Social Security is a government administered program that pays a monthly stipend based on lifetime earnings.
The way it is funded is through social security deductions from working persons.
Today’s working people are paying the social security benefits for those who are retired and collecting, and this continues through the generations.
It was started in 1935 and has been paying people in retirement ever since.
There are predictions that the social security reserve will run out and that future generations of workers will not make enough for those collecting to receive full benefits.
The government is working to find ways to solve this shortcoming.
Eligibility For Social Security
In order to be eligible to collect social security benefits there are certain criteria that must be met:
- Credits – A person must have 40 credits accumulated before they can receive benefits. For every $1,120 an individual earns through employment or self-employment, they receive a credit. The maximum amount of credits one can earn per year is four, so once $4,480 in income is earned the maximum credits are applied. At minimum, it would take a person 10 years to earn 40 credits. Only earned income counts toward credits, income from inheritance, dividends, and interest does not count as income.
- Age – At age 62, persons may begin to collect social security benefits at 25% reduced rate. Individuals born before 1938 can get full benefits at age 65. Those born after 1938 will get full benefits on a graduated basis, with the full retirement age for people born after 1960 being 67. Once you reach the age that you are eligible to collect social security you can apply 3 months in advance of that age. The 25% reduction in benefits is only if you claim exactly 48 months prior to “full retirement age.” The actual calculation can be found here.
- Disability – Disabled individuals can collect social security benefits regardless of age. There are different criteria that must be met, but if an individual can not work or provide for themselves they may be eligible to receive social security benefits.
What about Delaying Social Security Benefits?
Wanting to get an outside opinion on delaying Social Security benefits, I solicited Mike Piper from the Oblivious Investor to share his expertise on the topic. Here is what Mike had to offer:
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It’s often advantageous to delay claiming benefits. People often complain about the lack of defined-benefit pensions for most retirees these days.
But they overlook the fact that delaying Social Security is economically the same thing as buying a lifetime pension — one with inflation adjustments.
For example, if your benefit at full retirement age would be $15,000 per year, it would only be $11,250 (75% of $15,000) if you claimed 48 months early.
But if you wait one year and claim 36 months early instead, the benefit will be $12,000 per year — an increase of $750. In other words, you just spent $11,250 (one year of benefits) to buy yourself a $750-per-year inflation-adjusted pension.
Math details: That’s a 6.67% payout, which is much higher than what a 63-year-old could get these days by buying an inflation-adjusted lifetime annuity from an insurance company. (Vanguard’s quote system is telling me that with today’s interest rates, a 63-year-old male could only get a 4.62% payout. 4.25% for a female. And that doesn’t have any benefit going to a surviving spouse, whereas Social Security does.)
In other words, for people who would prefer to have safe retirement income, delaying Social Security (sometimes all the way to age 70) makes a lot of sense.
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Thanks, Mike, for your input! Here’s another great article from Mike where he addresses Social Security Strategies for Married Couples.
Additional Income
Social security was never intended to be the sole source of income for elderly individuals. Retirement savings such as IRA’s, annuities, and pensions should be considered as the primary means to supplement retirement income.
Social security payments are just a small bit of income that can help meet financial needs in retirement.
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