How Social Security Works

The Social Security program was signed into law in 1935 after the nation had endured more than a half-decade of the Great Depression. It was intended to provide a safety net of income for individuals too old or disabled to continue working.

Participation in the Social Security program is mandatory, with most wage earners contributing a percentage of their annual incomes to support the program. In return, participants, their spouses, and certain dependents are eligible for retirement, disability, and survivorship benefits. Nearly nine out of ten people aged 65 and older currently receive a Social Security benefit. For many, this benefit is their primary source of retirement income.

How Contributions are Made and Accounted For

Each year you work, you and your employer contribute to the Social Security program in equal amounts. The amount of workers’ earnings subject to Social Security taxes, known as maximum taxable earnings, is capped each year. Periodically, the federal government raises this cap. In 2022, the maximum earnings subject to Social Security taxes is $147,000, up from $142,800 in 2021. These increases are meant to keep benefits aligned with inflation and the pace of rising prices in the economy. (See chart).

YearMaximum Taxable Amount% Increase
2022$147,0002.9%
2021$142,8003.7%
2020$137,7003.6%
2019$132,9003.5%
2018$128,4001%
2017$127,2007%
2016$118,5000%
2015$118,5001%
2014$117,0003%
2013$113,7003%
2012$110,1003%
2011$106,8000%
2010$106,8000%

How Your Benefits are Calculated

Your Social Security account opens once you receive a Social Security card. However, it is not activated until you begin earning income. Once your earnings begin, the amount you contribute each year is recorded. You can view your personal Social Security Statement online by creating a “My Social Security” account at www.socialsecurity.gov/myaccount. Your online Social Security Statement displays uncertified yearly earnings free of charge and does not show any employer information. If you discover errors in your record, you can ask that they be corrected, but you must supply evidence of such errors. The Social Security Administration encourages people to check their earnings records every three years or so because the earlier a problem is found, the easier it is to correct.

The accuracy of your earnings record is important because your benefits are based on a calculation that includes how many years you worked and how much you earned. These figures are used to determine the number of quarterly credits you accumulated toward benefits. Receiving your full benefits (also known as the “primary insurance amount” or PIA) depends on claiming at your Normal Retirement Age, or NRA. If you were born in 1960 or later, your NRA is age 67. If you were born between 1937 (or earlier) and 1959, your NRA ranges between age 65 and 66 years, 10 months. The sooner you claim before your NRA, the more your benefits will be reduced. If you claim at age 62, the first year you are eligible, you will get just 75 percent of your benefits. To determine your NRA, visit http://www.ssa.gov.

Cost-of-Living Adjustments (COLA)

Beginning in 1975, Social Security began giving recipients automatic annual cost-of-living allowances. The purpose of the COLA is to ensure that the purchasing power of Social Security income isn’t eroded by inflation. The adjustment is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a COLA was given to the third quarter of the current year. If there is no CPI increase, there is no COLA, as was the case most recently in 2009 and 2010. The COLA for 2022 was set at 5.9 percent, the highest increase in 14 years. (See chart.)

YearCOLAYearCOLAYearCOLA
19758.019972.920170.3
19766.419982.120182.0
19775.919991.320192.8
19786.520002.520201.6
19799.920013.520211.3
198014.320022.620225.9
198111.220031.4
19827.420042.1
19843.520052.7
19853.520064.1
19863.120073.3
19871.320082.3
19884.220095.8
19894.020100.0
19904.720110.0
19915.420123.6
19923.720131.7
19933.020141.5
19942.620151.7
19952.820160.0
19962.6

How Your Benefits Are Taxed

Once you begin receiving retirement benefits, you may have to include them as part of your taxable income reported to the IRS each year. If you file as an individual, your Social Security is not taxable if your total income for the year is below $25,000. If, however, your total income ranges between $25,000 and $34,000, you may have to pay tax on up to 50 percent of your benefits. If your total income is higher than $34,000, then up to 85% of your benefits may be taxable. If you and your spouse file jointly, you’ll owe taxes on half of your benefits if your joint income is in the $32,000 to $44,000 range, and on 85% of it above that range. The IRS provides a worksheet to help you determine how much you must include in your taxable income each year.

Did you know that…

  • In 2021, an average of 65 million Americans per month received a Social Security benefit, totaling over one trillion dollars in benefits paid during the year
  • 68.8 million people received benefits from programs administered by the SSA in 2020, including 5.8 million new benefit recipients
  • Among elderly Social Security beneficiaries, 37% of men and 42% of women receive 50% or more of their income from Social Security
  • Among elderly Social Security beneficiaries, 12% of men and 15% of women rely on Social Security for 90% or more of their income
  • Retired workers and their dependents accounted for 75.2% of total benefits paid in 2020
  • Disabled workers and their dependents accounted for 13.1% of total benefits paid in 2020

Source: ssa.gov

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

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