Back to the Basics: Social Security 101

December 10, 2015

“The Basics of Social Security”

Before I began working for PERA and dwelling on the importance of retirement income, I had very little idea of what Social Security was. It was a term my parents and grandparents tossed around, and something I failed to investigate. I did not care about it, it never crossed my mind, and I certainly was not worrying about retirement security at the time. I had never seen a Social Security check, and did not stop to think about how a retiree affords to buy food or pay for housing.

I doubt I am the only one who did not care to learn about Social Security before retirement planning became a priority. If retirement planning is a priority for you, understanding Social Security should be a component.  Social Security is not likely to go away and financial education is key to helping you retire at the age you want to. For those reasons, it makes sense to familiarize yourself with the basics of Social Security.

Think of it as one big bank account...Kind of

Imagine Social Security as this bank account that most everyone who is working contributes to. Upon retirement, you begin receiving checks from the bank account based loosely on your pre-retirement income. Younger workers are continuing to contribute to the account by working, so you will receive checks for the rest of your life because the account should always have money going into it.

If you are not working under a Social Security-covered employer, like most PERA members, then you are not contributing to this bank account. However, if you have contributed to the account through previous jobs, you may be eligible for a Social Security benefit when you are older.

You pay into Social Security through the FICA Tax

If you are working in a Social Security job, you should see deductions for Social Security and Medicare on your pay stub. The two deductions together are called the FICA Tax. For simplicity’s sake, 6.2% of your salary goes to Social Security and 1.45% of your salary goes to Medicare. Your employer matches these amounts as well.

If you are working for an employer that is not covered by Social Security, like most Colorado PERA members, then you and your employer are both paying the 1.45% contribution for Medicare. However, because you are contributing to PERA and not Social Security, neither is paying the 6.2% contribution for Social Security.

You have to work at least ten years under Social Security

It takes at least ten years of paying into Social Security to qualify for a Social Security benefit* when you are older. Specifically, it requires earning 40 credits. Each year, you can earn up to 4 credits by working in a Social Security-covered job. In 2016, one credit is worth $1260 of income. To earn all four credits in 2016, someone would need to earn $5040 ($1260 x 4) by the end of the year. Working for ten years and earning 40 credits gives you what is called the Worker or the Earned Benefit.

62 is the earliest you can collect, but there’s a catch

The earliest age you can begin collecting your Social Security benefit in most situations is 62. Now, it wouldn’t be fair if someone who retired at 62 earned the same amount as someone who waited until age 67 to collect. Social Security gives you more if you wait longer to collect, and less if you retire sooner.

Full Retirement Age

According to Social Security, your Full Retirement Age (FRA) is the age at which you receive the full benefit. For anyone born in 1960 or later, it is age 67. However, if you wait to collect when you are older than 67, you will receive a higher benefit.

For every year you delay taking your benefit past your FRA, you will receive an 8% increase on your benefit up to age 70. For example, if your FRA is 67 and you delay taking your benefit until 70, you will receive 24% (8% x 3 years) more per month than had you collected at 67.

A spouse can also receive a benefit

A spousal benefit is another way to earn a monthly benefit from Social Security. If you are (or were) married to someone who has 40 credits, then Social Security may give you up to 50% of their benefit when they begin collecting it. For example, if Linda is receiving $1,200 from Social Security, her spouse Frank could receive up to 50% of her amount at the same time. In this scenario, their household income would end up being $1800 ($1200+$600) per month.

Your Social Security can be reduced

As a PERA member, it’s possible that upon retirement, your Social Security benefit could be reduced. The team of writers at our sister publication, PERA on the Issues, tackled the reasons why in the most recent issue.

This information is just scratching the surface. There are many laws, rules, and formulas pertaining to Social Security. Begin the investigation by looking up your account at Social Security’s website.
* Social Security and PERA both use the term benefit to mean a monthly check