BECOME THE BANKER Retirement Planning and Social Security

Does your retirement planning include Social Security?  If so, how much do you really know about Social Security and how it works?

The Social Security Act was written by President Franklin Roosevelt’s administration and passed by Congress in 1935 as part of the New Deal.  Use of the term Social Security in the United States today generally refers to the federal Old-Age, Survivors, and Disability Insurance (OASDI) program.  Social Security is currently the largest social insurance program in the U.S., funded through dedicated payroll taxes called Federal Insurance Contributions Act (FICA).  When you work and pay Social Security taxes, you earn credits toward Social Security benefits, including:

Retirement Benefits:  When applying your Social Security retirement benefit to your retirement planning, you should know the amount will depend on your age, your earnings, and when you decide to retire.  Social Security retirement benefits may also be payable to your spouse or certain other family members.

Disabililty Benefits:  If you are injured or become ill and cannot work, you may qualify for Social Security disability benefits.  Social Security uses a strict definition of disability in determining eligibility and pays benefits only for total disability.  No benefits are payable for partial disability or for short-term disability.

Survivors Benefits:  When you die, certain family members may be eligible for Social Security survivor benefits based on your work and earnings record.  In addition, your surviving spouse or minor children may be eligible to receive a $255 on-time payment at your death.

Social Security Taxes

The Social Security taxes you pay during your working years go into a trust fund, where approximately 85% is used to pay Social Security benefits to current retirees and their families, as well as to surviving spouses and children of workers who have died.  The remining 15% goes to a trust fund that pays benefits to disabled workers and their families.  A separate Medicare tax is used to provide Medicare coverage to retired and disabled people.

You pay Social Security taxes on your wagesor net earnings from self-employment up to a specified amount that may increase each year.  In 2018, that amount is $128,400.  The Medicare tax is paid on all of your wages or net earnings from self-employment.

You qualify for Social Security benefits by earning credits through working and paying Social Security taxes.  Your Social Security credits are based on the amount of your earnings.  In 2018, you receive on credit for each $1,320 of earnings, up to a maximum of four credits per year.  The credits you earn remain on your Social Security record, even if you change jobs of have no earnings for a period of time.

The number of credits you need to be eligible for benefits depends on your age and the type of Social Security benefits:

Retirement Benefits:  If you were born in 1929 or later, you need 10 years of work (40 credits) to be eligible for retirement benefits.  People born before 1929 needed fewer years of work to receive retirement benefits.

Disability Benefits:  The number of credits needed to receive disability benefits depends on your age when you become disabled…the older you are when you become disabled, the more credits you need.  For example, if you are younger than age 24 when you become disabled, you generally need 1 ½ years of work (six credits) in the three years before you became disabled.  If you are age 31 or older when disabled, you generally need at least 20 credits in the 10 years immediately before you became disabled, with the number of credits increasing with your age.

Survivors Benefits:  Depending on the worker’s age at the time of death, up to a maximum of 10 years of work (40 credits) is required for survivors benefits to be paid to certain family members of a deceased worker, with the survivors benefits to be paid to certain family members of a deceased worker, with the survivors of younger workers becoming eligible after as little as 1 ½ years of work during the three years before the worker’s death.

Medicare:  Generally, you are eligible for Medicare if you or your spouse worked for at least 10 years in Medicare-covered employment and you are 65 years or older and a citizen or permanent resident of the United States.  Certain disabled persons may qualify for Medicare at a younger age.