How to understand Social Security retirement benefits

Social Security, managed by the U.S. federal government, pays benefits to retirees. Social Security benefits are one part of a broader retirement plan. These benefits can supplement other sources of retirement income, such as 401(k)s, individual retirement accounts (IRAs) or other retirement savings plans.

 


How do I qualify for Social Security retirement benefits?

When you work and pay taxes, you earn “credits” toward Social Security retirement benefits. These credits are based on your annual earnings; you can accrue a maximum of four credits per year. Once you’ve acquired 40 credits (from approximately 10 years of employment), you’re fully insured and eligible to receive retirement benefits.

Your paychecks will withhold Federal Insurance Contributions Act (FICA) tax (often displayed on pay statements as OASDI, for Old-Age, Survivors and Disability Insurance) until you’ve earned up to the taxable earnings base for the year.

2021 FICA amounts1

Taxable earnings base

Earnings required for one credit

Earnings required for max (4) credits per year

$142,800

$1,470

$5,880

When should I collect
my Social Security?

The best time for you to collect depends on:

  • Your individual circumstances
  • The Social Security benefits to which you (and your spouse) are entitled
  • Life expectancy
  • When you plan to stop working
  • What other assets or retirement income streams you have

With Social Security, the longer you wait to start claiming benefits, the more monthly income you’ll receive. This is because the amount you collect in the form of your monthly benefit, called your primary insurance amount (PIA), is related to how old you are when you begin to claim benefits.

Can I collect my retirement
benefits early?

You can start collecting Social Security as early as age 62 – but there’s a catch. If you collect before you reach your full retirement age (FRA), you’ll receive a lower monthly payment – permanently. For example, if your FRA is 67, but you begin to claim benefits at 62, you’re signing up to get 30% less. However, this reduction will decrease for each month you wait after age 62, up until your FRA. Think of your FRA as your break-even point.

Age to receive full Social Security benefits2

Year born

Full retirement age

1937 or earlier

65

1938-1942

65 + 2 months for every year after 1937

1943-1954

66

1955-1959

66 + 2 months for every year after 1954

1960 +

67

How can I increase my monthly retirement benefits?

If you can wait until after your full retirement age to collect benefits, your benefit amount will increase each month until you turn 70. These monthly raises, called "delayed retirement credits," can boost your benefits by as much as 124% of your PIA if you have an FRA of 67 and you wait until age 70 to collect. Maximizing your Social Security benefits can help close a gap between the money you’ve saved and the income you want in retirement.

Percent of PIA collectable by Age3

Collect at Age 67 (FRA)

100%

Collect at Age 68

108%

Collect at Age 69

116%

Collect at Age 70 or Later

124%

*Assumes FRA of 67

How do I estimate my monthly retirement benefits?

You can estimate your monthly retirement benefits by calculating your PIA, the monthly benefit you’re eligible to receive once you reach your FRA. To determine your PIA, the Social Security Administration (SSA) uses your best 35 years of employment to arrive at your Average Indexed Monthly Earnings (AIME). If you haven’t worked for 35 years, some of the included earnings may be zero.

If you continue working after reaching your FRA, the SSA will automatically recalculate your benefits each year you continue to work. If your current income is greater than any of your previously calculated “best 35 years,” your benefits will be adjusted upward. The increase generally will be made in October of the following year but will be retroactive to January 1.

Social Security retirement benefits are automatically modified each year for cost-of-living adjustments (COLAs), which are either positive or zero — never negative. COLAs are based on the Consumer Price Index and have averaged between 1% and 2% over the past 10 years.

For more information, the SSA offers a helpful Social Security retirement calculator.

How will my retirement benefits be taxed?

Approximately one-third of people who collect Social Security benefits are required to pay income taxes on these benefits. Individuals with higher total incomes must include up to 85% of their benefits as income for federal income tax purposes, designated by special step-rate “thresholds.” However, the taxation thresholds for your benefits aren’t currently indexed for inflation.

