Social Security is a federal system of programs designed to protect individuals and families against economic hardship. Most Americans work in occupations covered by the Social Security system, and they will at some point in their lives receive Social Security benefits.
The system is administered by the Social Security Administration and financed mainly by Social Security tax (FICA) withholding on wages and by taxes on self-employment income.
How does it work?
Social Security is a compulsory system. Employers, employees, and self-employed individuals are required to participate and pay taxes that finance Social Security benefits. As an employee, you pay a Social Security tax of 6.2 percent of your pay (matched by your employer) each pay period and you pay a Medicare tax of 1.45 percent of your pay (matched by your employer). If you are self-employed, you pay a 12.4 percent self-employment tax on your earnings to finance Social Security programs and you pay a 2.9 percent tax to finance Medicare.
The Social Security tax on your earnings applies only to earnings under the maximum earnings limit ($117,000 in 2014). No limit applies, however, to the Medicare tax on your earnings.
Your earnings are tracked by the Social Security Administration
Your employer reports your annual Social Security earnings to the Social Security Administration. If you are self-employed, the IRS reports your earnings. They are compiled on a record known as a Social Security earnings record, which is identified by your nine-digit Social Security number. This earnings record is eventually used to calculate the amount of your Social Security benefit.
You receive benefits after meeting certain eligibility criteria
To be eligible to receive Social Security benefits, you must be insured under the system. To become insured, you have to work for a certain amount of time in an occupation covered under Social Security or be the spouse, ex-spouse, widow or widower, or parent of someone who has. You also have to meet the eligibility requirements specific to the benefit.
Social Security Retirement Benefits
Providing retirement benefits was a key provision of the Social Security Act of 1935. Older Americans were especially financially vulnerable during the Great Depression, and Social Security was enacted partly to provide them with some continuing income after retirement. Today, although the scope of the program has been widened through amendments to include survivor, disability, and medical insurance benefits, Social Security remains synonymous with retirement benefits.
When planning for retirement, you should neither overlook nor overstate the value of your Social Security benefits. Despite the anxiety some baby boomers feel over the future of Social Security, funds in the trust that pays benefits will rapidly increase in the short term (10 to 15 years). Predicting the future of Social Security is difficult, however, because to keep the system solvent, some changes must be made to it. The younger and wealthier you are, the more likely that these changes will affect you. But even if you retire in the next few years, remember that Social Security was never meant to be the sole source of income for retirees. As President Dwight D. Eisenhower said: “The system is not intended as a substitute for private savings, pension plans, and insurance protection. It is, rather, intended as the foundation upon which these other forms of protection can be soundly built.”
Normal retirement age is the age at which you can retire and receive full (unreduced) Social Security benefits. However, many people choose to receive Social Security retirement benefits early at age 62 (early retirement age). You can also retire and begin receiving benefits after normal retirement age. If so, you are considered to be electing delayed retirement benefits. Electing early retirement benefits means that you will receive a reduced benefit, while electing delayed retirement benefits means that you will receive a delayed retirement credit and thus a higher benefit.
Do military retirement benefits affect Social Security?
Generally, there is no reduction of Social Security benefits because of your military retirement benefits. You can collect both Social Security benefits upon reaching age 62 and military retirement pay once you reach a certain time threshold in active duty, the Reserves or Guard. You’ll get your full Social Security benefit based on your earnings history.
In addition, if you participate in the Department of Defense program, Survivor Benefit Plan, the amount paid to the surviving plan beneficiary is no longer reduced when the beneficiary is eligible for Social Security.
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