What is Social Security?

Social Security is among the first benefits you’ll receive on your road to retirement. However, like Medicare, navigating Social Security is complicated and overwhelming. Luckily, our guide to understanding Social Security will arm you with the knowledge you need to make a confident decision for your retirement. We’ll break down the program’s core components, eligibility requirements, and the various benefits available. Whether you’re still years away from retirement or nearing your golden years, this guide will equip you to make informed decisions and ensure a secure financial future. 

The majority of Americans will qualify for Social Security benefits. The Social Security Administration estimates 97 percent of adults age 60 to 89 are eligible to receive Social Security funds. The primary Social Security benefits that come to mind for most Americans are retirement benefits, tied to the money you made — and paid taxes on — throughout your working years.  

However, there are multiple ways you can become eligible for benefits, as outlined below: 

Retirement Benefits 

The most common Social Security benefits are retirement benefits — about 75 percent of Social Security payments go to retired workers. 

To qualify for retirement benefits under Social Security, you must have: 

• reached age 62 or older and 

• worked at a job that paid taxes into Social Security for at least 10 years

If you’re concerned about your qualification, you can check the Social Security Administration’s records by logging into your Social Security account.

It’s not just a matter of wondering, “When am I eligible for Social Security benefits?” though. For your full retirement benefit, you’ll want to wait until your Full Retirement Age (FRA) to file your benefits. The average check for a retired worker in 2024 is $1,916.

You are eligible to receive Social Security benefits starting at age 62, but, if you were born in 1960, your full retirement age isn’t until five years later. While the largest cohort of Social Security recipients take their Social Security benefits starting at full retirement age, 62 is the next most popular age to start receiving benefits. But this reduces your benefits. For someone born in 1960, starting benefits as early as you can at age 62 results in a monthly paycheck that is only 70 percent of your original Social Security retirement benefit.

Conversely, for every month you delay after your FRA, you can get a larger monthly benefit up to age 70. This delayed retirement credit amounts to 8 percent per year. If, for example, someone born in 1960 holds off on collecting their Social Security benefits until after their birthday in 2030, they’ll receive a monthly check that’s 124 percent of their original Social Security retirement benefit.

Spousal Benefits

Many people spend time outside of the workforce thanks to caregiving and other responsibilities. If you are married and haven’t accumulated enough work history credits to give yourself an income, or your work history adds up to a disappointing benefit, you may be able to qualify for a spousal benefit. 
Spousal benefits amount to as much as 50 percent of your spouse’s Social Security retirement benefit at their full retirement age. To qualify for the peak amount, you and your spouse must have both reached your full retirement age, and your spouse must be collecting their benefits. If your spouse begins taking Social Security retirement benefits before full retirement age, then your benefit will be reduced. And if you take the spousal benefit before you reach full retirement age, it will also be reduced. 

Unlike retirement benefits for individuals, delaying past full retirement age will not increase your spousal benefit. 

Another exception to keep in mind when collecting spousal benefits: if you are under FRA but you also care for a child who can claim special Social Security benefits on your spouse’s record because they are 1) younger than 16 or 2) have a disability. 

Ex-Spousal Benefits

Divorced people who were married for 10 years can qualify on their ex-spouse’s record similar to that of a spouse. The peak benefit allowed in this circumstance is up to 50 percent of your ex’s benefit at FRA. Unlike spousal benefits, your ex-spouse doesn’t have to be collecting benefits in order for you to begin collecting Social Security with an ex-spousal benefit. Additionally, your ex-spouse will not be notified that you are receiving on their record.

To qualify for this benefit, you have to have been divorced for at least two years when you begin receiving benefits, and you can’t be remarried before the age of 60 when you apply for benefits. But if you had multiple marriages that lasted for more than 10 years, you can qualify for whatever the highest benefit is. Your benefits will not impact your ex-spouse or anyone they have married or their benefits in the meantime.

Widow / Widower Benefits

If your spouse or ex-spouse has died, you may be eligible for widow/widower benefits. 

If you’re at least 60, or you are younger than 60 and you’re taking care of a child who is 16 or younger or is disabled and who your spouse was financially responsible for, you can qualify to receive a portion of your deceased spouse’s benefits. Like spousal benefits, if you wait until after your FRA to begin benefits, you may have a higher monthly benefit amount than if you begin payments at your earliest eligibility. 

As long as you have reached FRA and your spouse didn’t take their Social Security benefits early, you may qualify for 100 percent of their benefit. Divorcees and widows or widowers can continue to receive their benefits, sometimes even if they remarry after age 60.

Disability Benefits

Social Security pays a stipend for those with a disability based on two programs: the Social Security Disability Insurance (SSDI) program and the Supplemental Security Income (SSI) program. 

To qualify for benefits under SSDI, you have to have a physical disability that will last for at least a year or until death, and you must have a work record in the years before you developed your disability. Social Security uses a chart to help calculate just how many work credits you need on your history to qualify for benefits. If you don’t qualify for SSDI because you don’t have enough of a work record, however, you may still be eligible for SSI if you have a disability, low income, and few financial resources.

How is Social Security Calculated?

If you’re drawing Social Security retirement income on your own record (as most beneficiaries are), your FRA, the date you started benefits, and your work history are all part of answering your question, “How much Social Security will I get?” 

What is Full Retirement Age?

Full retirement age, or FRA, also known as “normal retirement age,” is the age the Social Security Administration says you’re eligible for your full monthly check. If you file when you are younger than your full retirement age, the Social Security Administration reduces your benefits by a certain percentage to account for the fact that you will receive more checks than if you had waited to turn on Social Security until FRA.

While FRA is crucial for understanding your Social Security benefits, it’s also slightly confusing, because anyone born between 1954 and 1960 has a full retirement age that is calculated to include months. So, don’t assume your FRA unless you’ve checked your birth year.

