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By Matt Frankel, Motley Fool Investment Planning

10 Things You Need To Know About Social Security

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April 15, 2023

1. You need 40 credits to be eligible

• You need 40 Social Security credits to be eligible for benefits when you reach retirement age

• Credits are relatively easy to earn

• One credit represents $1,220 in earnings, and you can earn up to four in a year

• So, 10 years of earning $4,880 or more is sufficient for eligibility

You’ll earn Social Security credits for each year you work, and 40 credits will make you eligible for benefits (photo is in the public domain)

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April 15, 2023

2. How benefits are calculated• Unlike many corporate

pension plans, Social Security is based on the average of your 35 highest-earning years

• Each year’s income is indexed to account for inflation

• This average is then plugged into a formula, and your benefit is computed

Social Security Formula (2015)

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April 15, 2023

3. What’s your primary insurance amount?

• The amount of your Social Security benefit at your normal retirement age is your primary insurance amount

• Since benefits can be adjusted if you start collecting early or late, this number can help you determine when you should start

• This calculator from the Social Security administration can help estimate yours

Source: flickr user Steven Depolo

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April 15, 2023

4. Normal retirement age is going up

• Your normal retirement age depends on when you were born

• For those reaching retirement age now, normal retirement age is 66

• It gradually increases for those born after 1954

If you were born in…

Your normal retirement age is…

1943-1954 66 years

1955 66 years, 2 months

1956 66 years, 4 months

1957 66 years, 6 months

1958 66 years, 8 months

1959 66 years, 10 months

1960 or later 67

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April 15, 2023

5. When can you start collecting?

• You can choose to begin Social Security benefits anytime between your 62nd and 70th birthday

• Your primary insurance amount (see topic #3) is reduced if you choose to collect early, and increases if you start late

If you choose to start receiving benefits…

Your benefit amount will adjust by…

5 years early -30.0%

4 years early -25.0%

3 years early -20.0%

2 years early -13.3%

1 year early -6.7%

1 year late +8.0%

2 years late +16.0%

3 years late +24.0%

4 years late +32.0%

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April 15, 2023

6. Spouses can get benefits too• Even if your spouse has never

worked, he or she may be eligible for benefits if they’re at least 62 years old and you already qualify for benefits

• If your spouse also qualifies on their own work record, the higher of the two computed benefits will be paid

• A spouse’s full benefit amount is equal to one-half of your full retirement amount

• Their benefit can be reduced if it’s claimed before full retirement age

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April 15, 2023

7. Self-employed individuals pay double

• Employees typically pay half of the Social Security tax (6.2% of the first $118,500 of wages), and employers pay the other half

• However, self-employed individuals are responsible for the entire 12.4% tax

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April 15, 2023

8. You don’t need to be a citizen

• Resident aliens can qualify for Social Security benefits

• To qualify, one of the conditions on the right must be met

• “Qualified Alien” Criteria

1. Receiving Social Security and legally residing in the U.S. as of August 22, 1996

2. They are a lawfully admitted resident alien with 10 years of work experience

3. Currently on active duty in the armed forces, or are a veteran

4. Blind or disabled, and legally residing in the U.S. on August 22, 1996

5. Granted immigration status in certain categories, such as refugee or asylum

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April 15, 2023

9. Having a job can affect your benefit

• If you claim Social Security early, having a job may reduce your benefits

• Until you reach normal retirement age, all earnings are subject to the “retirement earnings test”

• Once you reach normal retirement age, having a job won’t affect your benefits

The retirement earnings test1. Before the year in which you’ll

reach normal retirement age, every $2 you earn over $15,720 will reduce your benefits by $1

2. During the year in which you reach normal retirement age,

every $3 you earn above $41,880 will reduce your benefits by $1

Note: Any earnings reductions to early Social Security benefits will

increase your future benefit amount

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April 15, 2023

10. The future of Social Security• At the current rate, all Social

Security trust funds will run out of money by 2033

• However, the incoming Social Security taxes will still be enough to cover 77% of benefits

• Congress has several options to fix Social Security and ensure its solvency, and some are quite popular

• So, fears of Social Security going “broke” and benefits disappearing are unfounded

Options to fix Social Security

1. Increase Social Security taxes

2. Eliminate or increase the “wage cap”

3. Increase the normal retirement age

4. Reduce benefits for all or some retirees

5. Change how cost-of-living increases are computed

6. Base the formula on more than 35 working years

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