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How Does Social Security Work?

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The Basics

Basically, money comes in and money goes out. The money that goes into Social Security comes from your paycheck. About 174 million people contribute to Social Security. In 2017 (the latest figures available) Social Security collected $997 Billion. Most of that came from your paycheck as a social security wage tax. A small percentage of money comes into Social Security from interest that the government earns on trust funds. The trust funds is like the bank account where the government holds the money. At the end of 2017, the trust funds were worth almost $3 Trillion. This is where the money comes from that goes to the people who collect Social Security benefits. About 63 million people receive Social Security benefits and in 2017 this amounted to $953 Billion. Most of this was paid to retirees or their survivors. Some went to disabled workers and to a railroad retirement fund (0.4%). Thus, Social Security works like any business or any household budget. As long as more money comes in than goes out, all is good. Therefore, since $997 Billion was collected and only $953 Billion was paid, $44 Billion is leftover in the Social Security bank account.

What Will I Pay Next Year?

If you’re a wage earner in 2019 and make $132,900 or less, you’ll pay 6.2% of that to Social Security. Your employer will also pay 6.2% of your wages to Social Security. And if you’re self-employed, guess what? You’re paying the whole 12.4%. If you make more than $132,900, then you won’t have to pay any additional social security tax on top of this earnings cap.

When Should I Start Collecting Social Security?

While most of the advice says wait as long as you can (age 70) to collect Social Security retirement benefits you might want to base your decision on 5 important factors that impact your Social Security retirement benefits.

1. How much did you earn? For every $1,320 in taxable Social Security wages, you get 1 credit toward your Social Security retirement benefits. You can earn 4 credits per year.  This means you have to have earned $5,280 a year for ten years to qualify for Social Security retirement and the closer you were to the earnings cap (which will be $132,900 in 2019) the more you’ll probably get. Keep in mind that your past earnings will be adjusted for inflation. So, those teenage or college years, when you didn’t make a whole lot of money, will be calculated at inflation-adjusted dollars.

2. How many years did you work? Only your highest-earning 35 years will be counted toward your social security retirement benefit. So maybe the teen or college years won’t matter. But, if you didn’t have wages for 35 years then the number of years less than 35 are counted as $0 per year. This can significantly lower your social security benefits and you might consider working until you get there. But even if you’ve worked your entire career at a low wage you may qualify for a special minimum benefit (which is 848.80 per month in 2018).

3. What year were you born? This is the question that most people consider when deciding when they should start collecting Social Security retirement benefits. You can start collecting Social Security retirement at age 62 but you’ll only get 75% of your full retirement benefit. Full retirement benefits kick in at age 66, but for each year you wait to collect after you turn 66, your benefits will increase 8% until your maximum benefit is reached, at age 70.

4. Are you still working? If you decide receive Social Security in 2019 and you earn more than $25,000, you can be taxed on 50% of your benefits. If you make more than $34,000 in wages, you have to pay income tax on 85% of your social security benefits. (If you’re a married joint filer you can earn up to $32,000 and $44,000 respectively before the tax applies).

Note: If you’re not at full retirement age, and receive Social Security in 2019, and earn more than $17,640 in wages, your Social Security benefits will be reduced by half of the amount you earn over $17,640. In other words, for every two dollars over, they will hold back one dollar of your social security benefit. The good news is they won’t keep it. They actually add it to your future retirement benefits when you reach full retirement age.

 5. Where do you live? Some states actually tax Social Security retirement benefits! Here are the states in case you decide to move: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. It’s worth mentioning that some states have income exemptions before the benefits can be taxed. Income exemptions range from $43,000 to $85,000 in the states that have them.

It’s Still A Good Deal

All in all, most people receive more benefits than they pay into the system. There are many flexible provisions that help make it this way. For instance you can claim your individual benefit at age 62 and then switch to a spousal benefit if it’s higher when your spouse applies. If your benefit is less than half of your spouse’s benefit, you get a higher benefit. Also, you can collect on deceased spouse’s benefit as early as age 60 or wait until you’re 62, or 70. You can even change your mind one time about collecting before full retirement age. Social Security retirement  can be confusing because there are so many things to consider when deciding to apply. So, hopefully, this will serve as a place to start because Social Security retirement is a good deal, especially if you’re married or at either extreme of the income spectrum.

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