Believe it or not, you’ve (probably) been paying in to Social Security much longer than you think. That first gig at the local Dairy Freeze your sophomore year of high school? You started contributing to Social Security with your very first paycheck. In fact, you’ve been contributing for your entire working life thus far…unless you’re part of Colorado PERA, which actually serves as a replacement to Social Security for its 560,000+ members. Either way, we thought the topic an important one to dig into this month since…
…it’s the third leg in the good ol’ “retirement stool concept” we’ve been drilling into your head the last couple of months (#sorrynotsorry),
…chances are you’ll be eligible for some Social Security benefit in retirement, either due to contributions you made prior to becoming a Colorado PERA member, or via your spouse/partner,
…it’s important to have a basic understanding where the system is currently in order to appreciate its future outlook (which isn’t great at the moment—but we’ll get to that next week).
BOOM. OK, let’s get started.
What Is Social Security?
Social Security was established in the aftermath of the Great Depression, signed into law by FDR in 1935 as part of the New Deal. It serves as a foundation of economic security for millions of Americans (approximately 61 million, to be exact), including retirees, disabled workers, their dependents, and families of deceased workers.
As a largely pay-as-you-go program, money from current workers flows into the system in the form of Social Security taxes, and then back out in the form of monthly income to beneficiaries. This differs from “pre-funded” plans like that at Colorado PERA, in which the money is accumulated in advance so that it will be available for payment to today’s workers once they retire.
How Do I Qualify for Social Security?
"Full retirement age" (also known as "normal retirement age") is the age that you're first eligible to receive a full or unreduced retirement benefit. This chart from the Social Security Administration outlines what that age is based on one's birth year, but let's just cut to the chase: anyone born after 1960 won't qualify to take their full Social Security benefit until age 67. You do have the option to claim your benefit starting at age 62, but the benefit you receive will be permanently reduced [from what it would have been had you waited until that full retirement age]. Should you wait to claim your benefit, on the other hand (which you can do, up to age 70), the benefit you receive will be permanently increased. So, when it comes to Social Security, it pays to wait.
To be eligible to claim your benefit, you’ll also need to have earned 40 Social Security “credits.” As of 2017, one Social Security credit is equal to $1,300 in income (although this will likely increase in the coming years). Since you can only earn up to four credits in any one year, in order to qualify for a Social Security benefit, you’ll need to have worked for at least 10 years. (Doh! There’s always a catch.)
Lastly, if you and your spouse both file for Social Security at full retirement age, you’ll each be guaranteed at least half of the other's benefit. For example: if you’re entitled to, say, a monthly benefit of $2,000, your spouse will receive at least $1,000—even if his or her own benefit is much less.
To find out if you qualify, and to estimate the monthly benefit you’ll be eligible to receive when you reach full retirement age, click here.
How Is My Social Security Benefit Calculated?
While Colorado PERA’s plan considers a member’s highest average salary over three years in the calculation of his or her monthly benefit (although that will likely increase with the proposed changes to the plan), Social Security considers your entire work record.
First, your lifetime earnings, up to the Social Security taxable maximum for each year, are indexed for inflation. Then, your 35(!) highest-earning years are averaged together and divided by 12 to produce your average indexed monthly earnings (or AIME). The resulting number is then applied to a formula to determine your Social Security benefit at full retirement age. For 2018, that formula is:
- 90% of the first $885 in average monthly earnings, +
- 32% of earnings between $885 and $5,397, +
- 15% of the remaining balance
Added together, these amounts equal your full Social Security retirement benefit, also known as your primary insurance amount (or PIA). As we noted in the previous question, if you choose to claim your benefit before or after your full retirement age (which is most likely 67 for just about everyone reading this ), it will be permanently reduced (before) or increased (after).
Don’t worry, this is just the beginning of the Social Security fun in store for you this month. The next installment in the series will be coming in hot next week.