexed earnings during the 35 years in which the worker earned the most are calculated.
A formula is applied to these earnings to arrive at a basic benefit, or primary insurance amount (PIA).
| PIA | The primary insurance amount (PIA) is the amount the worker receives at full retirement age. |
|---|
For most people, full retirement age is now 67. Generation X and the millennials have become a much larger part of the working population than the baby boomers and earlier generations.
Currently, eligibility for collecting benefits may start as early as age 62. Benefits received before full retirement age are reduced by approximately 30% and benefits received later will increase by approximately 8% per year.
| Birth year | Full Retirement Age |
|---|---|
| 1943-1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 or later | 67 |
For further information about Social Security, go to: https://www.ssa.gov/.
Memory Jogger
Social Security is a(n):