Income taxes and Social Security benefits4

Percentage of benefits taxable

Single

Married, filing jointly

0%

$0-25K

$0-32K

0-50%

Above $25K

Above $32K

7-85%

Above $35K

Above $44K

*Based on provisional income = ½ Social Security benefits + modified adjusted gross income

Are there retirement benefits for my family members?

Once you start collecting Social Security, other family members may be entitled to collect benefits as well, based on your work history. If you’ve been married for at least one year, your spouse may be entitled to collect spousal benefits. Under certain conditions, your children may also be entitled to benefits.

There is a limit on the amount of benefits that family members receive on the earnings record of one worker. The limit varies between 150% and 188% of the worker’s PIA. If the total benefits owed to your spouse and children push your family’s benefits above the limit, their benefits will be reduced proportionately to bring the total within the limit. Your benefits will not be affected. Any benefits payable to an ex-spouse aren’t included in the family maximum.

  • If you currently qualify for a spousal benefit from a former spouse or meet certain other special exceptions, the one-year requirement is waived.

    Spousal benefits are equal to 50% of your spouse’s PIA if you collect benefits at your FRA or later. If you’re entitled to your own benefits and your PIA is less than 50% of your spouse’s PIA, you’ll receive spousal benefits in addition to your own benefits. Together, these combined benefits should equal 50% of your spouse’s PIA, assuming you start collecting both benefits at your FRA or later.

    As with individual benefits, if you opt to collect your spousal benefit prior to reaching your FRA, your benefits are permanently reduced. But unlike individual benefits, spousal benefits don’t increase after you reach your FRA, so there isn’t an added benefit to waiting.

    There’s no double-dipping when it comes to Social Security benefits. In other words, you can’t add full spousal benefits on top of your individual benefits. Instead, you’ll receive the larger of the two amounts. However, if you were born before 1954 and are eligible for both individual and spousal benefits, you can file a restricted application to receive only spousal benefits, which would allow your individual benefits to grow.

  • Survivor benefits are Social Security payments to family members of a wage earner who has died. Unlike spousal benefits, the size of the survivor benefits you leave behind changes depending on when you opt to collect your individual benefits. As a result, if you take your individual benefits early, you’re locking in lower lifetime income not only for yourself, but also for your spouse should you die before him or her. If you delay receiving benefits to earn a higher PIA, that amount is eligible to pass on to your surviving spouse.

    As a spouse, you may be entitled to survivor benefits if you’ve been married for at least nine months at the time of your spouse's death. You can collect survivor benefits as young as age 62, but if you do, those benefits will be reduced. Children and parents may also be eligible for survivor benefits, but only under specific circumstances.

    Survivor benefits would replace benefits you’re already receiving (individual or spousal) if the survivor benefits are of higher value. Additionally, if you receive a pension based on work without paying into Social Security, your survivor benefit may be reduced accordingly.

  • You may be eligible for spousal benefits based on your ex-spouse’s earnings history if you were married for at least 10 years, have been divorced for at least two years, and both you and your ex-spouse have reached age 62.

    These benefits include the same 50% that applies to married couples. But as with survivor benefits, if you earned a government pension while not paying into Social Security, your benefit could be reduced as a result.

    Should your ex-spouse pass away, you may also be eligible for survivor benefits. You could receive the same benefits as a widow or widower, without affecting the benefits of other survivors. Similarly, if your ex-spouse remarries, you can still receive benefits without impacting the benefits of his or her current spouse.

Will a government pension impact my retirement benefits?

If you worked for an employer that didn’t withhold FICA taxes from your salary, such as a government agency, the pension you receive based on that work may reduce your Social Security retirement benefits. This reduction, as part of the windfall elimination provision (WEP), affects individuals who earned a pension in any job where FICA taxes weren’t paid and who worked in other jobs long enough to qualify for Social Security retirement benefits.

In addition to a reduction in individual benefits, spousal and/or survivor benefits may also be reduced accordingly. In this case, Social Security benefits will be reduced by two-thirds of the government pension.