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Social Security: What is it, how does it work, and what will it look like by 2035?

Social Security offers both disability and retirement benefits.

Social Security benefits

It is a source of income for many. However, it may look different in the future.

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Social Security payments worth an average of $1,672 going out today

What is Social Security?

Social Security is best know for offering retirement benefits. However, the agency also offers disability benefits. Essentially, Social Security provides you with a source of income when you retire or if you can’t work due to a disability. In the case of death, it can also support your legal dependents– spouse, children, or parents. As of June 2022, more than 70.2 million Americans are collecting benefits

Your Social Security benefit depends on:

  • your lifetime earnings
  • the age you start collecting benefits
  • if you are eligible to receive a spouse’s benefit instead of your own

If you are trying to plan your retirement benefit, use this link to:

  • estimate your benefits at different ages– with the earliest you can claim being 62 and getting the largest benefit at 70
  • apply for benefits
  • learn about earning limits if you plan to continue to work

How does it work?

Social Security is an insurance program and workers pay into the it. This is usually done automatically with payroll withholding through your employer. Workers can earn up to four credits each year. In 2022, every $1,510 earned is one credit until they’ve made $6,040– or earned four credits.

The money goes into two Social Security trust funds: the Old-Age and Survivors Insurance Trust Fund (OASI) for retirees and the Disability Insurance Trust Fund (DI) for disability beneficiaries. There, it is used to pay benefits to people currently eligible for them. A board of trustees oversees the financial operations of the trust funds. There are six members on the board. Four of those seats are filled by are the secretaries of the departments of Treasury, Labor, and Health and Human Services, and the Commissioner of Social Security. The other two seats are public representatives appointed by the president and confirmed by the Senate.

Workers who have paid into the Social Security system for at least 10 years can start claiming retirement benefits as early as age 62. However, if you wait until age 70– you will get the largest possible benefit. If you wait until after 70 to claim, your benefits will not increase further.

Is the Social Security’s FRA is 70?

The Social Security’s full retirement age (FRA) being set at 70 is a a relatively new development. Right now, workers can claim starting at age 62.

Some historical context might help in understanding this shift. Before 1972, maximum monthly Social Security benefits were paid at 65. This means that monthly benefits did not increase if you waited to claim. In 1972, Congress introduced a Delayed Retirement Credit. This credit increased benefits by 1% for year year delayed. However, this credit did not compensate for the fact that late claimers would get benefits over fewer years. In 1983, the adjustment was raised to 3%. From there, it was gradually increased to 8% in 2008. Now, the Delayed Retirement Credit has matured and is fairer. This means that t is designed to keep lifetime benefits constant, on average, for those who claim later.

So, if the maximum benefit can be claimed at 70, then what is FRA about? Before the Delayed Retirement Credit became actuarially fair, the Full Retirement Age was important. It was the age when your lifetime benefits were highest. Now that the Delayed Retirement Credit is actuarially fair, the concept of FRA isn’t very meaningful. It doesn’t describe when benefits are first available or when they are at the highest– so, it doesn’t carry any meaning in terms of an official retirement age.

How much is the average retirement payment in 2022?

The maximum initial monthly benefit for 2022 by retirement age is as follows:

  • 62: $2,364
  • 65: $2,993
  • 66: $3,240
  • 70: $4,194

These figures are based on a worker with steady earnings at the maximum taxable level since age 22. For 2022, maximum taxable income is $147,000, but that number is adjusted each year.

Social Security will look different by 2035

The Social Security Administration (SSA) revealed that after 2035, the agency will only be able to pay a portion of benefits to retirees if policymakers don’t make changes to the system. Now, young adults are trying to save and looking for ways to supplement their post-retirement income.

Previous reports indicate that the fund’s reserves are drying up and when they do, the SSA will only be able to pay 80% of its promised benefits. This could mean higher taxes or lower benefits, unless Congress tales action.

If benefits are reduced by 20%, the average 35 year old currently earning $50,000 will lose an estimated $13,500 in annual Social Security income in the first year of retirement. The more money you earn, the greater annual loss.

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