Tom: This morning we have another topic that listeners had a number of questions about: Social security. Are you ready to help us out?
Mellody: I most certainly am! First, let’s start with the basics. Is everyone eligible?
Actually, not everyone is automatically eligible, but it is not very difficult. In order to qualify for benefits, you must accrue credits. Eligibility for Social Security is based on earned credits during your working years. Most people need to earn 40 credits in order to qualify. There are exceptions for individuals with disabilities, minors and others. In terms of accruing credits, as of 2016, one credit is given for every $1,260 in earned income up to a maximum of four credits per year.
Tom: Once you are eligible, how are your Social Security retirement benefits calculated?
Mellody: Great question. Many people wonder how their Social Security retirement benefit is determined. Your monthly benefits check is based on your lifetime earnings. The Social Security administration the adjusts your actual earnings to account for changes in average wages since the year you started working. Then Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most. Finally, a formula is used to arrive at your basic benefit, or the amount that you would receive at your full retirement age — 65 or older, depending on your date of birth.
Tom: What factors change this basic calculation?
Mellody: A few big things affect how your benefits are calculated. The first one is one that we talk a lot about here at Money Monday: your retirement age. While you can start getting your benefits as early as age 62, Social Security will reduce your payout if you start taking advantage of the program before your full retirement age. That is why you want to wait as long as possible to request your benefit.
Cost-of-living adjustments will also impact your benefits, and those increases start kicking in when you turn 62, even if you wait until your full retirement age or even age 70.
Finally, benefits will be impacted if you will receive a pension. If you’re a worker with a pension, and because of that you didn’t pay Social Security taxes, social security applies a different formula to your average indexed monthly earnings. For a detailed explanation about these calculations, visit HERE.
Tom: Our listeners are also interested in survivor benefits. Who can receive them, and what are the different categories?
Mellody: This is an important question as well. Only certain family members are eligible to receive monthly benefits in the event of a worker dying. In terms of spouses, the most common category is widows or widowers over 60 – over 50 if disabled – or those of any age caring for the deceased’s child who is under 16 or disabled.
A divorced spouse of a worker who dies can get the same benefits as a widow or widower, provided the marriage lasted 10 years or more. Divorced spouses also can get benefits if they are caring for a child under age 16 or disabled but the child must be your former spouse’s natural or legally adopted child. If this is the case, your benefit will affect the amount of the benefits of others on the worker’s record.
Beyond spouses, benefits can also go to children of deceased individuals who are unmarried, younger than age 18, or children older than 18 with disabilities that began before 22. There are also some more specialized cases, including parents over age 62 who were dependent on the deceased for at least half of their support, or in certain circumstances stepchildren, grandchildren, step-grandchildren, or adopted children.
Tom: That’s very helpful, Mellody. Thanks for joining us and answering some of our Social Security questions.
Mellody: You’re welcome. Have a great week!