Social Security was established in 1935 to provide a financial safety net for retired and disabled Americans. While many people are aware of its existence, few truly understand the intricacies and benefits offered by this program.
In addition to providing financial support to those who have stopped working, the program also covers individuals with disabilities, spouses of beneficiaries, dependent children, dependent parents, and spouses of deceased workers. These benefits are managed through Survivor Benefits and Disability Insurance.
Who can benefit from Social Security?
In 2024, workers can earn up to four Social Security credits per year, with one credit for every $1,730 earned. To be eligible to receive Social Security benefits, you must be at least 62 years old and have accumulated 40 credits, which is approximately ten years of work.
The amount of benefits you receive, known as the Primary Insurance Amount (PIA), is based on your Average Indexed Monthly Earnings (AIME). This calculation uses current wages to approximate income over a person’s working life.
Strategies to maximize your Social Security benefits
One option to receive the most benefits possible is to delay claiming them. For each year benefits are postponed between ages 67 and 70, the annual benefit amount increases by 8%.
For example, those who begin claiming benefits at the full retirement age of 66 receive 100% of their PIA. However, if they wait until age 67, they receive 108% of their PIA, and if they wait until age 68, they receive 116%.
In terms of numbers, the maximum annual benefit for those who start claiming at age 62 is $32,500, nearly half of the $58,476 those who wait until age 70 would receive.
The full retirement age is 66 for those born between 1943 and 1954, and it increases by two months for each year for those born between 1955 and 1959. For those born in 1960 or later, the full retirement age is 67.
How is Social Security funded?
In 2024, American workers pay taxes on their income up to $168,600 to finance Social Security benefits. Employees and employers each contribute 6.2% for Social Security and 1.45% for Medicare, totaling 7.65%. Self-employed workers must pay 12.4% of their income for Social Security and 2.9% for Medicare.
Most of these funds go to retirees: 85 cents of every dollar collected are deposited into a trust fund for those claiming retirement benefits. The rest goes into a trust fund for people with disabilities.
Cost-of-living adjustment and benefit increases
Based on the increase in the Consumer Price Index from the third quarter of 2022 to the third quarter of 2023, beneficiaries received a Cost-of-Living Adjustment (COLA) of 3.2% starting in 2024. This raised the maximum amount a person can receive upon reaching full retirement age from $56,530 in 2023 to $59,520 in 2024. The adjustment for 2025 will be announced in October.
Will Social Security benefits decrease or run out?
Due to the declining birth rate in the United States, the Social Security program will not be able to pay the full scheduled benefits for future generations. Beginning in 2035, the program is expected to pay only 75% of scheduled benefits.
This shortfall, caused by reduced payments into the system, is expected to stabilize after 2035, and the program should remain solvent in the foreseeable future. Congress can intervene to solve this problem.
Tips for determining the best time to claim your benefits
Determining the optimal time to claim Social Security benefits can be complicated. Consulting with a tax professional or financial planner can be helpful in making the best decision based on your particular situation.
These experts can offer you clear insights on when and how to claim your benefits to maximize your income throughout your retirement.
Social Security is a vital tool for millions of Americans, providing an essential safety net for retirees and people with disabilities. Understanding how it works, who is eligible, and how to maximize your benefits can make a big difference in your long-term financial security.
Be sure to stay informed and, if necessary, seek professional advice to make the best possible decisions about your Social Security benefits.