As previously discussed, starting your Social Security benefits before your full retirement age can reduce your monthly check, while delaying until later can increase your monthly benefit.

But how does the Social Security Administration calculate that base FRA benefit?

Social Security and Your Work History

That amount you qualify for at FRA is based on your work history and your earnings. For someone who has worked their entire adult life, the Social Security Administration will take your top 35 highest-earning years and get a monthly average for each year. Then that average will be measured against a wage index from each year, which measures your annual wage against metrics like market rate and inflation. 

Once the administration has calculated your “average indexed monthly earnings,” then they calculate your “primary insurance amount” (what you can expect at FRA) based on what the Social Security Administration calls “bend points.” Essentially, the administration takes everyone’s average indexed monthly earnings and then weights it so that low-income earners get monthly benefits closer to their work history, and higher-income earners get a lower percentage overall of their pre-retirement pay.

What is the Social Security Cost of Living Adjustment (COLA)?

Your monthly benefit doesn’t just stay the same year over year — your monthly amount is subject to an annual Cost of Living Adjustment (COLA), which ties your Social Security benefits to an inflation-adjusted rate. This COLA is built into the program as a federally mandated part of your Social Security benefits, and most years you’ll see some kind of increase. Since the COLA was introduced in 1975, there have only been three years when the COLA for Social Security was 0.0%. 

Medicare and Your Social Security Check

Your monthly Social Security check may be affected by Medicare. If you’re receiving benefits from Social Security, your Medicare premiums will come out of your Social Security paycheck. This can be surprising to those who began Social Security at age 62 and already have a smaller benefits check than those who waited until they reached FRA. This flows the other way for those who enroll in Medicare at age 65 and then wait until FRA, or even to age 70 to start Social Security — no longer paying Medicare premiums out of pocket can be a slight relief. 

Social Security Earnings Test

Some people enroll to start their Social Security benefits before they have fully exited the workforce. If you’ve reached full retirement age, then this is no problem. But if you’ve begun benefits before your FRA and you’re collecting a paycheck and paying payroll taxes, it’s a little complicated. 

This situation arises most commonly when someone is laid off or retires before FRA and begins Social Security, but then gets the opportunity to return to work either full- or part-time. 

In these situations, Social Security subjects you to an earnings test. In 2024, if have a year or more before your FRA you can earn up to $22,320 in income before the Social Security Administration steps in. The administration will withhold $1 of your Social Security benefit for every $2 you earn over that threshold. In the year you reach your full retirement age, for the months before your birth month, the administration withholds $1 in benefits for every $3 you earn over $59,520.

It’s also important to note, that these withheld Social Security benefits will be added back to the benefits pool so, once you have attained your full normal retirement age, you will permanently have a higher monthly benefit check that adds the withheld benefits back in.

Do You Pay Taxes on Social Security?

While Social Security is a benefit we qualify for by paying taxes in the first place, Social Security is also a taxable benefit. 

Social Security and Income Tax

Under current tax laws, at least 15 percent of your Social Security income is completely tax-free. But the remaining percentage of your check will have taxes withheld and how much depends on your other income sources.

The IRS taxes your Social Security benefits based on the “combined income formula,” which adds your adjusted gross income, half your annual Social Security benefits, and nontaxable interest. Yes, you read that right; your nontaxable interest, like gains from municipal bonds, counts toward the formula for taxing your Social Security. 

According to the Social Security Administration, about 40 percent of Social Security beneficiaries pay federal income taxes on their benefits.

When to Claim Social Security

As we covered earlier, most people are first eligible for Social Security at age 62. Full retirement age, your 100 percent benefit age, is from 66 to 67 depending on your birth year. And you can qualify for delayed retirement credits up to age 70. So, what’s best?

Spoiler: There’s not a single age that’s “best” to take your Social Security benefits; there’s just the age that’s best for you.

Social Security Break Even Points

One frequent question when you’re looking at the best time to file for Social Security is the discussion of a “break even” point. 

Waiting longer to take Social Security means having fewer lifetime checks, but more money in each check. Taking Social Security early means more checks, with less money in each check. So Social Security break-even calculations are essentially a matter of estimating how long you have to live to get the most out of your decision.

Many break-even calculations compare the options of starting Social Security at age 62 vs. FRA (66-67) vs. waiting until 70. Your break-even calculation will depend on your primary insurance amount or “base Social Security rate.” Typically once you are in your mid-80s, the people who waited until 70 to file have started to pull head and shoulders above their earlier-filing peers. 

How to Decide When to Start Social Security

Some of the factors that should influence your decision are things like:

• Break-even rates

• Current health: Someone who has a terminal diagnosis or a lifespan-reducing chronic illness will want to factor that into their decision-making.

• Family history: Perhaps your family has genetic conditions that reduce or extend your personal life expectancy. These are worth factoring into your decision – no sense filing early if your grandparents lived to 100!

• National life expectancy: Modern medicine and hygiene have helped lengthen life expectancy. And, statistically, the longer you live, the longer you are likely to live. So, if you’ve made it to 65, you’re very likely to live into your 80s. If you have “average” health and family history, keep in mind these national trends.

• Your broader retirement goals: Delaying Social Security means your income has to come from somewhere else. Did you hope to let your personal savings grow to build legacy assets? Remember, Social Security isn’t an asset you can pass to a new generation.

• Spousal decisions: As we’ve covered, your spouse could qualify for benefits based on your work history. If you delay filing until age 70, your spouse may also have to wait to turn on benefits. If you file early, you could permanently reduce your monthly check options and theirs.

In conclusion, your Social Security and Medicare benefits are inextricably linked, and both involve making decisions that can affect your health and income for the rest of your life. No pressure!